Co-Opetition - Adam M. Brandenburger [114]
High-Altitude Fog In April 1992 American Airlines tried to dispel the fog with its Value Pricing initiative. Bob Crandall, CEO of American, explained the move:
In our unsuccessful pursuit of profits, we have made our pricing so complex that our customers neither understand it nor think it is fair.… By moving to a new approach, which emphasizes simplicity and equity and value, we hope to regain the good will of our customers.… We call it Value Pricing.24
Value Pricing involved a dramatic simplification of the fare structure. From now on, there would be just four kinds of fares: first class, regular coach, and two discount fares. The other airlines responded positively. Within forty-eight hours of American’s move, United put together its own Fair Fares price-simplification scheme. Alaska, America West, Continental, Delta, Northwest, and USAir were also quick to follow American’s lead and adopt simplified pricing. An Alaska Airlines representative exclaimed: “If we were a big airline, it’s something we would have done ourselves. It’s dynamite.”25
Imitation of Value Pricing was healthy. The more airlines that copied American, the simpler airline pricing got. That meant fewer disgruntled travelers and travel agents, and that, of course, was good news for the airlines. Value Pricing changed the game in another way. When the pricing game was being played in a fog, there was always the temptation for an airline to engage in furtive price cutting. An airline could hope to cut price and steal some share before the other carriers had time to spot what was really happening and respond. With Value Pricing, the game was much more transparent. The chances of pulling off a surreptitious price cut were reduced, and thus the incentive to try was reduced, too. Simplified prices meant more stable prices—a clear benefit to the airlines.
TWA was the spoiler. It saw Value Pricing as an opportunity to cut price and steal share. Apparently, it reckoned that American, with only four fares to play with now, would be less likely to respond. So just three days after American’s announcement, TWA came out with fares 10–20 percent below American’s. In response to TWA’s move, America West, Continental, and USAir matched TWA’s price cuts, and a week later, American felt obliged to follow suit by cutting prices across the board.
Over the following months, Value Pricing lost momentum as more airlines started coming up with discounts and special promotions that nibbled away at the edges of simplified pricing. For example, Northwest came out with a promotion to encourage family travel. Its “Grown Ups Fly Free” deal offered a free ticket to adults accompanying children.
By September 1992 American admitted that Value Pricing had stalled, and decided to return to the previous status quo. Why did Value Pricing fail? The financially distressed airlines—principally TWA and Northwest—had pressing short-term cash needs and couldn’t resist the temptation to cut price. They couldn’t afford to wait around for the long-term benefits that Value Pricing promised. Another reason was that during his tenure at American, Bob Crandall hadn’t exactly won industry popularity contests. No matter how good an idea Value Pricing was, some wouldn’t go along with it simply because it was Crandall’s baby. This was the lose-lose mindset that helps explain how the U.S. airlines managed to lose nearly $5 billion that year.
Complex Pricing Schemes
1. Hide high prices.
2. Disguise opportunistic pricing.
3. Hide low prices, too, preserving an image of quality.
4. Hamper comparison shopping.
… but also …
1. Increase administrative costs.
2. Confuse and frustrate customers.
3. Encourage furtive price cutting by competitors.
Shaping Opinions
Many games are ultimately decided in the court of public opinion. Here, perceptions aren’t just part of the game, they’re the whole game. In this section,