Co-Opetition - Adam M. Brandenburger [62]
Trade-Offs
One way to engineer added value is to make intelligent trade-offs. The trick is to spend $1 in such a way that customers value the quality improvement at $2. Then you can raise price by $1.50, and it’s a win-win. Likewise, the trick is to save $2 in such a way that customers value your product only $1 less than before. That way, you can cut price by $1.50, and it’s a win-win. In both cases, you’ve engineered an extra dollar of added value and split it with the customer.
To find these trade-offs, you have to depart from business as usual. You have to challenge the old, comfortable assumptions about how you operate—or, in TWA’s case, the old, uncomfortable assumptions.
Comfy and Cozzi In January 1993 TWA was in Chapter 11 reorganization. The airline was in a nosedive. Passengers were abandoning it. TWA was at the bottom of consumer ratings—by an uncomfortable margin. Employee morale was nonexistent. And there was only $10 million left in the coffers.
Bob Cozzi, TWA’s senior vice-president of marketing, saw a way out. He proposed removing ten to forty seats per plane and spreading out the remaining seats to give passengers in coach more legroom. According to Cozzi, “We rolled the dice right down the table. We spent $1 million to take out the seats, the other $9 million to promote it.”16 It was an all-or-nothing bet.
Cozzi promoted Comfort Class with the ad campaign “TWA—the most comfortable way to fly.” Comfort Class offered an extra three inches of legroom, a big difference when the industry standard was thirty to thirty-two inches. While everyone offered more legroom in business and first class, TWA was the only major airline to add legroom in coach. Still, many people were skeptical. Unkind observers likened the initiative to rearranging the deck chairs on the Titanic.17
The skeptics were proved wrong. Customer satisfaction soared, as did employee morale. Within six months, TWA moved from the bottom to the top of the rankings—all because of the extra legroom. TWA was rated below average in six of seven categories: on-time performance, aircraft interior, flight accommodations, scheduling, in-flight amenities, gate check-in, and postflight performance. Yet its performance in the remaining category, seating comfort, so clearly dominated all the other airlines that market research firm J. D. Power ranked TWA the top carrier for long domestic flights and number two for shorter flights.
All this helped fill up the planes. Cozzi calculated that an extra coach passenger on every flight was worth $80 million per year. Equally important, many more full-fare travelers were now flying on TWA. If a company didn’t permit its employees to fly business class, TWA’s Comfort Class was the next best thing. By the end of 1993, yield or average revenue per seat was up by 30 percent—double the figure for the rest of the industry.
Comfort Class was a very smart and cost-effective way for TWA to improve its quality of service. The real cost of taking out a seat is the lost revenue from someone who would have paid to sit in that seat. If the planes aren’t full, it costs very little to take out some seats and give people more legroom.
This was a win for TWA and a win for its customers. With its improved service, TWA also had a leg up on the competition. Did that mean it was a loss for the other airlines? Not necessarily. To the extent that TWA attracted full-fare passengers from them, yes, it was. But there was an element of win-win present as well. TWA was not about to start a price war. With fewer seats and even fewer empty ones, it had no incentive to cut price. In fact, with customers willing to pay more for its improved service, TWA even had some room to raise price. The other airlines benefited now that TWA was no longer forced to compete on price.
But what if other carriers copied the strategy? Wouldn’t that negate TWA’s efforts? No. If others copied TWA’s move, excess capacity would be retired from an industry plagued by overcapacity. Passengers would get more legroom, and