74-Pricing Taken Too Far
In the early 1990s, I was involved with a company that faced a very competitive price environment. The company felt it could not increase the prices on its standard product. Instead, it raised its prices on the ancillary services it offered to all customers, though not all customers used these services. The company felt, at the time, that it could continue to raise these prices until the market took note and complained bitterly, or until its prices notably exceeded those of its competitors.
We now may have an instance, several years later, where that approach to pricing has begun to wear out its welcome. A recent article on cruise ship travel took two newspaper pages to help readers avoid the ancillary price increases on cruises.
The article noted that the advertised price for a particular cruise was an attractive $699. However, many customers of this cruise line end up paying over $1200 for that same cruise because of these ancillary fees. (See the Perspective, “Is Your Industry Ripe for Hostility?” on StrategyStreet.com.) These fees include port fees, trip insurance, airport transfers, automatic gratuities, internet access and others. The typical customer uses most, if not all, of these extra services and ends up paying a price for the cruise 70% over the advertised cruise price.
This is a good example of pricing going too far. If the cruise industry keeps this up, no one will believe their advertised prices. Nor should they. Those advertised prices bear little relationship to the real price the customer will pay for taking the cruise.
The practice of hiding fees continues where industry competitors are united in the practice and where industry leaders think they can get away with this pricing approach. In 2022, advertised airline prices do not include various taxes and fees that increase the price of the ticket. In addition, airline mileage programs vary significantly in value from one to another. Apparently, flyers pay little attention to these differences. The cruise line industry certainly continues the practice of charging hidden fees and by offering extra services during the cruise at relatively high prices. VRBO, Airbnb and other vacation rental sites quote per night rentals that are significantly less than the full per night costs the customer will incur. The customer doesn’t see these full costs until ready to check out.
Because virtually all airlines copied them, ancillary fees have been successful in the airline industry. These ancillary fees cover services like checking a bag, providing extra legroom or changing a reservation. In the early 2010s, these fees kept the entire industry in the black. More than half of the flying public dislike these fees, but the industry gives them little in the way of alternatives. In addition, a large portion of airline ancillary fees comes from the sale of frequent flyer miles to their marketing partners. In 2019, the 5 largest US airlines gained about $29 billion in ancillary fee revenue.
Every price has at least three, and usually four, components: the Benefit Package, the List Price, the Basis of Charge and, often, Optional Components of Price. The airlines are using optional components of price to raise prices. These optional components have succeeded because all the competitors in the industry copied them. The customers had no alternative. The company may use these four price components to further contain the spread of its new pricing to customers within its target segments. See HERE for more detail. HERE is a more comprehensive article on pricing when prices tend to fall. You can use our many price change concepts and examples to brainstorm improvements for your own company.
HOW CAN THESE BLOGS HELP ME?
If you face a competitive marketplace, read these blogs. We wrote them to help you make better decisions on segments, products, prices and costs based on the experience of companies in over 85 competitive industries. Much of the world suffered a severe recession from 2008 to 2011. During that time, we wrote more than 270 blogs using publicly available information and our Strategystreet system to project what would happen in various companies and industries who were living in those hostile environments. In 2022, we updated each of these blogs to describe what later took place. You can use these updated blogs to see how the Strategystreet system works and how it can lead you to better decisions.