How a dynamic pricing strategy made American Airlines the top global airline
This month we’re doing a series on Differentiation through the Marketing Mix. Mix 2 – How can you truly differentiate your organisation through Pricing?
What is the marketing mix?
Before that, a recap: The Marketing Mix consists of 7 elements Product, Price, Place, Promotion, Physical Evidence, Process, People. All these elements provide customer touch points that deliver a customer experience. They are all powerful ways to differentiate and position your organisation from the competition. Whichever way you decide to differentiate, it is critical that all the other marketing mix elements exude the same customer experience (CX)/positioning.
What is a pricing strategy?
A “pricing strategy” determines how much to charge for a product or service. To put a great strategy into action, you’ll need to perform market research, consumer research and analyse your financials.
A strong pricing strategy ensures you create and meet customer expectations that justifies your pricing and considers how your target audience and your competitors will react to your pricing decisions.
There are several pricing strategies that each achieve a different psychological buyer reaction and will depend on your objective – Launching a new product/service, entering new market, reducing entry barriers, yield management plus many others reasons.
Service industries provide perishable goods, such as hotel rooms or airline seats. In other words, you can only sell an airline seat for a specific flight, you can’t sell it later like you can for a product sitting in a warehouse. Once that date is gone, the sales opportunity is gone.
Example of an effective pricing strategy
In 1978 Airline pricing was deregulated which resulted in many airlines going bankrupt. In the early 80’s American Airlines needed to fill all their available seats (reduce waste) to ensure each of its flights could achieve the maximum profit possible. To do this, they developed a Yield management system.
This started in a much simpler model in the days of travel agent booking, but then the internet allowed for a much more complex algorithm to create dynamic pricing. It reserves a set number of seats at different pricing levels. As the seats sell, then the pricing falls into a new higher price bucket. However, if the seats aren’t filling closer to the flight, the system will adjust and sell those last seats at a lower cost to ensure the flight is full.
Remember the days of an international flights in the 80s/90s when there were always open seats on a flight. How often do you see open seats on an international flight these days? (pre-covid).
By filling its capacity, American Airlines went from a domestic airline to international in the 1990s and is now the second most profitable airline globally at £17.3 billion.
The lesson here is that American Airlines weren’t out to compete on price, but they needed to reduce waste on unsold seats. They conducted a strategic exploration that researched their marketplace, competitors and customers which determined that a seasonal pricing strategy would fill seats. Their research pinpointed the right pricing bracket and assessed their financials to ensure they would turn a profit within a set period of time.
Differentiation on price alone is a risky, short-term and aggressive strategy…however, building a pricing strategy, that addresses your challenges and better accounts for market and consumer conditions, means you’ll be able to take the competitive advantage in your industry.
Each part of your marketing mix tells a story and you need to ensure that story is consistent in every part of the mix.
Let’s chat
Your organisation could be sitting on untapped value to increase that customer experience in other parts of your channels which could be identified in a CX review. If you’d like to discuss how a CX review works, drop me a message or book a complimentary no-obligation meeting and find out how I can help your business.
