How Southwest and Spirit Are Changing Their Pricing Games
Jean-Manuel Izaret (JMI)
Global Leader of Marketing, Sales & Pricing Practice | Managing Director & Senior Partner at Boston Consulting Group
Dear Friends,
Here are the posts to catch up on since the last edition of the newsletter.
Playing the right pricing game is essential to a company’s financial and commercial success. That’s why companies seize the opportunity to change their pricing game – by choice or by force – when their market characteristics change.
Southwest Airlines and Spirit Airlines are currently demonstrating in real time that the Strategic Pricing Hexagon we defined in our Game Changer book is hard reality, not textbook theory. The two low-cost carriers recently announced new pricing strategies that are literally game-changing. Recognizing that their market characteristics have fundamentally changed, they are leaving behind the principles of the Cost Game and implementing the principles of the Choice Game.
In this edition of the newsletter, my co-author Arnab Sinha and I dig deeper into these game changes and show how well they follow our structured approach for defining a pricing strategy.
How Southwest and Spirit Are Changing Their Pricing Games
The definition of a pricing strategy depends on senior management’s answers to these three questions:
Let’s start with the old answers. When Southwest Airlines launched its low-cost pricing model in the early 1970s, it addressed a different market than the higher-priced carriers in the regulated US market. Its value proposition was basic point-to-point transportation that was friendly, faster, and more comfortable than the alternatives. One executive described it this way: “We're not competing with other carriers. We want to pull people out of backyards and automobiles and get them off the bus.”
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They built their businesses around a tight alignment between prices and costs, the key success factor in the Cost Game. Improving efficiency became the organizing principle that enabled them to lower costs and prices, accelerate growth, improve profitability, and generate the funds to invest in further cost advantages. Their pricing model relied on simplicity, or “Transfarency” in Southwest speak: open seating for all and no fees for checked baggage. Their success paved the way for ultra-low-cost carriers such as Spirit, which put the “basic” back into basic transportation.
How Southwest and Spirit Changed Their Answers
Changes in consumer preferences prompted Southwest and Spirit to revisit those three strategic questions. They revealed their new answers a couple of weeks ago.
Southwest announced that it will eliminate open seating, offer a premium seating section with more legroom, and introduce redeye flights on some routes. The goal of these changes is to “elevate the customer experience, improve financial performance, and drive shareholder value.” This marks a move from the Cost Game to the Choice Game.
The airline cited extensive research and simulations as the basis for its changes. It learned that over 80% of current and potential customers wanted assigned seats rather than open seating. It also discovered that open seating was the most frequently cited reason for customers to choose a different airline. Enough customers also wanted a more premium experience, which led the airline to introduce the new fare class.
The changes should lead to a significant boost in Southwest’s revenue. The airline currently "makes a little less than $1 billion" from fees, but the move to assigned seats and premium offers should bring ancillary revenue “substantially north of that” according to CEO Bob Jordan.
About a week after Southwest’s game-changing announcement, Spirit said that it will introduce a portfolio of fare classes that, in its own words, will be “redefining low-fare travel with new, high-value?options that empower travelers to choose an elevated guest experience at an affordable price.”
This marks an even clearer shift from the Cost Game to the Choice Game. Starting this month, Spirit will offer four options, each with its own benefits: Go Big, Go Comfy, Go Savvy, and Go. It will also offer an enhanced boarding experience as well as priority check-in at some locations. Finally, it eliminated change and cancellation fees and increased its checked luggage allowance to 50 pounds. These last two changes are important because they show how Spirit has changed its answer to the third strategic question: what pricing model best fits your value creation strategy? In the Cost Game, companies tend to have an unbundled offer structure with separate prices, while in the Choice Game, companies have a structured menu of offerings aimed at different customer segments. Choice Game players also rely less on fees and surcharges.
In Game Changer we wrote that “a leadership team's decisions on how to share value with customers not only determines the financial performance of a company and its ecosystem, but also affects the medium‐and long‐term shape of markets: Who gains customers, who is best positioned to serve them and retain them, who stays in the market, and who leaves?” The move from the Cost Game to the Choice Game creates fresh opportunities for Southwest and Spirit to attract and serve more customers and gives them a better chance of survival.
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