Unbundled Pricing - A Reference Price Solution

Unbundled Pricing and Charging For Extras

Valuing Free

What is in this report Background Hypothesis Experiment Results and Implications

Marketers are used to selling all inclusive bundles Customers are trained to see the product/service as a monolith with one price Gaming Bundles Cable TV Airline Travel

They cannot continue to give away extras for free The economy is melting and customers are becoming increasingly price sensitive With pricing pressures and cost overruns there is no cover Costs of providing the extra services continue to increase

Airline Industry serves as prime example According to a Cost study - $15 marginal cost per bag Increasing cost of meal service Falling ticket prices = no differentiation There is an increasing need for airlines to charge separately for paper tickets, meals, checked baggage, etc.

Some airlines are taking it to an extreme… See related: Unbundling the in-flight toilet … the carrier had been investigating fitting coin slots to the doors of aircraft toilets, similar to those installed at train stations.

How can marketers practice unbundled pricing without turning off customers?

If customers never paid for a widget, how can a marketer price it? Customers have always paid nothing There is nothing to compare against They are bound to feel “nickel and dimed”

We think the answer lies in Reference Price Reference price is what the customer is used to paying for a product and expect to pay despite the value they get $ 0.00

We believe that improving the reference price increases customer acceptance Hypothesis: If marketers can improve this reference price , they can increase consumer acceptance of these extra charges One way to do this may be to provide consumers with two options

We devised a between-groups experiment for Airline Unbundled Pricing Group 1 had just one option: proposed pricing for freebies Group 2 had two options: with expensive and standard pricing Group 1 or 2 decided by coin toss – different survey shown randomly to each respondent

Respondents were told they were taking a survey for an airline Respondents were asked to rate on a scale of 1 – 10 their likelihood of purchase We targeted MBAs and others in our LinkedIn and Facebook networks

For example…

No premium Option

With premium Option

Our Airline is considering charging $2 for in-flight soft drinks . How likely are you to purchase the service?

Our airline is planning to introduce two in-flight drink options.

(1) Offer premium soft drinks from luxury brands like Evian at a price of $4 a bottle.

(2) Continue to offer soft drinks including bottled water and soda but at a price of $2 per bottle.

How likely are you to choose Option 2 at $2 a bottle?

We analyzed the survey results by comparing the sample means Compared the mean likelihood values of the two groups We had almost 60 responses for each group Highly Unlikely-1 Highly Likely - 10

How likely are you to pay a $25 fee to check-in your bag? Conclusion: People are more accepting of baggage fees when presented with a premium option. t-stat 9.368332827

How likely are you to pay $2 for in-flight soft drinks? US Airways abandoned its six month practice of charging $2 for soft drinks and $1 for coffee/tea after customer outcry. The Wall Street Journal t-stat 8.241069952

How likely are you to pay $4 for pillows and blankets? Conclusion: People would pay $4 for pillows and blankets when offered an $8 option t-stat 6.533785889

But options do not increase airline preference! Given these options, how likely are you to choose our airline in the future? There is no statistically significant difference between the two groups on overall airline preference. Even with options, people were no more likely to prefer the airline because of its pricing. t-stat 1.809522874

What does this mean to you as a marketer Focus on reference price Provide Options This helps to translate customer value to WTP Priced options nudge customers to assign a reference price to free $1.99 Customer Choice But customer preference of your brand is not guaranteed

Thanks to my amazing colleagues My colleagues: Jason Topel Dave Ericksen Catherine Cho Chris Lavine For More information: Http://iterativepath.wordpress.com http://unbundling.wordpress.com