5. Government Regulation
• Civil Aeronautics Board (CAB)
• Formed in 1940
• Safety Rulemaking
• Control of what routes airlines can fly
• Control of fares airlines can charge
• Federal Aviation Administration (FAA)
• Formed in 1967 under Dept. of Transp.
• Air Traffic Control
• Airman and Aircraft certification
• Safety Enforcement
• Airway Development
6. Infrastructure Constraints
• To start service airlines must have:
• Access to airport facilities
• Gates
• Ticket Counters
• Baggage Facilities
• Access limited at most of nation’s largest
airports by long-term exclusive-use
leases
7. High Fixed and Operating Costs
• Airplanes
• Fuel
• Engines
• Parts
• Labor
• Equipment
• Insurance
• Leases
• Marketing
8. Legal and Political Dangers
• Regulation of airline industry often
brought out intense litigation among
competitors who would protect their
market at all costs
• Similarly, regulation often led to
enormous political power held by
major carriers who were unafraid to
wield this power against the
competition
9. Summary – Barriers to Entry
•Government Regulation
•Civil Aeronautics Board
•Federal Aviation Administration
•Infrastructure constraints
•High fixed and operating costs
•Legal and Political Dangers
10. What would you do?
•Anyone interested in
starting an airline?
11. Southwest Airlines
• The beginning
came on a
cocktail
napkin,
pointing out
the “Golden
Triangle” of
Texas was
perfect
opportunity.
15. Value Creation + Southwest
• Reference Value
• Differential Value
• Monetary
• Psychological
• Total Economic Value versus Use Value
Reference Value + Differential Value
19. Responding to Price Objections
• Ad hoc price negotiations
• Value of price negotiation policies
• Value-Base Selling
Importance of Differentiation
High
Low
Low High
Cost of Search
(Difficulty of Comparison)
20. Price Increase Policy & Economic
Downturn
• Know that an increase in cost affects
the competition too.
• Hedge your price flux by buying
futures or bulk.
• INNOVATION!!!
21. Differentiation Through Employees
Southwest Hires….
•Positive attitudes over degrees and skill
•After rigorous interviewing
•With peer interviews
Culture/Structure
•Casual dress code
•Pension through profit-sharing plan
•Team focus
•Cross-training encouraged
•Internal promotions common
•Encourages employees to treat customer service as most important
part of the job
Former CEO Kelleher, “We want people who do things well, with
laughter and grace.”
CEO Gary Kelly, “Our people are our single greatest strength and most
enduring long term competitive advantage.”
22. We Luv Market Segmentation
• Low cost
• Low-fare
• Short-haul
• High-frequency
• Point-to-point
• Fun to fly
• No inflight meals (nuts and pretzels)
• No assigned seats
• Bags fly free
Good morning everyone and welcome aboard for today’s journey. The Captain will have several announcements in a few minutes, but I wanted to thank you all for keeping your seats in the upright position and seatbelts fastened. You are aboard Pricing flight 670 manned by Team 3, Angela, Jeff, Kelly and myself who also run Ca-Boom! Footwear in our spare time.
In order to understand what price a product is sold, what behaviors and expectations do the business have to focus on? The relationship between sellers and buyers are interconnected- The relationship of sellers expectations drive their behavior on price, which portrays to the buyer a value, and their behavior is driven by that perceived value. Southwest told buyers what to expect both in their advertising and price: No frills flying, no hidden fees, you get from point A to point B in a car, this is compariable…
Ad hoc pricing policy isnt a policy at all. Someone wants an exception in a policy. You give it to them. Guess what, give a mouse a cookie, he’ll ask for a glass of milk! You just let the customer create a pricing policy… who has control over the pricing policy? The company or the customer? No exception should be the main pricing policy. Material costs of planes. 737 only. Fly back for maint. @ low cost to customer Standardize the way costs are handed down. If the cost of raw materials increase by 5%, and your standard is earn 40% GM, there should be no surprise to the customer that because your product’s material increased, your price will also increase. Examples of how this does not work? Discuss developing more efficient ways to build to work with price increase, etc. Inducing product trials- SW has expanded from Texas only, to Mid-West, to USA, to US and Europe, CONTINUING TO DIFFERENTIAT.
Ad hoc price negotiations- Lose price integrity and the purchasing agent either will exploit it or will end up paying higher prices- A shift occurs: Instead of the seller managing the buyers expectations, the buyer manages the sellers expectations. So the buyer seeks and defines substitutes and reinforces the value of maintaining competitive suppliers because suppliers match the price. This minimizes the expectation that the supplier’s differentiation has a justifiable economic value. In the case of SW The economic value is geared towards driving, versus flying. So the value is already perceived as low because the airline doesn’t charge for extras but also doesn’t have any frills. **Negotiate for someone’s _____. E.g. glasses. Walk into the door knowing that all suppliers with this product face similar price constraints, e.g. the rent space at an airport increased. Prepare and arm the seller with pre approved value trade offs and discount policies. Instead of telling them about a price increase, find a method for a value increase. To take advantage of these new values, the buyer will have to conform to your policies and procedures and again supporting value creation as workflow will increase. In the case of SW an increase in price still puts them at the low cost segment of the market, however, they do not need to change a thing if their competitors are changing everything to decrease value. Same ticket prices but now you have to pay to check bags and you don’t get any snacks? Just a soda!? SW continues to let bags fly free and also gives snacks and soda. As other airline’s increase their price and offer less, SW is able to continue to be more value based for their customers. Ask class for examples! Value Buyers: Large Volume and can afford to cost search and evaluate many alternatives. Try to get all the benefits that are important to them while push the price as low as they can go. Use trade offs and offer a defense against pressure on price alone. Brand Buyers: differentiation, particularly of the type that is difficult to determine prior to purchase, is valuable but the cost to evaluate all suppliers to determine the best possible deal is too high. Buy a brand that is well known for good product and services without considering cheaper but riskier alternatives. Very loyal. Price Buyer: polar opposite of brand buyers. Reverse auction purchasing process or sealed bid. Use to load excess inventory or fill excess capacity. Convenience buyer: Don’t compare prices they just buy from the easiest source of supply. Expect to pay a premium for convenience. They are value, loyal, or price buyers that buy more frequently or spend more at a time. Discuss driving as an alternative for substitutes. Ask for examples of how South West appeals to these different types of Buyer Drivers.
So the cost of material increased… your margin has decreased. The competition is in the same boat. Educate the customers and increase perceived value. -Sure cost of tickets increased for all airlines, but SW is still letting your bags fly free! See a hint of economic downturn or future telling? Hedge your costs by buying now, bulk, or buy futures. SW bought gas futures and was the only airline to not increase their price from 2001 until 2009 * “SITE” If you cant beat the costs or increase the value, innovate and redesign! The day of September 11 th , 2001, all US airlines grounded their flights and canceled their trips, except for SW. They saw an opportunity to differentiate among the airlines. Sure, 9/11 was a horrible moment for the entire world, but why make it worse by grounding all flights, stopping people from commuting back and forth from interstate work, or canceling long awaited for trips? They kept a realistic mindset about the USA at that point. Not only were they continuing to support their customers, they continued to support their employees by being the only airline to not layoff employees during that tragic time. Mention 9/11 and no layoffs. Differentiation of having employees first vs customers.
The 9/11 no layoff story is a great example of Southwest’s unique culture that is known to truly believe in their employees. This is a large way that they differentiate themselves. They have been an example of putting their employees first, not the customers. By doing this, they know that the employees would take good care of the customers. Culture: Their culture is the driver behind customer satisfaction and the facilitator of Southwest’s competitive advantage.* I tried not to take it personally when I read that they didn’t seek out people with MBA’s or higher education during their hiring process. But I can appreciate and respect the notion that they hire for positive attitudes, and they believe they can provide training for skill, but positive attitudes come from within. Potential hires had to have a sense of humor an be creative to customer needs.Though the company does humorously acknowledge that pilots should know how to fly planes. An example of rigorous interviews and peer interviews - a story we heard through Scotty was that Southwest had a group of candidates in a room, they were told to go and take 5 minutes and come back prepared to present themselves to a group of Southwest employees. Usually when you are presenting you expect the interviewer to be watching and paying attention to what you say and how you deliver it. However, the Southwest interviewers were watching the Audience! They were looking for the listeners in the group- those are the people that got hired.
Southwest flies more passengers per employee and also has fewer employees per aircraft than the other major airlines. Low cost: Originally Southwest Airlines has flown only one type of aircraft, as mentioned earlier, the boeing 737. (Though this is changing with more recent happening) Using the 737 as the aircraft for all destinations helps keep the maintenance and training costs low and allows them to purchase, operate, and service their aircraft at a lower cost. Having only one aircraft streamlines pilot training, mechanic training, safety inspections, and allows the flexibility of switching aircraft and point-to-point connections. The majority of Southwest’s fleet is younger in years than the industry average, and that means less maintenance costs. They also retain their own 737 simulators for training in Dallas. One fall back is that Southwest’s model requires planes to fly short routes, multiple times a day for many years…over time this means tiny cracks due to the pressurizing and depressurizing of the plane each flight. But overall the cost benefit of having one type of aircraft has remained. Point-to Point/Short-haul: Southwest’s point-to-point model is key to their rapid gate turnaround strategy, which in turn allows more flights per plane per day. This spreads it’s labor and capital costs over more flights and keeping its average cost per flight below the industry average. No assigned seats: While I’ve heard some call it a cattle call…SW keeps the process simple with the no seat assignment policy and provides customers a first come first serve opportunity. You better believe I am putting calendar reminders for my check-in 24 hours prior to my flight! Bags fly free…is a huge differentiator for Southwest in the modern airline industry. Much of their current advertising revolves around this ‘bags fly free’ whereas previously their LUV advertising focused on their fun and friendly culture.
You might recognize this pyramid from our text. Little things accumulate to make BIG differences. Good pricing strategy involves five sets of choices that build upon one another. Through these choice Southwest was able to break the barriers of the airline industry. At the bottom, or foundation of strategic pricing is value creation. One way Southwest created value was that they didn’t operate in the hub-and-spoke route system. Instead, SWA passengers flew non-stop origin to destination. Next comes Price Structure. A Southwest example of this would be that they flew into uncongested airports of small cities, less congested airports of large cities. This controlled costs in reduced taxi time, fewer gate holds and less in-air waiting time. With Value Communication, Southwest did all of its ticketing in the beginning – there were no online sales. The travel agents had to contact the airlines. Pricing Policy: Example Price Level: Example
