Unbundled Pricing and Charging For
Extras Valuing Free Rags Srinivasan @rags Iterative Path

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 There is urgent need for revenue optimization!

Businesses Need Better Value Realization
Banks Effective pricing for services News Media Moving from Free to Fee Telecom Moving from All- you-can-eat to Metering

Case Study: Airline Industry 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… … the carrier had been investigating fitting coin slots to the doors of aircraft toilets, similar to those installed at train stations. See related: Unbundling the in-flight toilet

How can marketers practice unbundled
pricing without turning off customers?

What is in this report
Background Hypothesis Experiment Results and Implications

If customers never paid for
something, 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”

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 Revenue Optimization and Value Realization start with customer reference price

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

What is in this report
Background Hypothesis Experiment Results and Implications

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 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 using t-test We had almost 60 responses for each group Highly Unlikely-1 Highly Likely - 10

What is in this report
Background Hypothesis Experiment Results and Implications

How likely are you to
pay a $25 fee to check-in your bag? t-stat 9.368332827 Conclusion: People are more accepting of baggage fees when presented with a premium option. 0 5 10 15 20 25 30 35 1 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly Likely No Premium Option With Premium Option

How likely are you to
pay $2 for in-flight soft drinks? t-stat 8.241069952 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 0 5 10 15 20 25 30 35 40 1 = Highly Unlikely 2 3 4 5 6 7 8 9 10 = Highly Likely No Premium Option With Premium Option

How likely are you to
pay $4 for pillows and blankets? t-stat 6.533785889 Conclusion: People would pay $4 for pillows and blankets when offered an $8 option 0 5 10 15 20 25 30 35 40 45 1 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly Likely No Premium Option With Premium Option

But options do not increase
airline preference! Given these options, how likely are you to choose our airline in the future? t-stat 1.809522874 0 5 10 15 20 25 30 35 1 = Highly Unlikely 2 3 4 5 6 7 8 9 10 = Highly Likely No Premium Option With Premium Option 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.

What does this mean to
you as a marketer Findings from this study apply in general to all use cases 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

For More Information http://iterativepath.wordpress.com Pricing
and Marketing Strategy http://unbundling.wordpress.com Revenue Optimization

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