À la carte pricing by airlines

Faced with more thrift-oriented passengers during economic declines and the commoditization of their product, US airlines are moving towards pricing “extras” separately from the price of the ticket – charging for checking baggage, selling pillows and bottled water. The attraction of this incremental pricing strategy is a better deal for passengers who do not use these services, and it generates additional revenue from those who do (McCartney, 2008). Leading European budget airline Ryanair charges not simply for any checked baggage, but also for airport check-in (rather than online). The ancillary revenue has proven to be a very important contributor to airline financial performance

Traditional pricing approaches

The evidence is that pricing has traditionally been dominated by balancing costs with competitor prices – whether in complex quantitative pricing models or on “the back of an envelope”. Even new products have too often been priced based on the price of existing products. Basic principles for determining prices have tended to be cost-oriented (e.g. “cost-plus”), competition-oriented (e.g. meeting the competition or pricing relative to their prices), or demand-oriented (e.g. judging “what the market will bear”) (Cravens and Piercy, 2009). The result has often been a piecemeal and fragmented approach to pricing.

Indeed, the result of ad hoc price decisions for some companies has been “confusion pricing” when customers do not know the real price to be paid for the product or service. Traditional approaches have led to major pricing errors – Sony overpriced the PS2 in competition with Nintendo and had to quickly bring the price down to stay competitive while more recently repeating the error with the PS3 and cutting prices again; Apple overpriced the first iPhone and very early in the cycle had to reduce the price and apologize to the existing buyers and offer refunds.

Questions

1. What are the pros and cons of À la carte pricing model?

2. How does À la carte pricing model differ from traditional pricing approaches?

3. Think of a company that may be able to adopt À la carte pricing model, and discuss how it could implement the model in its pricing strategy.