My father was an entrepreneur and executive that built an IT services enterprise. He drove a van. Then he converted to one of the original mini-vans. I was embarrassed. My friend’s parents drove cool vehicles: Suburbans, station wagons with 3rd seats facing backwards, anything but a mini-van (& it was puke brown). In my friend’s station wagon, we used to make faces and “kept up relations” with the cars behind us back then. I wonder if our generation started the road rage epidemic?
I remember my father driving to his offices throughout Texas (Yes, in the Mini). Then one day, Southwest Airlines changed his travel habits. My father began to fly. He also began to ONLY travel using Southwest Airlines to all of his offices located throughout the South. As someone who dreamed of being “first class”, I couldn’t understand why my CEO Dad was traveling common style. This could have been due to his loyalty to SWA’s free Scotch promotion, but more likely, it was his loyalty to the low prices and convenience of getting to his destination is less time.
When is the last time that you considered your pricing strategy? Most of us take a cost plus approach to almost everything. If SWA tried this, we would not be talking about them. I want to challenge you to work on an exercise that starts with arriving at the ideal pricing to dominate a market, and then work backwards to arrive at the costing that will get you to that plan. It may just save your company.
Try this approach and let me know what it reveals.
- First, determine your “Usual Suspects”: all of those products and services that most closely resemble your offering (this is your traditional Competition).
- Second, determine your “Non-Customers”: all of those products and services that do not take on the same form as your offering BUT perform the same function.
Take Southwest Airlines. “We’ve always seen our competition as the car. We’ve got to offer better, more convenient service at a price that makes it worthwhile to leave your car at home and fly with us instead.” (Colleen Barrett, executive vice president). This is not the time to be proud of your offering. What are all of the ways a customer can solve the same problem that you fix but in different forms?
- Third, determine what price range you will need to attract this larger market (in SWA’s case, those people that drive cars) in order to compete.
Your price range needs to attract the mass of target buyers that fall into both the Usual Suspect and Non-Customers so that they will have a compelling reason to buy.
In SWA’s case, they priced their fares based upon the cost for someone to drive instead (not for someone to fly using another airline).
In the case of Ford and the Model T, the Usual Suspects were over 500 automakers in the United States that built custom-made luxury autos. Henry decided to focus on the horse-drawn carriage as his competition instead of the luxury custom made shops. The carriage offered the same utility as the automobile but it was very different in form. The Model T was designed and priced to compete against the horse carriages.
- Finally, determine the cost structure that you will need to deliver in order to make a profit on your new determined pricing.
In Ford’s case, the Model T had to offer the same utility as a horse drawn carriage that could travel anywhere (smooth and uneven roads, during rain or shine) and was easy to maintain. As a result, Ford achieved a breakthrough in innovation by limiting options that did not enhance utility and by creating an assembly line that could use interchangeable parts. Ford was able to achieve a competitive cost position that allowed him to price his product against the mass market, automobile owners and horse carriage owners (Where is Ford’s cost position today?). Back then, the 500 other auto manufacturers focused on customization (high prices, low utility).
What operations breakthroughs can you uncover by turning your analysis around and focusing on your pricing first to arrive at your achieved cost targets?
One last thought on promotional pricing. When Braniff Airlines moved into Texas to take SWA head on, it offered flights from Houston to Dallas at 50% of SWA’s prices. In response, SWA did something absolutely brilliant. SWA cut it fares to the same price BUT for those passengers that paid the full fare, SWA would give the customer a bottle of liquor (or an Ice Bucket for “the Mormons who claimed they don’t drink” according to Herb Kelleher). Herb told a group of us a few years ago that in 1973 during the promotion, Southwest Airlines was the #1 distributor of Whiskey in Texas.
Cheers and Bottoms up to that!
Now that I think about it, I think my Dad flew SWA for the Wild Turkey