Question

Pricing is extremely difficult for companies to get right. Not only does price provide revenue and enable a company to maximize profit, price also reflects the value of the product or service.

Some examples of pricing strategies are:

• Premium Pricing: a high price for a product (e.g. Lexus or Ferrari)
• Penetration Pricing: a low price to win market position (e.g. Walmart entering a new market)
• Economy Pricing: a no-frills low price (e.g. Low-cost carriers)
• Bundle Pricing: a combination package of products or services to increase sale or move inventory.

Select a product or service in the aviation industry. What pricing strategy/model is used? In your opinion, is it the correct one? Why or why not?

The important part of this activity is to think about the specific pricing strategy as you apply the concepts found in your readings with your chosen product or service to develop your response.

Answer 1

Spirit airlines, like other low cost airlines, offers customers a low cost alternative to the higher priced airlines. Unlike Southwest, who offers customers the basics for free, Spirit offers bundle pricing to its customers. This often is something that customers do not fully understand until they are ready for their flight. Spirit now offers customers a low base fare that they then can add on to. At the time of purchase for example, a customer can chose to bundle their flight with adding bags, seat choice, and even expedited TSA clearance. Customers who opt not to add ancillary services at time of booking can still do so when they get to the check-in counter but often at a higher cost. This approach has been shown in research to bring in higher revenue. Many customers who choose to go with a low cost airlines are those who are taking a vacation or who don’t fly often. Literature has shown, “Intuitively, a customer who purchases a lower priced seat and more ancillaries (e.g., a vacationer with a lot of baggage) might bring more revenue than someone who purchases a higher priced seat but less ancillaries For this purpose, it would seem that Spirit has a good approach as their bundle pricing will increase their revenue. This is reflected as their overall revenue growth has increased year over year. In 2018 alone they saw a 37.09% growth in their revenue. This type of bundle pricing might be good for the airline but it might have it downside as customers might not continue to choose to fly with a company where they feel they are nickeled and dimed.