If customers complain about your pricing, should you do something? A few things have occurred recently that have prompted me to write this post. In early March a bill was introduced in the Senate, Forbidding Airlines from Imposing Ridiculous Fees (FAIR) Act. A few days later I overheard two guys in the gym complaining about being charged for paper statements on their brokerage accounts. And a week after that, my personal dealings with Verizon for TV and internet felt like playing a game of Hunt the Wumpus. (Due to space, I will write more about this in a future post.) The issues are slightly different, but all are related to customers complaining about pricing strategies. Complaints about differentiated prices for differentiated service are natural and should not cause changes in your pricing structures. On the other hand, if your pricing is deceptive rather than aligned with different value profiles, you should fix it.
Senators Ed Markey (Dem., MA) and Richard Blumenthal (Ind., CT) have decided that separate fees for checking bags, changing or canceling a flight, and selecting better seats are somehow unfair and should be limited or prohibited; and that led them to introduce the FAIR Act. Certainly some customers have complained about those fees, which lends support to the senators’ view. However neither the complaining customers nor the senators are recognizing the benefit of those add-on fees. Customers are not all the same. They have different budgets, different needs on planes, and different abilities to plan their schedules. The airlines have appropriately recognized these different customer segments and created offers that can appeal to each. By differentiating prices, the airlines can offer the lowest fares to those who:
- Can plan their trips in advance (which enables the airlines to schedule flights more efficiently)
- Don’t need to check a bag (which saves space and bag handling labor)
- Are willing to accept less spacious seats
- Are willing to board the flight later than others
Remarkably, the price of a cross-country flight is similar today to prices 20 or 30 years ago. Those low fares are possible in part because of these structural price changes. And those low fares enable many people to fly who otherwise would choose not to. The airlines are able to make money by selling premium services like early check-in, exit-row seats and blankets to only those travelers who want them and are willing to pay for them.
On a political note, our politicians do not seem to mind tacking on separate fees for excise taxes, tourist taxes, airport usage fees, and drink taxes to all customers. It is pretty inconsistent to believe add-ons to fund government spending habits are acceptable, but add-ons for extra services are not.
Moving on to the guys in the gym, I understand why they might complain. They always got paper statements in the past and they do not understand why they wouldn’t today. Well the main reason is technology has enabled the world to do things electronically at a lower cost than mailing paper. That technology has enabled many new options for brokerage and other financial services over the years, and the prices for buying and selling securities have dropped dramatically. The financial services firms have passed their technology-related savings on to customers. Since it costs the firms money to print and mail paper statements, and many customers are happy to keep electronic records, it makes sense to offer the paper service for a separate fee. The separate fees also encourage customers to migrate away from paper records which is good for the environment.
Since customers have different needs and desires, pricing strategies should include identifying the different segments and creating offers for them. Restaurant customers do not all want cocktails, appetizers, and desserts, so prices for those items are usually separate. In some restaurants, even side dishes have separate prices, so the most price-sensitive or least-hungry customers can get what they want without subsidizing others. On the other hand, it is inappropriate to deceive customers about your prices, and doing so will ultimately cause customers to defect. A restaurant would not stay in business by posting a price for a meal, and then charging an extra fee to cook it.
It has often been said that if your customers do not complain about your prices, they are too low. Pricing to resistance is an acceptable part of any pricing strategy. More important is pricing to the value desired by different segments of customers.
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