Pricing to the Attributes Perceived to have Value

There is an interesting article in Harvard Business Review with a little sidebar on how customers respond to different pricing schemes. The researchers manipulated a payment mix between products and labor for car service in a conjoint analysis. In one scenario, customers saw greater value in paying more for products than for labor. However, they rejected a scenario in which they only paid for products and all labor was free, or one in which they paid for labor and all products were free.

The authors concluded that the most important thing to assess is the perceived value of what is being charged for. If customers do not see the value in something, they will resist paying for it. In the conjoint analysis noted, customers saw greater value in paying something for products, but not exclusively for products. They saw less value in paying for labor.

Think about what the airlines have done to their brands by charging for things like bags and food. The airlines have made the value proposition all about them and their profitability rather than having a customer-centric model. So, the airlines decided that paying a large fee for a flight was not enough to make themselves profitable. So, they started charging for extras, like bags, peanuts, cokes, etc. After customer rebellion, they reinstituted beverage service, but they had shown their hand--they had demonstrated to customers that they did not understand customer perceived value. The airlines were being run by accountants and investment bankers, not by marketing managers who understood brand management.Southwest now has a value proposition based upon having bags fly free, demonstrating to customers that they are only paying for what they value--i.e., the flight itself.

We also have the craziness going on at Ryan Air, the Irish-based discounter. They are considering having customers pay to use the toilet on board. The argument from the airline is that customers can use the toilet before boarding and if they want to go in flight, they should pay for it. This is an entirely "ass-backwards" way of thinking. Ryan Air built its brand based upon a basic premise--that a flight could be cheap and that customers would pay for bags, food, etc. Their flights were really cheap--one could get a flight for as low as one British pound. The basic necessities of the flight were included in the low fee. All other things were charged on a use-basis. Customers loved it. The customer understood the value exchange--they were giving up a luxury flight for a basic one. They were not flying to major airports, but rather to secondary ones, in most cases. In exchange, they were going very inexpensively. The question is, when is using the toilet--a biological necessity--considered a luxury like bringing bags and getting food on board? This is stepping over the line and Ryan Air has gone from being an admired brand to one that is now an international joke. Ryan is showing that he is more of an accountant than a brand steward. He should call Sir Richard Branson for some advice.

Money needs to be made, but the point is to charge for things in which the customer perceives value and to discount things that the customer does not value. If something is totally free, there is no value--at least not one we can measure. Customers have to be willing to give something in exchange for something to demonstrate value. We don't want to give things away for free and assume these discounts, but the costs can be absorbed or subsumed into the prices of valued items. We need to be certain that we are pricing appropriately to the customer perceptions and not to our own accounting needs. If we provide value and charge accordingly, we will make more money.