20130123 southwest airlines presentation draft
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Pricing – an Airline Industry example
Team 3 (Ca-Boom!) – Angela Hoskisson, Jeff Van Sant, Kelley Malone, Shawn Casey
Time to Go Back…
Late 1960’s
How Far Back?
The Airline Industry – Late 1960’s
Barriers to Entry
Government Regulation• Civil Aeronautics Board (CAB)
• Formed in 1940• Safety Rulemaking• Control of what routes airlines can fly• Control of fares airlines can charge
• Federal Aviation Administration (FAA)• Formed in 1967 under Dept. of Transp.
• Air Traffic Control • Airman and Aircraft certification• Safety Enforcement• Airway Development
Infrastructure Constraints
• To start service airlines must have:• Access to airport facilities
• Gates• Ticket Counters• Baggage Facilities
• Access limited at most of nation’s largest airports by long-term exclusive-use leases
High Fixed and Operating Costs
• Airplanes• Fuel• Engines• Parts• Labor• Equipment• Insurance• Leases • Marketing
Legal and Political Dangers
• Regulation of airline industry often brought out intense litigation among competitors who would protect their market at all costs
• Similarly, regulation often led to enormous political power held by major carriers who were unafraid to wield this power against the competition
Summary – Barriers to Entry
•Government Regulation•Civil Aeronautics Board •Federal Aviation Administration
•Infrastructure constraints•High fixed and operating costs •Legal and Political Dangers
What would you do?
•Anyone interested in starting an airline?
Southwest Airlines
• The beginning came on a cocktail napkin, pointing out the “Golden Triangle” of Texas was perfect opportunity.
TURN AROUND TIME
BUSINESS OR PLEASURE
DON’T MESS WITH A TEXAN
Value Creation + Southwest
• Reference Value• Differential Value
• Monetary• Psychological
• Total Economic Value versus Use ValueReference Value + Differential Value
Southwest Strategic Pricing
Interaction of Expectations and Behaviors
Pricing Policy Development
• Ad hoc Pricing Policy?• Passing on material costs• Inducing product trials
Responding to Price Objections
• Ad hoc price negotiations• Value of price negotiation policies
• Value-Base Selling
Imp
ort
ance
of
Diff
ere
nti
ati
on
High
Low
Cost of Search(Difficulty of Comparison)
Low High
Price Increase Policy & Economic Downturn
• Know that an increase in cost affects the competition too.
• Hedge your price flux by buying futures or bulk.
• INNOVATION!!!
Differentiation Through EmployeesSouthwest Hires….•Positive attitudes over degrees and skill •After rigorous interviewing•With peer interviews
Culture/Structure•Casual dress code •Pension through profit-sharing plan•Team focus•Cross-training encouraged•Internal promotions common•Encourages employees to treat customer service as most important part of the job
Former CEO Kelleher, “We want people who do things well, with laughter and grace.”CEO Gary Kelly, “Our people are our single greatest strength and most enduring long term competitive advantage.”
We Luv Market Segmentation
• Low cost• Low-fare• Short-haul• High-frequency• Point-to-point• Fun to fly• No inflight meals (nuts and pretzels)• No assigned seats• Bags fly free
Strategic Pricing
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