Meissner Research Group

In a recent interview with German business newspaper Handelsblatt, Lufthansa’s Deputy Chairman Christoph Franz mentioned that the airline will implement several strategies so far employed by flow cost competitors (Lufthansa will Billigflieger kopieren, Handelsblatt, November 17, 2009). On certain short routes, the pitch between seats will be reduced. Kitchen and wardrobes will be completely removed to create more space for passengers. Franz mentioned that Lufthansa will have to let go of the old strategy that the profitable long haul business is subsidizing the less profitable short haul routes.

Most importantly, Franz admitted that Lufthansa has underestimated the competition by the low-cost carriers. After some initial panic following the arrival of Ryanair, Easyjet, Air Berlin and others on the scene, most incumbent full-service airlines had settled on the thought that low-cost passengers are a different bread and that their current customers will stay with them not matter what. They now realize that this leniency is dangerous.

For us this is good news, as this might spark some renewed industry interest in choice modeling in network revenue management. Doctoral candidate Arne Strauss and I have been working on improvement in this area for some time now. See for example our articles ‘Pricing Structure Optimization in Mixed Restricted/Unrestricted Fare Environments’ and the upcoming ‘Improved Bid Prices for Choice-Based Network Revenue Management.’

Pricing strategies to thrive in the continuing market downtown.

In the current recession, top executives are called upon to make tough decisions to find a quick turnaround for sliding profit margins and reduced sales. And while sale prices, gimmick promotions, and free giveaways might stir up business in the short term, they may also cause long term damage to your company’s image and brand. Executives need to remember that pricing on value, instead of on costs, competition, or even those frugal recession era customers, can reap the largest benefits for their companies.

1. Don’t Slash Prices for a Quick Buck.

Since customers during the recession are looking for the cheapest prices, even going so far as to haggle when they wouldn’t have dared before, businesses are quick to drop prices in hopes of retaining these customers and perhaps even creating new ones. And while the price cutting might lead to short-term increased revenue, it can also create a bidding war that will devastate your future pricing. The prices will drop so far, so fast, that even if you got the sale, you’ll be so far beneath your profit margin that it you’re essentially paying for part of the product yourself.

2. Don’t Ruin Your Brand Name.

Any marketing specialist will tell you that branding is essential to a business’s long-term success. You’ve worked for years to develop your company’s brand, to instill confidence in your products, and to create lifelong customers. If customers suddenly see you dropping prices, they will start to doubt the value of your products, even if nothing has changed. In the eyes of a customer, if your product becomes cheap, so does your brand. To keep your prices where they should, remember that what is unique about your company. Give the customers detailed descriptions of the value of your products, and they’ll remember why they started buying from you in the first place.

3. Luxury Items and Services Are Just That – A Luxury.

Just because the economy is tanking and the recession is continuing doesn’t mean that your high end items should suddenly be sold at Wal-Mart. If you’re going to reduce prices on some items, thereby reducing their inherent value in the customers’ eyes, then reduce the prices of your lower quality products. The customers who want cheap prices will find cheaper alternatives no matter what you do, but your loyal customers, who expect a high level of service and value from your products, will continue to pay for the service and value. Luxury items and top-of-the-line products should retain their top-of-the-line pricing.

4. Fix Pricing the Hard Way.

Pricing products often falls to people who are not in charge of the entire company. They watch the markets and the product flow, and they alter prices according to the old standards of supply and demand. In a normal or booming economy, this is an effective decision. In a recession, this no longer works. As an executive, seeing how each piece of the pricing puzzle fits together, finding where to squeeze that last profit dollar out, is not only your responsibility, it should be a priority. Look at pricing as a whole package deal, taking into account everything from the gas for delivery to the price of raw materials. Improve employee relations by setting new sales standards for your staff, instead of relying on figures from when customers were more apt to buy. Figure out where money is being lost by trimming production costs, cutting back on any expansion project, and slash nonessential perks. Take control of your pricing policy, and don’t let the nagging customers who claim they’re going to go to your competitor force you into bad pricing decisions.

5. If They’re Going to Go, Let Them.

If customers say they’re going to take their business elsewhere when you can’t produce lower prices, let them. Instead, create loyalty programs for the customers who do stay with you and attract new customers with deals designed for recession era economics, like bundling new services into old programs while keeping the same price. Keeping the loyal customers and attracting new customers is far more important than placating the fickle ones, who are just as likely to jump ship as they are to stay. Also, entering into a bidding war with other companies is useless: the customer will go with what they perceive to be the lowest cost, costing your business money in the end whether they went with you or your competitor.

In a recession, your profit margins and overall revenues are not going to be as good as last year. But by taking control of your pricing policy and not cutting prices just to survive today, you help to create a recession-proof product by continuing to build your customer base. If you can keep your customers happy and retain the level of value and service your customers expect, you and your company will continue to thrive long after the recession has ended.