Managing Consumer Perceptions With A Reference Price

In my previous posts I identified a problem with unbundled pricing, managing consumer perceptions. When a marketer itemizes components and prices them separately, the consumers are bound to feel nickel and dimed. Since the components have never been sold separately there is no reference price for these.

United Airlines, the first among airlines to introduce unbundled pricing, charges $25 for the first bag and $50 for the second. In the absence of a substitute the fees are viewed dimly by travellers. Now United has entered into a contract with FedEx to introduce expedited bag service.

United and Fedex service costs $149 for less than 1000 miles and $179 for more than 1000 miles, a single 50 lbs bag, to be delivered by 430PM. For most passengers who check in bags and balk at the $25 and $50 fees at the check-in will not consider the FedEx option. But it helps to set a higher priced comparable in their minds hence help alleviate the resistance to unbundled pricing. For those with a higher willingness to pay to avoid the hassles of hauling the bags to and from the airport and deal with lost or delayed bags, the FedEx service will be attractive.

It is not clear if United agreed to pay a fixed fee to FedEx regardless of volume. If there is no such fee then FedEx is really using the idle capacity (marginal cost of which is zero) to transport the bags. So even if no one uses this feature, the very existence of it helps United to justify its baggage fees because now there is a reference price.