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.

Fairness Questions on Unbundled Pricing

There is a scathing opinion piece in The Econonist web-only edition on the Airline fees. Titled, "Come fly the fee-filled skies", the article frames the entire unbundled pricing as a fairness question wondering whether the passengers will be asked to pay for reclining in their seats or using the bathroom.

And in the midst of this malaise, airline executives have been casting around for new ways to make money—including charging customers more for “extras” that were previously embedded in a basic ticket price.

Fairness in pricing is definitely a factor that marketers should consider when unbundling. In the case of airlines, there is also considerable history behind th outrage. With the practice of "yield pricing", almost everyone views airline pricing as not "fair".

Combined with it when customers do not get the value for the price they pay, the fairness issue is going to cause outrage. For example, when United charges $50 for the second bag and still manages to lose it (albeit temporarily) the customer sees no value for the cost incurred.

Unbundled pricing is not about wringing the last dollar out of every customer without providing value. It is about identifying those with higher Reservation Price for certain components and delivering them value that is well above what they would get with bundled pricing.

This topic on fairness and consumer behavior have a much larger significance in the success of unbundled pricing. I will revisit these in the future.

Partioned Pricing Is Not Unbundled Pricing

In their paper titled Bundling of Products and Prices published in Journal of Marketing 2002, Stremersch and Tellis say this about Partioned pricing

Morwitz, Greenleaf, and Johnson (1998) show that partitioned
pricing, in which a firm divides a product’s price into
two mandatory parts, the product and shipping charges, can
increase consumer demand because of lower recalled costs.

 The key word here is "mandatory".  One part cannot function or will be of any use without the other. For example,take the case of  product plus shipping case they quote. When customers buy from an online only seller, there is no avoidance on purchasing the shipping. The customer does not have a choice on whether or not to purchse shipping even though they may have options for multiple classes of shipping.

Partitioned pricing is not same as unbundling. In the Airline that I love talking about, suppose the airline charged a separate fee for your seat cushion and offer you three choices

1. basic          $8
   
2. comfort     $16
   
3. super comfort   $20
   

 This is not unbundling, passengers have to pick an option. Compare this to baggage fee, inflight meals and movies. In all these the customers have the option of not buying.  Unbundling is about giving customers that option and making them self-select on which additional services they want to buy and which they don't.