Once you understand how value is created and can be communicated for

different customer segments, the next choice required for a pricing strategy

is to select a way to monetize that value into revenue. We call the output of

this process a price structure and we cover the topic in depth in Chapter 4.

The most natural price structure is price per unit (for example, dollars per

ton or euros per liter). This is perfectly adequate for commodity products and

services. The purpose of more complicated price structures is to refl ect differences

in value created, or ability to pay for it, from different customer or

application segments.

An airline seat, for example, is much more valuable for a business traveler

who needs to meet a client at a particular place and time than it is for

a pleasure traveler for whom different destinations, different days of travel,

or even non-travel related forms of recreation are viable alternatives. Airline

pricers have long employed complex price structures that enable them to maximize

the revenue they can earn from these different types of customers, who

may be sitting next to each other on the same fl ight. On Monday morning or

Friday afternoon, they can fi ll their planes mostly with business passengers

paying full coach prices, but they are likely to be left with many empty seats at

those prices on Tuesday, Wednesday, and Thursday. While they could just cut

their price per seat to fi ll seats at those “off-peak” times, they then would end

up giving business passengers unnecessary discounts as well. To attract more

price-sensitive pleasure travelers without discounting to business travelers,

they create segmented price structures so that most passengers pay a price

aligned with the value they place on having a seat.

On the Tuesday morning when this was written, you could fl y from Boston

to Los Angeles and return two days later for as little as $324—but with

a non-refundable ticket, a $100 charge for changes, a $15 checked baggage

charge each way, and low priority for rebooking if flights are disrupted by

weather or mechanical problems. For $514 you could get the very same seats

on the very same flights, but with a refundable, changeable ticket and high

priority rebooking in case of disruption—all things likely to be highly valued

by a business traveler but barely missed by a pleasure traveler. Similarly, you

could pay $934 for first-class roundtrip travel with a non-cancellable ticket

and $150 change fee. Totally fl exible and cancellable fi rst-class travel would

cost you $1,901. With these different options, the airlines maximize the revenue

from each fl ight by limiting the seats available at the discounted, noncancellable

prices to a number that they project could not be sold in the higher

fare classes.

 

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