American Airlines (AA) is a well-known company that managed to become a leader in the industry. At the beginning of the 20th century, it managed to introduce a new value pricing model. Such a step was made to meet clients’ complaints and minimalize organizational expenditures. In addition to that, the alteration of the pricing model was needed because of increased flight demand. The desire to enhance the airline’s market share is also critical to consider.
With the help of the value pricing model, AA received an opportunity to benefit its clients. In particular, the existing system became much easier to understand and utilize, which reduces the number of misunderstandings and associated problems. Professionals expected that this alteration would make it possible to increase customer satisfaction, which will also have a positive influence on changes associated with the airline’s demand.
As a result, the profitability of AA is expected to increase significantly. Such alteration can be caused by the mutual influence of the improved demand and reduction of expenses. All in all, the airline is expected to set prices, focusing on the way the value of services is perceived by clients. In particular, this value is associated with the result of the product utility. Thus, AA is believed to have an opportunity to provide its clients with the lowest prices associated with the highest value.
When AA started using a new value pricing strategy, the whole airline industry of the country faced significant alterations. A massive distraction was caused, and it had both positive and negative influences. For instance, the use of this pricing strategy led to the reduction of ticket prices. The first-class tickets, in particular, became 20% cheaper. In some cases, these numbers reached 50%. In addition to that, the unrestricted coach seats reduced almost by 40% throughout the industry.
The prices of a one-way coach fare and a ticket bought two weeks before the flight became equal. Noticing significant fare pricing reduction, those individuals who fly rather often started using services provided by the AA. In this way, demand for the company’s offerings increased significantly. Customer loyalty was also enhanced because people became willing to travel for lower prices instead of paying more for the same offerings. At the same time, passengers appreciate an opportunity to spend less and enjoy traveling as often as possible.
Except for the discussed characteristics, value pricing impressed AA’s shareholders due to its simplicity. Being easy to understand, this system could be perceived by clients without any critical issues. Receiving information about the flight charges, passengers realized their connection with the number of miles they spent flying. In this way, clients were not surprised by prices. They understood that the longest flights are the most expensive while the shortest trips turn out to be rather cheap. Thus, people who used AA’s services had no necessity to try to understand more complex pricing systems already.
Regardless of several advantageous changes associated with value pricing, this model turned out to be associated with various disadvantages that affected the success of the company. As AA minimalized its ticket prices, it managed to increase demand and attract more loyal clients who travel much. Nevertheless, it also led to a significant reduction in profits because of the initiatives implemented by its competitors to enhance their position in the market. In particular, they had to reduce prices even more than AA to attract clients. As a result, AA cut prices one more time, and this decline continued. Finally, the profits of the whole industry were affected negatively.
Moreover, the very process of implementation of a new pricing strategy was associated with additional expenses. In particular, the company had to spend more to actualize the model. The organization had to deal with the increased number of customer complaints and demands that is why it had no other opportunity but to hire more personnel and to acquire additional phone lines that could be used to handle such issues.
New reservation agents were needed to deal with bookings, and new staff members were employed to administer the system. One of the major disadvantages of value pricing was the fact that it could be easily copied by any other competitor within the same industry. In this way, soon after AA, other companies started using the same system, developing more and more attractive programs to attract clients.
To obtain better outcomes, AA could have considered the possibility of using alternative methods. For instance, a more positive resolution could be obtained if the company considered the implementation of a strategy that could not be easily implemented by other organizations operating in the same field. Many advantages could be expected if AA tried to enhance its customer care services, ensuring that its competitors do not have an opportunity to manage the same improvements.
In this way, AA would have a chance to offer those services that appeal to its clients and are unique at the same time (Narangajavana, Garrigos-Simon, GarcÃa, & Forgas-Coll, 2014). Thus, passengers would resort to it when they are going to travel. It was important to keep the flight prices competitive because being too high they could also demotivate people from using AA’s services. To become a leader in the airline industry, AA should have focused on its offerings and its quality. It was possible to enhance market share and remain competitive in this way (Brueckner & Luo, 2014). The company should have considered more opportunities for improvement and their possible outcomes before implementing value pricing.
References
Brueckner, J. K., & Luo, D. (2014). Measuring strategic firm interaction in product-quality choices: The case of airline flight frequency. Economics of Transportation, 3(1), 102-115.
Narangajavana, Y., Garrigos-Simon, F. J., GarcÃa, J. S., & Forgas-Coll, S. (2014). Prices, prices and prices: A study in the airline sector. Tourism Management, 41, 28-42.