Pricing Lessons from the Airline Industry

The airline industry is guilty of sharing Too Much Information. A few days ago the media was full of reports that American Airlines (AMR) was going to start charging passengers $8 for a blanket. This would be the next chapter in the continuing saga of the industry's financial woes and how it struggles to find new ways to nickel-and-dime its customers in order to stay afloat during these difficult times.

For example, during the past few years, many of the airlines either stopped providing in-flight meals or began to charge anywhere from 5 to 10 bucks for one. In 2008, US Airways (LCC) announced a $25-per-checked-bag fee. Another airline I recently flew offered a premium seat, which was nothing more than a seat a few rows ahead of me, for an extra 30 bucks. This past September, Southwest (LUV) (et tu, Southwest, et tu?) added a "priority boarding" fee, which allows ticketed passengers the option of getting on the plane approximately 3 minutes and 12 seconds faster than if they were to just hang around for regular boarding. And now this American Airlines thing.

C'mon, folks. We don't need to know about your revenue woes any more than we need to know that Hayden Panettiere recently reconciled with her ex-boyfriend. We don't care. It's TMI. Don't you get that? If not, then maybe you should listen to a few smart business owners I know who do.

Because they find ways to get additional revenues from their customers without turning it into a mass-media event. They would never make public announcements or advertise these actions like the airlines do. It's just Too Much Information. It's like finding out that Tom Cruise will soon be making Mission Impossible 4. No one cares. And it's a perfect example of why so many small companies are run better than their larger counterparts. So to the airline chiefs, let a few entrepreneurs and I offer you some pricing advice.

One Number

For starters, don't bring attention to your prices; just bake in the extras. For example, we used to break out all the individual costs of the software products we sold—licenses, maintenance, support, shipping, handling, taxes, etc. All that did was encourage customers to negotiate individual line items. It was a headache. So now we include all the costs as one number. Some of our overhead is included in handling so we spread that among all our clients. US Airways, you've got computers, right? Figure out what these extra bags are costing you, build in a little profit margin, and then include it in your pricing. We don't need to know any more than that.

Here's another crazy idea. Reward us. A friend of mine, John, runs a landscaping business and often gives stuff away for free to his best customers. Sometimes he throws them a fall cleanup on the house. Or he has one of his guys fix a drainpipe or gutter at no extra charge. Of course, he always lets the customer know that he did the work at no charge. Now that's a good thing to advertise. Kind of like the free promotion those warm-hearted celebs got when they so graciously appeared on that Haiti fundraiser, during prime time, in front of hundreds of millions of potential buyers of their products. Good people. Good promotion.

For John, giving away stuff creates a lot of goodwill. And keeps his good customers coming back. So here's a good idea, British Airways (BAIRY)—before charging me extra for a "premium seat," how about just moving me to that seat at no extra charge as a little thank-you for using your airline four times a year to drag my screaming kids over to London to see my in-laws? You'll get more long-term revenue out of me that way. Want me to have John give you a call and explain how this is done? Geez.

Andrea, who runs a 50-person printing company does the opposite of John, but with similar results. When she quotes a price to a customer, she's got a special line item titled "AF." The second letter stands for "Factor." And the first letter? Well, what do you call those customers who you hardly see, but when they do crawl out of the woodwork with a small order, it's to you in complaints, requests, and demands that create a lot of unnecessary work? Andrea charges these people more. So Southwest, rather than charging a lame "Priority Boarding" fee, how about putting technology to work to find those similarly high-maintenance customers and up their pricing a mere 10 or 20 bucks? What, like you don't know who they are? Oh yes, you do. We all know who these customers are.

"Preferred Customer" Discounts

And American Airlines…believe it or not, I think you guys do a great job. I'm a frequent flier of yours. So instead of announcing a silly $8-per-blanket charge, why not instead promote your frequent flier and "Business Advantage" plans instead, both of which are excellent. And one of the advantages of using these plans could be "discounts" off your pricing. Let the non-frequent guys pay the extra cost somehow. Give us a break. I signed up as a "Preferred Customer" at the sushi restaurant down the street from me and instead of being told that the price of a spicy tuna hand-roll is going up a buck next month, I get a coupon e-mailed to me offering a 15% discount on dinner. I feel appreciated. I keep coming back. I buy more spicy tuna hand-rolls. Get it?

And to the entire airline industry, why not give Michael, who runs an electrical supply company a call. Or Dave, whose business sells custom signs. Or Terri, who with her two brothers, owns a company that manufactures machine parts. All of these people have one astonishing thing in common: their companies use a price list. Shocking! If you do what they do, then your customers will know what the published prices are for all your services and products. These prices can include all of those extra fees you like to charge. Believe me, Michael's company doesn't charge a customer $50 to replace an outlet and then $250 to the customer next door for doing the same thing. By the way…the "stated" price on your price list can also include that "AF" fee I mentioned above. This gives you the ability to look like a prince when you discount it. Believe me—this works.

Did you know that Brad and Angelina were together at the Super Bowl? Or that Heinz (HNZ) has developed a new and improved ketchup packet that solves all of the problems that the old one had? Do you care? Of course not. It's TMI. Run an airline? Want to charge an extra fee? Ask a small business owner how they would do this. If you do it right, your customers should never even know about it.

Before it's here, it's on the Bloomberg Terminal.