(a). Discuss the decision behind American Airlines developing and implementing value pricing to gain more market shares.
In 1992, American Airline (AA) came up a pricing strategy in its airline fare pricing known as value pricing. The decision was made following a complaint by the airlines customers seeking to cut down losses and operation costs. Additional factors that resulted to the development, introduction and implementation of value pricing include need to increase the airlines market shares in the entire airline industry as well as induce demand for flight services. The system that existed prior to the introduction of fair pricing was complex hence discouraged people from using it. Value pricing was anticipated to be a more beneficial system to the customer as it was considered simple and user friendly. By having a simple and user friendly system, AA was looking at increased satisfaction to its consumers which would translate into tremendous customer conversion and increased airline demand. Coupling increased demand with reduced operation cost would inarguably result into greater profit percentages. Value pricing model was perceived to be customer oriented. It gives the customer value which they derive from utility of the airline’s services. The main objective of this strategy was to maximize the consumer value and lower the prices.
(b). Evaluate the impact competitors and additional economic factors had on the results of the value pricing strategy.
Introducing a new strategy in an already established market must have an effect on the competitors and other economic factors especially if the strategy is product and/or cost oriented. Development and introduction of value pricing strategy had a direct impact on cost because it was looking at reducing the airline charges. The end result was a mixture of massive positive and negative distractions.
The first major impact that competitors and economic factors had on the result of value pricing strategy was the reduction of firs class air flight ticket fares by between 20 percent and 50 percent. The unrestricted coaches saw an average of 38 percent flight fare reduction. Additionally, the one way coach charges equaled that of 14 day advance purchase. Since the new system proved to be cheaper, passengers could enjoy traveling as frequent as they could afford. AA looked at providing services that would be more affordable compared to that the competitors were offering. Similarly, economic factors such as low purchasing power and need to do business saw to it that the value pricing strategy was economical.
Another major impact competitors had was simplicity and user friendliness of the entire system. AA had to look at the logistics used to arrive at the final flight fares and use the statistics to come up with a more competitive strategy. For instance, a customer would need to understand why they pay X amount of money to move from point A to point B. They would easily associate the understanding to why they pay Y amount of money to move from point A to point C and so on. The easiest way to bill such fares is by considering the distance. The previous billing system (which was also used by competitors) was complex and consumes could not comprehend it. By competitors having a complex system, it impacted on the result of the AA’s new value pricing system.
(c).What factors contributed to the advantages and disadvantages of this new pricing strategy.
As it is common with new strategies, profits are realized at the expense of other things. This leads into having advantages and disadvantages of the new strategy. AA’s new pricing strategy had advantages such as massive customer conversion (stevenson & Hojati, 2007, p67). However, the system witnessed disadvantages such as huge reduction in total profits due to stiff price completion from competitors. The main factor that resulted into huge number of customers was a simple and elaborative fare billing system. However, the spell was cut short because competitors mimicked the system. In fact the main factor that led to reduced airline profits was aping of the system by Trans Word Airline. Tran World Airline lowered its flight ticket charges lower than that charged by American Airline. To continue enjoying massive customer appeal, American Airline had to reduce their prices too. The overall effect was decline in profits from the entire airline industry.
Implementing the new system was a process that required financing. The expenses incurred in modeling, actualizing and putting the system to use the new system led to utilization of a considerably large portion of the airline’s profits. Expenses incurred include employing additional reservation agents to manage increased flight bookings, purchasing phone lines for customer service and expanding the staff to administer the entire operations.
Coping of the value pricing system led to a reduced number of customers because there was an alternative for the customers. Other airlines made improvements on their system making them even more attractive. For example, Northwest Airliners introduced ‘grownups Fly Free’ program which was more appealing compared to the flat value pricing offered by AA.
(d). Provide alternative recommendations to the value pricing strategy that would result in a different outcome when implementing the strategy.
The value pricing strategy is a brilliant idea. However, the steps followed while implementing the strategy were flawed. An alternative to one time implementation is step by stem implementation (Hoskisson, Eden, Lau, & Wright, 2000, p. 250). Since the systems was not patentable, it meant that other airliners were not blocked from exploring the option. AA should have invested bits by bits such that their revenue was not being overspend. In the case another airliner copies the system, there is still enough revenue to explore more mimic proof strategies.
Chan, S. (2001). Operation and cost optimization of a distributed servers architecture for on-demand video services. IEEE Communications Letters, 5(9), 384-386. doi:10.1109/4234.951385
Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). STRATEGY IN EMERGING ECONOMIES. Academy of Management Journal, 43(3), 249-267. doi:10.2307/1556394
Stevenson, W. J., & Hojati, M. (2007). Operations management (Vol. 8). Boston: McGraw-Hill/Irwin.
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