Pricing is one of the most powerful -- yet underutilized -- strategies available to businesses. A McKinsey & Company study of the Global 1200 found that if companies increased prices by just 1%, and demand remained constant, on average operating profits would increase by 11%. Using a 1% increase in price, some companies would see even more growth in percentage of profit: Sears, 155%; McKesson, 100%, Tyson, 81%, Land O'Lakes, 58%, Whirlpool, 35%. Just as important, price is a key attribute that consumers consider before making a purchase.
At most companies today, pricing is a mix of marking up costs, matching competitors, and doing things "the way that they have always been done." A simple change in the way that managers think about pricing can reap a financial windfall. The key to better pricing is to "think like a customer" and set prices to capture the value that consumers place on a product or service. The beauty of focusing on better pricing is that prices can be changed on Sunday night and new profits can start rolling in as early as Monday morning.
Consider airline travel. On a packed cross country airline trip, how much would you pay for the benefit of not having someone sitting next to you in the middle seat? No airline has been able to capitalize on the tremendous value that passengers reap when someone is not squeezed in next to them. For me, an empty middle seat equates to enjoyable flight: no jabs and plenty of room to spread out my work materials. It's almost as good as first class.
Today, it's generally luck that determines which middle seats remain vacant at take off. When a flight is not sold out (which is often), some passengers are "luckier" than others. Why not start charging passengers for this added value?
One way to essentially guarantee that no one will sit in the middle seat is to simply purchase the middle seat, as some travelers do on international trips. However, there is another, lower priced, "no middle seat" option that may make sense to both airlines and consumers.
Here's my thinking: suppose two people book a trip and take the window and aisle seats. For, say, $100, the airline will "hold" the middle seat and designate it as one of the last seats to be sold. If demand ends up high, the airline will sell the middle seat to reap full revenue and refund the initially paid $100 option fee. If the plane is not sold out, the middle seat remains open. The benefits of offering a "no middle seat" option are two-fold: consumers have the opportunity to boost their chances of enjoying a relaxing flight and airlines reap revenue from unused capacity.
This straightforward value capturing strategy could reap an extra $227 million in profits to
annually. Delta offers 6,230 flights daily. Suppose that just one "no middle seat" option is sold on every flight (this is a realistic assumption: Southwest was selling two to three of its premium priced Business Select tickets -- which offer priority seating -- on every flight within a few months of rollout). Now assume an average price of $100 per option ($50 on shorter flights to $200 on long hauls). The result is an extra $623,000 in pure profit per day; multiplied by 365 days yields roughly $227 million in new profits.
Consider the profit potential for other U.S. airlines:
, $124 million;
, $120 million,
( UAUA), $120 million;
; $110 million;
, $100 million. Given the "hidden profit" potential of monetizing excess capacity, every airline in the world should be offering a "no middle seat" option.
So...what's your company's "no middle seat" opportunity to capture value?