Results from a consumer behavior experiment on customer acceptance of paying for extras. We propose a reference price based solution to managing consumer behavior.

1. Unbundled Pricing and
Charging For Extras
Valuing Free
Rags Srinivasan
@rags
Iterative Path

2. What is in this report
Background
Hypothesis
Experiment
Results and Implications

3. Marketers are used to selling all inclusive
bundles
Customers are trained to see the product/service as a monolith with one
price
Gaming Bundles Cable TV Airline Travel

4. They cannot continue to give away extras for free
The economy is
melting and customers
are becoming
increasingly price
sensitive
With pricing pressures
and cost overruns
there is no cover
Costs of providing
the extra services
continue to increase
There is urgent need for revenue optimization!

5. Businesses Need Better Value Realization
Banks
Effective pricing
for services
News Media
Moving from
Free to Fee
Telecom
Moving from All-
you-can-eat to
Metering

6. Case Study: Airline Industry
According to a Cost
study - $15 marginal
cost per bag
Increasing cost of
meal service
Falling ticket
prices = no
differentiation
There is an increasing
need for airlines to
charge separately for
paper tickets, meals,
checked baggage, etc.

7. Some airlines are taking it to an extreme…
… the carrier had been investigating fitting coin slots to the
doors of aircraft toilets, similar to those installed at train stations.
See related:
Unbundling the
in-flight toilet

8. How can marketers practice unbundled pricing
without turning off customers?

9. What is in this report
Background
Hypothesis
Experiment
Results and Implications

10. If customers never paid for something, how can a
marketer price it?
Customers have always paid
nothing
There is nothing to compare
against
They are bound to feel “nickel
and dimed”

11. The answer lies in Reference Price
Reference price is
what the customer is
used to paying for a
product and expect to
pay despite the value
they get
$0.00
Revenue Optimization and Value Realization start
with customer reference price

12. We believe that improving the reference price
increases customer acceptance
Hypothesis: If marketers
can improve this reference
price, they can increase
consumer acceptance of
these extra charges
One way to do this may be
to provide consumers with
two options

13. What is in this report
Background
Hypothesis
Experiment
Results and Implications

14. We devised a between-groups experiment for
Airline Unbundled Pricing
Group 1 had just one
option: proposed pricing for
freebies
Group 2 had two options:
with expensive and standard
pricing
Group 1 or 2 decided by coin toss –
different survey shown randomly to
each respondent

15. Respondents were told they were taking a
survey for an airline
Respondents were asked to rate on a
scale of 1 – 10 their likelihood of
purchase
We targeted MBAs and others in
LinkedIn and Facebook networks

16. For example…
No premium Option With premium Option
 Our Airline is considering
charging $2 for in-flight soft
drinks. How likely are you to
purchase the service?
 Our airline is planning to
introduce two in-flight drink
options.
(1) Offer premium soft
drinks from luxury
brands like Evian at a
price of $4 a bottle.
(2) Continue to offer soft
drinks including bottled
water and soda but at a
price of $2 per bottle.
How likely are you to choose
Option 2 at $2 a bottle?

17. We analyzed the survey results by
comparing the sample means
Compared the mean
likelihood values of
the two groups using
t-test
We had almost 60
responses for each
group
Highly Unlikely-1
Highly Likely - 10

18. What is in this report
Background
Hypothesis
Experiment
Results and Implications

19. How likely are you to pay a $25
fee to check-in your bag?
t-stat 9.368332827
Conclusion: People are more accepting of baggage fees when
presented with a premium option.
0
5
10
15
20
25
30
35
1 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly Likely
No Premium
Option
With
Premium
Option

20. How likely are you to pay $2 for
in-flight soft drinks?
t-stat 8.241069952
US Airways abandoned its six month practice of charging $2 for soft drinks and
$1 for coffee/tea after customer outcry.
The Wall Street Journal
0
5
10
15
20
25
30
35
40
1 =
Highly
Unlikely
2 3 4 5 6 7 8 9 10 =
Highly
Likely
No Premium
Option
With
Premium
Option

21. How likely are you to pay $4 for
pillows and blankets?
t-stat 6.533785889
Conclusion: People would pay $4 for pillows and blankets when offered an $8
option
0
5
10
15
20
25
30
35
40
45
1 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly Likely
No Premium
Option
With
Premium
Option

22. But options do not increase airline
preference!
Given these options, how likely are you to choose our airline in the future?
t-stat 1.809522874
0
5
10
15
20
25
30
35
1 =
Highly
Unlikely
2 3 4 5 6 7 8 9 10 =
Highly
Likely
No Premium
Option
With
Premium
Option
There is no statistically significant difference between the two groups on
overall airline preference. Even with options, people were no more likely
to prefer the airline because of its pricing.

23. What does this mean to you as a marketer
Findings from this study apply in general to all use cases
Focus on reference
price
Provide Options
This helps to translate
customer value to
WTP
Priced options nudge
customers to assign a
reference price to free
$1.99
Customer Choice
But customer
preference of your
brand is not
guaranteed

24. For More Information
http://iterativepath.wordpress.com Pricing and Marketing
Strategy
http://unbundling.wordpress.com Revenue Optimization

25. $0

26. $4.98
added
then
removed