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    18.CASE STUDY - Southwest Airlines

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    Daniel Ciprian
    The document provides information on Southwest Airlines' marketing strategies and innovations including: 1) Southwest arrived at their initial $20 price point using break-even analysis to determine a price that would cover costs with a reasonably expected load factor. 2) Demand for flights between Dallas and Houston was highly price elastic, with ridership doubling when Southwest lowered prices from $26 to $13. 3) In response to a predatory pricing campaign by competitor Braniff, Southwest offered customers a choice between the discounted $13 fare or the $26 fare with a gift, while also launching a public relations campaign accusing Braniff of predatory tactics.

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    Download as PDF, TXT or read online from Scribd

    18.CASE STUDY - Southwest Airlines

    Uploaded by

    Daniel Ciprian
    635 views23 pages
    The document provides information on Southwest Airlines' marketing strategies and innovations including: 1) Southwest arrived at their initial $20 price point using break-even analysis to determine a price that would cover costs with a reasonably expected load factor. 2) Demand for flights between Dallas and Houston was highly price elastic, with ridership doubling when Southwest lowered prices from $26 to $13. 3) In response to a predatory pricing campaign by competitor Braniff, Southwest offered customers a choice between the discounted $13 fare or the $26 fare with a gift, while also launching a public relations campaign accusing Braniff of predatory tactics.

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    18.CASE STUDY- Southwest Airlines

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    The document provides information on Southwest Airlines' marketing strategies and innovations including: 1) Southwest arrived at their initial $20 price point using break-even analysis to determine a price that would cover costs with a reasonably expected load factor. 2) Demand for flights between Dallas and Houston was highly price elastic, with ridership doubling when Southwest lowered prices from $26 to $13. 3) In response to a predatory pricing campaign by competitor Braniff, Southwest offered customers a choice between the discounted $13 fare or the $26 fare with a gift, while also launching a public relations campaign accusing Braniff of predatory tactics.

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    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    635 views23 pages

    18.CASE STUDY - Southwest Airlines

    Uploaded by

    Daniel Ciprian
    The document provides information on Southwest Airlines' marketing strategies and innovations including: 1) Southwest arrived at their initial $20 price point using break-even analysis to determine a price that would cover costs with a reasonably expected load factor. 2) Demand for flights between Dallas and Houston was highly price elastic, with ridership doubling when Southwest lowered prices from $26 to $13. 3) In response to a predatory pricing campaign by competitor Braniff, Southwest offered customers a choice between the discounted $13 fare or the $26 fare with a gift, while also launching a public relations campaign accusing Braniff of predatory tactics.

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    You are on page 1of 23

    Spring Marketing Electives

    15.828 New Product Development 15.831 Marketing High Tech Products 15.834 Marketing Strategy 15.835 Entrepreneurial Marketing

    25
    20
    15

    the
    market

    10
    5

    R = 0.90 !!!
    0 0 5 10 15 20 25

    you

    Repeat after me
    Everybody is not like me. Everybody is not like me. Everybody is not like me.

    Southwest Airlines:
    key concepts

    Break-even analysis Price elasticity Price wars

    What are some of the product attributes of


    an airline flight?

    How does importance of attributes


    differ by segment?

    Safety Comfort Service Convenience Price

    Business Business Business Business Business

    Pleasure Pleasure Pleasure Pleasure Pleasure

    Southwest Airlines

    Who was Southwest Airlines major competitor?


    "We've always seen our competition as the car. We've got to offer better, more convenient service at a price that makes it worthwhile to leave your car at home and fly with us instead."
    (Colleen Barrett, executive vice president)

    Southwest Airlines

    Why did the president feel that the current level of usage underestimated potential demand?
    Because the interstate carriers weren't doing the job in this market.
    it was difficult to get reservations (Why?) poor record for punctuality (Why?) poor service (Why?)

    Southwest Airlines
    What were SW's innovations?
    fun atmosphere
    no assigned seating
    flight attendants required to clean airplane
    turnaround an aircraft in 15 minutes
    pilots paid per trip
    flight attendants paid per trip. (Lower pay, but more flexibility)
    job security valued over pay
    compensation in terms of stock options
    extremely selective hiring policies (More selective than Harvard)

    Southwest Airlines

    How did Southwest arrive at their initial price of $20? "Break-Even Analysis": "Pick a price at which you can break even with load factor that you can reasonably expect to get within a short period of timethe price ought to be as low as you can get it without running out of money"

    Break even analysis

    total
    revenue
    total costs

    # of passengers

    Break even analysis

    BEQ = Fixed cost Unit Price Unit VC

    Fixed cost= $670 per flight Variable cost= $2.80

    revenue

    costs

    Break even analysis

    BEQ = Fixed cost Unit Price Unit VC

    Fixed cost= $670 per flight Variable cost= $2.80

    costs

    revenue

    39

    ??

    Break even analysis

    additional variable costs


    (93-39) * $2.80

    losses from charging intramarginal customers less

    $20
    $10

    -$390

    -$150 +$540

    additional revenue from increased demand


    78

    39

    93

    Was the BEQ of 39 passengers per flight


    realistic, given the current market?

    What was the daily demand for flights between Dallas and Houston, prior to Southwest's entry? (see Exhibit 1) (p. 4) Southwest scheduled called for 12 daily round trips between Dallas and Houston. That's 24 flights. (p. 5) break-even load requirements = 39 What proportion of the current market would SWA have to capture?

    Southwest needed to not only take share from competition, but to expand primary demand. To expand primary demand via price cuts, demand for air travel between Dallas and San Antonio needed to be price elastic. Was it?

    Was demand elastic with respect to price?

    Price Quantity 1973 (Jan) $26 17 1973 (Feb) $13 48

    from page 11

    Yes, very elastic !!

    from page 22

    Price Quantity 1972 (June) $20 29 1972 (July) $26 26

    Much more than a previous calculation would imply

    Radio ad for Southwest Airlines


    Southwest Airlines half-fare flights. Every flight between San Antonio and Dallas every day. Only $13 [Irate Male Voice] "Hey! If you people fly Southwest Airlines during this half-price sale, you're gonna have a lonely bus driver on your conscience. Take the bus. It only costs a little more and is just 4 hours longer."

    Pricing strategies: a timeline

    June 1971 SW Opens. Introduces $20 flights July, 1971 Braniff and TI reduce price to $20 July, 1972 SW raises basic fare from $20 to $26, but flights after 9:00 p.m discounted to $10. July, 1972 Braniff and TI raise price to $26; Braniff adds a $10 flight to Houston after 7:30 p.m. January 22, 1973 Announces a "60-Day Half-Price Sale" on all flights between Dallas and San Antonio. February 1, 1973. Braniff announces 60 Day "Get Acquainted Sale" between Dallas and Houston (H).

    How should Southwest respond to Braniff's


    move? What are their alternatives?

    What did Southwest do?


    Offered people a choice between the low fare $13 or the normal fare of $26. If they paid the $26, they received a thank you gift.
    Liquor Ice bucket (for the Mormons who claimed they don't drink)

    Initiated a PR campaign in which they accused Braniff of predatory pricing Reminded customers what service was like before SW.

    Postscript

    When Braniff's 60 day sale was over, they returned prices to $26. So did Southwest. In 1975, a federal grand jury indicted Braniff and TI for predatory pricing Both Braniff and Texas International Airlines are now defunct Southwest worth more than all other airlines combined (11 Billion). Successful business model for the east coast?
    More weather related delays People not as friendly or fun loving

    Advertising campaigns Braniff Texas International Southwest

    Price Quantity 1972 (June)


    $20
    23,000 1972 (July)
    $26
    19,000

    gains from charging intramarginal customers more

    $26
    $20

    reduced variable costs & "fixed" costs lost revenue from decreased demand

    19 23

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