Rafi Mohammed

Dear Delta Airlines...

Posted on October 28th, 2008 (1 Comments)

Dear Delta, With sadness, I’ve decided to stop flying your airline. Growing up in a hub city (Cincinnati), I registered for my Delta frequent flyer number over 30 years ago. In the ensuing years, I’ve remained loyal by connecting through offbeat cities and in some years flew enough miles (often paying full fare) that you deemed me an “elite” customer.

So why am I leaving you for a new airline? Because you don’t understand value. Let me illustrate the concept of value with a simple story. Suppose you are selling lemonade on a beach and are located right next to a rival lemonade seller. Of course, if your lemonade is identical to your rival’s, you have to set the same or lower price. However, if your lemonade is better (e.g., uses organic lemons and/or premium filtered water), you can charge a premium. The two key takeaways of this basic story are: (1) Value-based prices are based on a product’s next best alternative, and (2) Value-based prices capture the value customers place on differentiating characteristics.

So in this lemonade case, your price would equal your rival’s price plus the premium you estimate customers place on your high-end distinguishing attributes (better lemons and water). Simple, right? If you had understood this fundamental concept of value, you’d be ahead of the majority of managers (and consultants) I meet who specialize in pricing.

In the last year, you’ve added many new fees and restrictions. First, you are charging $50 to redeem frequent flyer miles (when many next best alternatives charge nothing or a nominal fee). Second, you won’t allow me to standby on a same day flight for free. Instead, three hours before a flight, if there is availability, I can pay $50 for a confirmed change. In contrast, American offers free standby or the option of paying $50 for a confirmed change 12 hours before a flight. And finally, in my experience, it is very difficult to book an award ticket on your airline (doing so often requires spending more than 25K miles). In contrast, I’ve never had a problem booking a 25K frequent flyer flight on American.

Granted, I understand there are reasons why Delta should consider charging these fees (and requiring more miles for a flight). But if the next best alternatives (i.e., other airlines) aren’t matching these new fees, the value of flying Delta decreases. Of course, if rivals had matched your initiatives, I’d have remained a loyal customer. There’d be no reason to change. My guess is that your pricing strategists neglected to take into account the role that next best alternatives play in value-based pricing.

Best of luck, Rafi

To my blog readers: my point is when implementing value-based pricing, you have to be keenly aware of how your prices/restrictions match up against your customers’ next best alternatives (i.e., competitors). Pretty straightforward you are probably thinking. Well, if Delta understood this simple principle, I’d still be flying their airline.

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Readers' Comments on This Blog Entry

From Steve on October 28th, 2008
Amen. This seems so simple. I think the people at Delta are moonlighting running the McCain campaign.