Southwest Airlines made one tiny change that probably added $80-100 million to their operating profits. Interestingly, this small change might create customer retention even though the customer ends up paying a fair bit more.
It seems odd to think of higher prices being critical to customer retention, doesn't it?
If you've ever been on a Southwest Airlines flight, you know that you don't have a guaranteed seat. You board the flight based on the letter on your boarding pass. Passengers are allocated A, B, and C boarding passes when they check-in at the airport or through the website.
When you have an A pass, it gives you the privilege of choosing the best possible seat. If, on the other hand, you end up with a C boarding pass, you have to take whatever's available. This means that you could be stuck on a long flight, smack in the middle seat.
Therefore, Southwest Airlines created a new ticket category called “business select”
For about $10-$30 more than the airline's highest fares, the passenger could get a guaranteed a pass, bonus frequent-flier points, and an alcoholic beverage. Just a few months after introducing this business select fare, Southwest was managing to sell two or three additional tickets per flight. According to estimates, this would end up with an additional $80-$100 million in additional operating profits.
But what is even more interesting is how this premium pricing affects customer retention
Think of yourself as the passenger in the middle seat on that flight. How fantabulous was your trip? What are the chances that you will choose Southwest over another airline? You see what's happening here, don't you? The superior the experience, the more you're likely to come back and buy products and services. Sure you ended up paying an additional amount, but that premium experience causes you to want to repeat it over and over again.
When you don't have “higher prices,” all you're doing is sending your customers to the competition
You don't have to run an airline or dig into the operating profits of the company to know this to be true. When faced with using a dial up modem vs. a super-duper Internet connection, we opt for speed. If given a choice between a brick-sized mobile phone vs. one that will slide perfectly in our pockets, there's not much decision-making involved. As humans we tend to discriminate between what we perceive to be good—and what's better; regular and premium.
This means that if you're creating products or services and you don't have a premium option, you are just driving the customer elsewhere.
Take for instance the article writing course at Psychotactics
The course is priced at close to $3000, and yet it fills up year after year. There are other article writing courses priced at $200 or $500 — or even cheaper. And yet the client signs up for the course that we have to offer. So why choose the most expensive course over the cheaper one? Again, we know the answer to that question.
As a client who's about to buy a course, we have a decision to make. Should we take the cheaper course? Or should we opt for the incredibly expensive option? Then we do some sort of reasoning in our head. We figure that a course wouldn't get away with those prices unless it were already exceptionally useful. We sense that the premium course is less of a waste of our time and energy, and we're likely to learn more, even if we have to pay more. We bounce all of these ideas in our heads, and then decide to go for the premium course.
But let's not forget the “customer retention” side of things…
When you look at the client who signs up to one of the premium Psychotactics course, there's almost a 70% chance he or she will sign up for another premium course. A three-month course like “copywriting” or “how to create information products”, for example.
In fact, most customers do more than two courses and an inordinately large chunk end up doing as many as three to five courses. The customers who buy the premium courses stick around for years; some have been around for more than a decade. On the other hand when you look at customers who've not experienced the premium option, they tend to be wispy—they come, and they go.
But aren't cheaper prices better to attract clients?
Yes, they may start off as a good form of attraction, but if you continue to keep your product or service cheap, the client gets dissatisfied simply because they want to pay more. That factor of “wanting to pay more” sounds weird and crazy, but don't you feel better when you buy a more expensive bottle of wine? Don't you feel better when you buy a better pair of shoes? Cheaper prices start off being an attraction device, but over time you've got to give the clients the chance to have a premium experience.
Take the example of book publishing
An author may spend a year or more writing a book. What sense does it make for the author to sell it at the ridiculous figure of $9.99? The answer lies in the premium offering that follows the book. You sign up for the workshop, the consulting and all the other premium goodies that show up after you've consumed the book. If those offerings are not around, you might still read the author's books, but end up attending the workshop of another author who's created a premium experience.
And once you've tasted the premium experience, it's hard to go back
Which is why we've all got to create pricing that winds its way upwards. Have some products or services that are lower-priced, mid-range, but make pretty sure you have the premium in place. The premium offering not only earns you a lot more but gives you the chance to spoil the client a bit. It allows to give them more attention or helps them acquire a skill.
So what are you going to do about your pricing?
Do you have a series of products and services that are at are in the nose-bleed section? Are you able to give that client the “premium seat, additional frequent flyer points and a drink of their choice?” If you aren't, the client is having a less-than-premium experience dealing with your company. They will stay with you as long as they need to, but the moment they find a premium service, they will be off like a rocket.
Premium products may seem to be good for our operating profit, but hey, it helps you retain your client as well.
How cool is that?