Chapter 19: Pricing Concepts
33
During the six hours of selling everything for $49.95, much of which was below cost,
Zappos.com lost $1.6 million. While the terms and conditions on the company’s website state
that the company does not need to fulfill orders that are placed due to pricing mistakes, Hsieh felt
as though it was the right thing for the company to do by honoring customers’ orders at the noted
price. Interestingly, Amazon.com, the parent company of Zappos.com, did not share this same
policy when it experienced a similar pricing glitch a few months prior. In that instance,
Amazon.com cancelled any orders that had not been fulfilled and gave customers a $25 gift card
instead of the books that had been ordered at the wrong price.
Sources: 6pm.com, www.6pm.com/; Zappos.com, www.zappos.com/; Edward Moyer, “Zappos
Sister Site Zapped by Pricing Glitch,” CNET, May 23, 2010, http://news.cnet.com/8301-1023_3-
20005714-93.html; Marc Perton, “Zappos Eats $1.6 Million in Pricing Snafu,” Consumerist,
May 24, 2010, http://consumerist.com/2010/05/zappos-eats-16-million-in-pricing-snafu.html.
Open-ended questions
1. What is the relationship between demand and price for products on the 6pm.com e–
commerce site?
Evidently, there is a strong relationship between demand and price on the 6pm.com
2. Should there be any legislation that requires companies to adhere to online prices
even when posted in error?
This is a difficult question to answer since it has to be viewed from both the online
retailer’s and the consumer’s perspective. From the online retailer’s perspective, mistakes
in programming can happen too easily, and working in cyberspace leaves an element of
Chapter 19: Pricing Concepts
34
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
checker, the lower price (on the tag) is given to the consumer. That seems to be standard
operating procedure, and one might expect the same standard operating procedure for
online retailers.
It would be interesting to engage students in a discussion about the role of the government
(via legislation) in the monitoring of online retailing. Issues from big brother to the
expense associated with such monitoring (given the enormity of online retailing in the
twenty-first century) are likely to arise.
True/False
1. Given American Airlines demands that Orbitz and other middlemen use its Direct Connect,
the carrier sees a satisfactory profit.
2. GDS evolved from YMS.
3. The GDS systems that Orbitz and other middlemen use is an extranet.
4. Critics say that Direct Connect will allow American Airlines to raise its prices whenever it
wants.
Chapter 19: Pricing Concepts
35
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Airlines charges and it will price it tickets to ensure seats get filled up.
PTS: 1 OBJ: 19-1 TOP: AACSB Reflective Thinking
KEY: CB&E Model Pricing MSC: BLOOMS Level I Knowledge
Multiple Choice
1. American Airlines risks disappointing consumers who perceive Expedia and other
middlemen as the go-to source for “great deals.” This is because consumers expect _____
when they buy tickets.
a.
reasonable competition
b.
a reasonable price
c.
little sacrifice
d.
satisfaction maximization
e.
all of the above
2. American Airline tickets are a commodity. If other agents can sell its tickets, then they
have _____ that American Airlines does not have.
a.
status quo pricing
b.
competition
c.
a distribution
d.
supply and demand
e.
unit market share
Chapter 19: Pricing Concepts
37
e.
bundling with hotels, rental car agencies, and the like
6. By eliminating the number of online ticket shopping venues that sold its tickets, American
Airlines improves _____.
a.
its status quo pricing
b.
its buyer dependence—those traveling in and out of its hubs
c.
its ability to absorb fuel costs
d.
its economies of scale
e.
all of the above
Critical Thinking Case
Will A New Reservation System Translate To Higher Prices For Travelers?
American Airlines, one of the top three airlines in the United States and a major international
carrier via strategic alliances with leading carriers around the world, was founded in 1930 as
American Airways. As an innovative leader in air travel, American Airlines started the frequent-
flyer program in 1981. Since then, every major airline in the world has adopted some form of a
frequent-flyer program. In late 2010, American Airlines once again took the lead in an airline
initiative that could change the way consumers search for and ultimately purchase airline tickets.
In an effort to reduce distribution costs, gain greater control over the marketing of its airline
tickets, and better meet customer expectations, American Airlines upgraded its reservation
system. In making the upgrade, the company expected third-party travel operators such as
Expedia, Orbitz, and Priceline to follow suit.
Chapter 19: Pricing Concepts
38
The Reservation System
Consumers want low fares while also having the ability to customize their itineraries. Plus, they
want to do this themselves and not have to go through a travel agent. Via an in-house reservation
system called Direct Connect, American Airlines will be able to present a variety of
individualized options to consumers, including prices, flight schedules, seat upgrades, lounge
access, faster check-in, hotel reservations, and car rentals. Direct Connect constitutes a wholesale
shakeup of the traditional reservation process that has relied historically on Global Distribution
Systems (GDS) such as Amadeus, Sabre, Worldspan, and Galileo. All of these global
distribution systems were designed originally by airlines, but all are now operated by
independent owners.
Middlemen such as Expedia and Orbitz conduct business via a GDS and do not want to upgrade
their reservation systems to models such as Direct Connect. However, the Direct Connect
technology will enable airlines to bypass the GDS and avoid paying the GDS fees. Airlines
stopped paying commissions to travel agents in the 1990s, but the GDS model enables travel
agents to sell tickets and collect fees from the sale of tickets via the GDS.
The Dispute
In December of 2010, American Airlines announced that it would no longer do business with
Orbitz. By making this move, Orbitz could no longer sell American Airlines tickets on its online
booking website. At the heart of the dispute was that American Airlines wanted Orbitz to use
Direct Connect instead of GPS. Orbitz refused to switch reservation processes, so American
Airlines withdrew its tickets. Beating American Airlines to the punch, Expedia announced on
January 1, 2011 that American Airlines tickets were no longer an option on Expedia.com.
Following suit, Sabre dropped American Airlines’ ranking on its site thus making it difficult to
find American Airlines fares on this GDS.
Some say that the bottom line is that American Airlines wants travelers to buy directly from its
website, such as the process utilized by Southwest Airlines. From a pricing perspective, the
middlemen such as Orbitz and Expedia say that this will allow American Airlines to raise ticket
prices since customers will not have easy access to competitive pricing information. These
distributors are charging that American Airlines’ new Direct Connect model is anti-consumer
and anti-choice. Conversely, American Airlines says that it will enable lower ticket prices since
it will eliminate the cost of the middleman, contending that the GDS model used by online travel
agencies prevents airlines from offering the lowest possible fares.
The chief financial officer at US Airways said that his company agreed in principle with what
Chapter 19: Pricing Concepts
39
American Airlines was doing, citing the importance of lower airline distribution costs. Yet, this
competitive airline recently entered into an agreement with Expedia in which US Airways
committed to offering all of the airline’s content on Expedia through the GDS model. It could be
that competitive rivals see this as an opportune time to appear more customer-friendly, in the
hopes of gaining customer affinity while American Airlines battles it out with the middleman.
Sources: American Airlines, http://www.aa.com; Doug Cameron, “American Airlines wants
Expedia, Orbitz to Come Around,” Wall Street Journal, January 5, 2011,
http://www.wsj.com/articles/SB10001424052748704723104576061891746793776; Kirsten
Cluthe, “American Airlines Battles Expedia and Sabre over Reservations,” PCMag.com, January
18, 2011, http://in.pcmag.com/personal-home/27014/news/american-airlines-battles-expedia-
and-sabre-over-reservation; Jane Levere, “Who Wins in the Dispute between Airlines and Online
Ticket Sites?” Daily Finance, February 1, 2011, www.dailyfinance.com/story/investing/who-
wins-in-the-dispute-between-airlines-and-online-ticket-sites/19822771; Josh Lew, “Is American
Airlines Ducking Competition?” LowFares.com, February 16, 2011; Hugo Martin, “American
Airlines-Orbitz-Expedia Feud may affect Ticket Prices,” Los Angeles Times, February 7, 2011,
http://articles.latimes.com/2011/feb/07/business/la-fi-0207-travel-briefcase-20110207; Reuters,
“Expedia Dumps American Airlines Listings,” FoxBusiness, January 3, 2011,
www.foxbusiness.com/personal-finance/2011/01/03/expedia-dumps-american-airlines-listings.
Open-ended questions
1. Identify each channel member’s pricing objective.
American Airlines: Sales-oriented retailer (e.g., Expedia, Orbitz, Priceline); profit-oriented
The pricing objective for channel members appears to vary based on position in the
channel. American Airlines juggles pricing on a daily basis so as to maximize sales.
Ultimately, the goal is to have every aircraft take off with all seats filled. American
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
3. What would be the retailing principle that compelled Tony Hsieh to ship merchandise that
was grotesquely underpriced when he could have just cancelled the orders?
a.
Every online sale is a legal sale, a contract between consumer and retailer.
b.
It would maintain customer satisfaction.
c.
It would have cost more to settle in court.
d.
The dollar amount lost is only retail, not wholesale.
e.
The loss would be made up in future sales.
4. What really pays for the losses absorbed by 6pm.com?
a.
Amazon.com
b.
Amazon shareholders
c.
6pm.com
d.
6pm.com vendors
e.
None of the above
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5. By rewarding consumers who took advantage of the pricing mistake, what factor of human
behavior did Tony Hsieh encourage about the shopping experience at 6pm.com? What
made a mistake a promotion?
a.
Feelings of entitlement
b.
The hedonistic effect
c.
A sense of fair play
d.
The allocative effect
e.
All of the above
6. Choose the most plausible reason that marketing manager might rationalize giving away
$1.6 million in merchandise?
a.
Ultimately, long-term profit goals had to be considered, not a short-term loss.
b.
It is still the right thing to do and no point second guessing Tony Hsieh.
c.
The company seeks only a satisfactory profit motive.
d.
People need a break from the recession.
e.
Consumers did not feel like they were paying a penalty.