Southwest has historically and relentlessly pursued a low-price strategy. Its goal was to always be the cheapest carrier in any market where it flew. This would ultimately require the competing carriers to drop their prices to match those of Southwest in order to be competitive. This is something that has come to be known as the “Southwest Effect.”
The easy answer to why it worked is based on Southwest’s cost structure. The business plan developed by Herb Kelleher seemed to fly in the face of every aspect of airline convention. No meals, no assigned seats, no amenities, no retirement plan, one kind of plane, and flying point-to-point instead of hub-and-spoke. But every one of these things was cheaper for Southwest and gave it a cost advantage. Thus, when competition attempted to match Southwest’s prices, they could not match Southwest’s profits.
Students should recognize that in order to deliver low prices, Southwest must keep the cost of the other marketing mix variables low. Therefore, it offers a no-frills, point-to-point, air transportation service (product) at out-of-the-way airports (places) where costs are low, with limited and low-cost promotion. Price is the only marketing mix variable that produces revenue, so with low prices the company must keep the cost of the other variables low. Southwest has done an excellent job of getting the marketing mix variables to fit with each other.
The most recent way that Southwest has implemented value-based pricing is through its commitment not to charge for luggage. Baggage fees charged by almost every other airline have fast become calculated into traveler’s perception of price. If you are traveling alone and have to check a bag each way, that could add between $30 and $70 to the price of the round-trip ticket; much more if for some reason you have to check two bags. Combined with the fact that Southwest is also holding firm on not adding other popular...