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Wednesday, May 8, 2013

Strategic CSR - Samoa Air

Here is a contentious issue that has been causing lively debates in my classes. Recently Samoa Air, the national carrier for Samoa, began to price its tickets based on the weight of its passengers:
“Under Samoa Air's plan, customers are now required to estimate their weight when they book their flight online, and then to weigh in when they arrive at the airport. That number determines the price they will pay and also how much space they will get once they board the plane. ‘You travel happy, knowing full well that you are only paying for exactly what you weigh ... nothing more,’ the Samoa Air website says.”
Hmmmm, I am not sure it will be quite that easy! The resulting differences in prices are real:

“Estimates of price per pound vary with the length of the trip. According to The Wall Street Journal, customers flying to American Samoa will pay 92 U.S. cents a kilogram, or 42 cents a pound, for each flight. A kilogram equals 2.2 pounds. … As an example of the new policy, [the company] estimated that a 160-kilogram person on Samoa Air will pay four times as much as a 40-kilogram person, but he or she would also get more space.”

There are various drivers of this decision—primarily the high correlation that exists between the weight of a plane and the cost (primarily in fuel) of moving it and everyone in it from point A to point B. In addition:

“One reason for the new policy may be the fact that Samoa has the fourth highest obesity rate in the world. Estimates of the percentage of obese people in the population range from 55% to 60%.”
I am interested in the concept of discriminant pricing. Although this seems unfair on the surface, companies discriminate in pricing structures all the time—think of the cost of a movie ticket for a student or senior citizen. Think also of the different prices we already pay for our airplane tickets, depending on the time we buy, location in the plane, whether we are a member of the loyalty program, etc. In spite of the overall agreement in the article that this pricing strategy does not amount to discrimination (at least, not in terms of “the legal definition of discrimination based on race, age, sex, nationality, religion or handicap”), there was broad agreement on the advisability of fairness—achieving the same goal via more ‘acceptable’ means:
“Wharton marketing professor Deborah Small agrees there may be ‘more tactful ways’ to accomplish the same goal. For example, Samoa Air could have child discounts (in fact, children under 12 are charged 75% of the adult rate) ‘or they could even have discounts for low-weight people.’”
I found this example particularly interesting:
“[Coca-Cola] plans to use vending machines that would change the price of a can of soda depending on the weather. On warmer days, the price would go up, and on colder days, it would go down. ‘That makes perfect sense from an economic [standpoint],’ Small says, ‘but customers were very upset that the company would take advantage of their thirst on hot days.’ The launch was called off.”
Ultimately, however, the arguments come down to a perception of a firm’s social license to operate based around stakeholder perceptions of behavior that is deemed to be ‘acceptable’—in other words, CSR:
“Consumers have ‘a relationship with firms, and their expectations are much like their expectations in any interpersonal relationships,’ Small says. ‘When a firm acts in a way that violates the social rule of treating people fairly, consumers get offended.’ So it's fine for a restaurant to offer a discount to people on a relatively uncrowded Tuesday, but if the restaurant tried to add a surcharge to people eating there on a busy Saturday, that would be considered unfair.’”
Take care
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When Samoa Air last week announced it was going to start charging people for airline tickets based on their weight, it set off a flurry of comments, some supportive, some not. Is this new policy an example of discrimination or a smart business model? Are there better ways to achieve the same objective? And will other airlines adopt the same approach?