Pricing Lessons from Southwest Airlines

Coffee with an Icon: Howard Putnam, former CEO of Southwest Airlines

I recently found out that Howard Putnam, former CEO of Southwest Airlines, lives in the Reno area, as do I.  A friend introduced us over email and he agreed to meet for coffee.  Woohoo!

I didn’t go trying to get anything from him, just to listen and learn, maybe make a new friend. Howard was awesome. He had story after story and I loved every one.  He’s a master storyteller. I would love to share some of our conversation with you.

Quick disclaimer:  I use quotation marks below to represent dialog, but I didn’t record the meeting. All quotes are based only on my memory.

“How do you do pricing?”

He started off the conversation by asking me, “How do you do pricing?”  There are about a thousand answers to that question, but I quickly rattled off something like, “The two most important decisions in pricing are to adopt value based pricing and to embrace price segmentation.”  I briefly described both of these, hopefully sounding a little bit smart and knowledgeable.  Then the stories began.

“Do you know how Southwest used to determine prices?” he asked.  “We did short haul routes and we would look at the cost of driving that distance, including the time, and made sure it was more cost effective to fly.”  What a fabulous value based answer!!!

Then he ruined it.  He taught me about the cost of a seat mile, which is the cost of one empty seat flying one mile.  They assumed 50% or 60% utilization and set the price to make their margin.  I didn’t want to ruin the coffee, but I couldn’t help myself.  I said something like, “That sounds like cost plus pricing.  I’m not a fan of cost plus pricing.”  He then amended his answer to say that was the floor.  They tried to get more.  Whew.

One story I knew I wanted to ask him about was when Robert Crandall, CEO of American Airlines, tried to price fix with Howard. I told him I wouldn’t share any details he told me, but the story was fascinating.  Suffice it to say that Howard suspected this was the purpose of the call, which is why he took the call in his lawyer’s office and they recorded it.  Click here to read a public version of the story in the Washington Post. Howard’s version had the same details, but much more color. Unfortunately, our hour ended too quickly.

Here are 3 key takeaways:

  1. Use Value Based Pricing (Isn’t that always the lesson?!)
  2. Don’t talk price with competitors
  3. Find interesting people to tell you stories, and then listen
**Note: Mark Stiving has an active LinkedIn community, where he participates in conversations and answers questions. Each week, he creates a blog post for the top question. If you have a question, head over to LinkedIn to communicate directly with Mark.
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