One of the biggest fears for any company making changes to their pricing or overall value offering is losing customers.
When managed properly, this fear can be healthy, prompting organizations to carefully plan their actions, run incremental pilots, and consistently monitor feedback from both internal and external stakeholders. However, without proper processes, training, and monitoring mechanisms, customer churn can quickly escalate, causing devastating impacts on the business.
A recent example of this worst-case scenario is American Airlines, which cut its annual profit forecast last week due to a failed new commercial strategy and excess capacity in the market. The failed strategy included several key changes:
1. Reducing the sales team as part of a cost-cutting effort.
2. Renegotiating contracts with corporate travel agencies, reducing perks and discounts.
3. Encouraging customers to book directly, rather than through third-party sites and travel agencies.
This combination of fewer discounts, reduced sales support, and a worse user experience—asking customers to do more work themselves—proved to be a lethal mix. It is likely the strategy was not adequately tested before rollout, and the most impacted customer segment was business travelers, who are typically highly valued by airlines.
The implications were enormous. Revised full-year profits are now expected to be less than half of the original estimates, and the Chief Commercial Officer who spearheaded the strategy lost his job. This situation serves as a stark reminder that changes of this magnitude need thorough evaluation and testing across all major customer segments. Additionally, precise monitoring must be in place to detect significant shifts in customer behavior.
Particularly during weaker economic environments, churn metrics can be confused by the overall demand softness, making it more difficult to discern signal vs. noise. However, by agreeing on specific triggers upfront, companies can implement remediation actions if churn accelerates beyond predicted (and acceptable) levels.
American Airlines’ CEO, Robert Isom, promised a “reset,” including reinstating some of the eliminated sales positions and renegotiating contracts with corporate customers and travel agencies. Courting back customers is always a humbling experience, typically involving financial concessions and the need to rebuild trust.
While this was a tough lesson for American Airlines, it serves as an important reminder for all businesses: careful planning is crucial when making significant pricing and value proposition changes. Would you like to review the effectiveness of your pricing metrics? Please reach out.
