The WSJ had a great story about how the airlines, in the age of deregulation, dropped fares below what they could sustain. They all went bankrupt in one form or another or merged to survive. I would suggest that is the analogy most apt rather than charging extra for things consumers value or developing “personal pricing.”

There’s no mystery to discounting—someone is going to pay for it, either the owner or the stockholders, in Amazon’s case. Retailers should use the airlines as a cautionary tale.

The American consumer is going to the retail marketplace multiple times per week—grocery stores some 99 trips per year, discount stores 20+ times per year, specialty stores and department stores on an ongoing basis. The airline experience for those outside of the business travel segment just doesn’t measure up to those frequencies.

Consumers will readily accept being recognized for being loyal customers and receive reward points. They are not likely to stand still for radical price swings for their discretionary, and even non-discretionary purchases at retail.

I do see retail going in this direction in some ways. Advanced technologies are allowing retailers to personalize offers and prices for individual shoppers online, during the shopping experience and at checkout.

Of course, there are always risks with this type of approach. If Customer A knows Customer B is spending less on a product, or getting a better offer, the retailer risks losing Customer A. As always, retailers are going to have to weigh the benefits of personalizing prices and offers, remembering who their best customers are.

Now, regarding fees for service, that is more of a slippery slope. No one is pleased with having to pay an extra dollar to print out a boarding pass at the airport or an extra $50 for checking a bag. Airlines can (sort-of) get away with it because, when we need to fly somewhere on a specific date and time, we may not have a lot of choices. Shoppers have more choices when it comes to choosing a store to buy a jar of pasta sauce or a sweater.

The Fast Company article and Marc Andreessen’s comments about the downfall and even death of brick-and-mortar retail make for great headlines but like David, I’m taking the other side of the trade on this one.

It’s important to note that not all airlines are low-cost/low-service just as all retailers to not compete solely on price. If you look at the Macy’s sales numbers posted (January same store sales +11.7%!), they are driven by both physical store and online sales increases. There are a number of other retail examples (Nordstrom, J. Crew, etc.) that also compete on dimensions other than price.

That said, there is increasingly a black/white contrast in retail between those that “get it” (i.e., compete on dimensions other than price) and those that are going to follow the path describe by Andreesen and Kath in the article.

David forgot my favorite part of airline-ification, going to the deli and getting to jump to the head of the line with my gold loyality card. My good friend Dich Schulman spoke about this many years ago. Century 21 Department stores made a step in that direction when they opened up dedicated checkouts for their top loyal customers even providing red carpets at the loyal checkout stations.

Pricing is a big factor in retailing but not the only one. Service, instant gradification, and just being with people also count these days. It will be soon enough that the network providers will add fees for shopping on a mobile device.

While there will be some examples of this occurring, I expect competition will limit it from becoming widespread.

If it does occur, I agree that any fees will be waved for loyal customers.

Good review David and glad to see you avoiding the “C” word. Katz and team are way off the mark and gee, happen to be in other industries. Retail is not simply shopping for a low price—like traveling point to point to point at a low price.

Retail is a relationship business that takes on multiple shapes at multiple points throughout the relationship. One retail shopper relationship might be one based on pure price. Another might be based on the experience and the experience element might be the catalog, the store, the website, or all of those combined.

Dr. Phil helps with this. A good relationship let’s one vent, have common interests, and more. Being close to Valentines Day go visit the link to Dr. Phil and learn that retail and airlines are not in the same business, and prepare for Thursday.

Thanks Dr. D!

Okay…where do I begin in commenting on this story? 1) There is ZERO evidence that consumers are obsessed with price, big ticket items excluded. There is more than ample evidence that retailers (particularly those who underperform on comps) ARE obsessed with it. Isn’t it time we stopped propagating this myth/self-fulfilling prophecy? 2) I thought we tried the “airline model” in the early 2000s, when some retailers persuaded themselves that “pain avoidance” (i.e. avoiding long lines at the airline counters) was remotely equivalent to “service” and installed all kinds of self-service tools and technologies and took payroll out of the store. #epicfail. 3) The airlines have what amounts to a cartel. Thus, they can [more or less] get away with some of the stunts they pull to cut their costs and increase their revenue. Fliers don’t have a lot of options. Retail shoppers have a LOT of them. 4) Marc Andressen is a brilliant technologist and (so it seems) a not particularly astute student of human nature. People really are social, and they like to shop.… Read more »

Great piece David. And it relates very nicely to other recent discussions about retail doing what was good for vendors and to heck with the customers. So, sadly, retail IS going the way of the airlines. What is the ‘airline’ model? Well, the customer be damned by constant nickel and diming, a tortuous flying experience, deceitful operational practices and irrational pricing policies. I just wish they’d compete on price since they’ve abandoned any kind of comfort or service. Check a flight and you get one price, go to book it ten minutes later and it’s another price. Who wins the “Total Irrationality” award for their business model is a toss-up between airlines and book publishers. But is retail really going that direction? On many points, yes. For the most part shopping isn’t a great experience any more, it’s just not fun. It is almost impossible to distinguish one store from another and it’s all too desperate. Soon it will be “Do you want buttons on that shirt?” Or “We’ll take another 3% off if the… Read more »

I don’t think there will be a widespread trend toward the airline model. There are just too many choices at retail and through the internet to make the fee add-ons work everywhere. The airline model has made flying distasteful enough due to fees and less service. I used to have a 4 hour drive rule as to whether to drive or fly—it is now up to 6 hours.

If consumers had to put up with add-ons and much less service, the large percentage of people who like to shop would rebel and force retailers back to catering to consumers. Retail consumers today have the power of choice-airline passengers have much less choice as time goes by.

Please say this is not going to happen. Oh my, can you imagine how retail will look and be perceived by the public if it takes on even the slightest appearance of the airline industry? Retail has enough of a PR problem now. Add to it, as the article suggest, fees for services; and we can see a little upstart, like Southwest Airlines at the time, come along and grab a big market share.

Competition from an upstart grabbing the attention of the big boys might be what is needed.

Sadly, this has already been true for quite some time about supermarkets. But it’s interesting because once consumers get what they ask for, i.e., low, low prices, but with less services and less comfort, there will gradually be a demand again for something “nicer,” just as there is on the airlines.

Low cost, no frills airlines are fine until consumers start complaining about lack of services, cramped seating, and long lines. Some consumers will always want low, low prices no matter what. But be careful not to judge what all consumers want simply by listening to the low, low price crowd.

The major challenge with this post is the assumption that all customers have similar value structures. In fact, many customers are highly convenience driven, especially those with dual incomes and very little free time. In addition, certain segments of customers are very service oriented, particularly in categories that require expertise that is more technical in nature (e.g. computers, appliances, etc.)

Now, in order for those value propositions to succeed, the pricing of those retailers must be competitive—with the availability of price information on the Internet, consumers these days are more aware of the premium that they might be paying in any given store.

When the price is considered at least competitive, then consumers in the segments will choose establishments that speak to their needs.

There is also a segment that is willing to experience less customer service and a worse customer experience in order to have the lowest prices. However, that is just one segment of the population, and often a low profit one to boot.

Some retailers will compete on price, others will compete on service, and still others will compete on exclusive inventory. Consumers will vote with their dollars. In some ways this is similar to the airline model; in others it is different.

Soon there will be only 4 major air carriers in the US. There are far more options in each retail category. This alone will prevent some of the airline-ification of retail.

I don’t think the airline-ification allegory holds. I don’t see the same level of amenities for retail. Maybe I’m myopic about this as I try to think of examples. Would consumers perhaps be asked to pay for the use of a shopping cart or a fitting room? And the retailer’s risk of turning people off is huge. Once a shopper has gone elsewhere for her business (and been satisfied) you will have a hard time bringing her back.

However, this article made me think of the extraordinary accomplishments of the big gaming establishments…hotels and casinos. They also know their customers very well (by name), what they like and how to bring them back…again and again. Often it’s done with some kind of upgrade (better room), discounts (free meals), etc. It’s not just for the high rollers, but the frequent rollers. In my opinion there’s an opportunity to look at their successes (and failures) for a best practices inspiration.

To some extent the airlines are following the lead of retailers and many other industries that have already lived through massive consolidation. The number of “legacy” airlines has shrunk from six to three in a matter of a few years, and their product hardly differs from the well-run “low cost” operators like Southwest and JetBlue. The parallel is the reduced number of regional department store nameplates and the rise of Macy’s.

The parallel ends there, however, because of the wide array of goods and services still available across the retail spectrum. There is room for both Walmart and Nordstrom (and a lot of options in between, in terms of merchandising, pricing and service) but very little room for airlines to differentiate a commodity product.

There will definitely be retailers and brands that will experiment and implement similar experiences as we’ve been forced into by the airlines. It will depend on the brand and our expectations as shoppers. If we’re actively looking for the cheapest airfare, then our expectations are minimal. On-time arrival and departure as well as the number of stops or layovers factor into our decision making.

Ironically, I just received an e-mail from Spirit Airlines enticing me with a $19.95 promotion. When prices get that low I begin to wonder what their maintenance schedules are?! For me, I can tolerate almost anything for a flight shorter than 3 hours. Beyond that, I am willing to pay more for some degree of comfort and respect.

However, as Mr. Dorf points out, there will be a range of retailers and it will depend on the objective, perception and competitive landscape for the brand. Costco has found an intriguing balance—low prices, low sales associate expectations, but balanced with a shopping sense of surprise, discovery and excitement with its product mix.

Study and after study shows that customers will spend more for a better experience. Customers refuse to pay more for an average or mediocre experience.

I love Paula’s comment, “Isn’t it time we stopped propagating this myth/self-fulfilling prophecy?”

Price matters. People matter. Convenience matters. Selection matters. There will always be a spot for brick and mortar retailers. They just have to be better at what they do than they used to.

To paraphrase Mark Twain, reports of my death are greatly exaggerated. Retail is, as always, changing. To believe that whatever is happening today will replace everything from the past is, in a word, silly.

Good article and also love Paula’s comments on it. One thing I’ll add is that there is a lot more room for creativity in retail. Airlines are constrained by a lot of things including regulation, safety concerns and fuel costs. Retailers have far fewer constraints, and preparing for an airline-like future is a trap that would deny the industry the creative energy that will keep it viable for decades to come.

The exec’s experience base is a single service industry (at least he discusses it as a single service industry) and that is the transportation of the public. Additionally, his history is with airlines who have failed to thrive because they act short term (quarterly) and fail to offer services the consumer prefers. In all but the largest hubs, the choice of carriers is very limited. Consumers are basically captives. To say retail is following this course is very short sighted. First of all, retail is much broader that the airlines industry, and isn’t a service industry. You go to retail to buy objects. Airlines only sell services and almost every service industry evolved to a fee for service basis years ago. You go to your mechanic and he charges for labor plus parts, same with your doctor, your plumber, and almost everyone else in the service industries. Retail isn’t going where the airlines are, and I hope no other industry ever goes there. Retail will have its price comparison issues—always has, always will. Retail could… Read more »

Retailing will never follow the airlines. They are a broken model that only survives because if you want to travel, you have limited choices.

In the airlines industry the customer is last. If they could containerize you and palletize you, they would.

My oh my! If you want to make shopping into the most dreaded of things to do then yes, go the way of the airlines. Buying an airline ticket is a necessity if I need to get somewhere that is outside of my reach any other way. Not only do I need to get there, I need a seat and my gear needs to get there with me. So paying extra for my seat and paying extra for my bags is not giving me any added value, it is the only way I can have what I NEED. This in no way correlates with shopping. If retail were only about price, then maybe you could use the argument that I’ll get the absolute lowest price, but will have to pay to use a buggy or a dressing room. Shopping is a pastime even a hobby for some. It’s fun! Let’s improve the customer experience and yes, I see no reason why retailers can’t add value with add-on services that the customer actually wants to pay… Read more »

The biggest difference is that barriers to entry (mostly capital costs but also regulation) are much lower in retail than in airlines. As a result, people can try many more retail concepts that serve different niches.

There is ALWAYS room for low cost in any industry. That isn’t unique to airlines or retail. In airlines, though, there isn’t really room for anything more. Fee-for-service is what passes for innovation. In retail, not so. We will continue to see innovation in pricing and service both, in the physical world, online, and in increasingly wonderful blends of the two.

Until the economy rebounds, the consumer will not pay a premium for the promise of better service, selection and price advantage. They have learned how to play the “game” over the past 10 years especially. Charging a premium for a preferred credit card that gets more rewarding service benefits (no questions asked returns, free shipping, personal shopper, etc.) and incremental rewards.

I simply believe that the premise is incorrect and a poor comparison. For example, yes, you do pay a fee to enter Sam’s Club or Costco. On one of my most recent trips to Costco, I was flagged by an associate carrying a hand held device as I came through the check-out. I was advised that had I had the next level membership, I had already qualified for a rebate that would not only cover the cost of the membership but also the cost of increasing to the next level. Is that a value? When all else is equal, consumers do tend to choose the lowest common denominator—price. If that were not true, Walmart would not exist as it does today. Nevertheless, consumers do seek the overall value proposition that includes all of the other factors one can place in that equation. Successful brick and mortar stores are evolving and re-inventing the value proposition. They are also making the connection with the consumer online as well making their connection even more relevant. In making the… Read more »

This is an apple-to-orange comparison. Airlines is a commodity service and the more accurate comparison of airlines would be internet services or mobile airtime.

Retailers are not commodities.

Per Katz, “airlines determined that their customers are driven by price more than any other factor.” While that might be true, let’s be realistic; the fee-for-service model is driven by airlines squeezing margins everywhere they can.

I can see retailers offering a bare bones approach in retail—akin to GAP’s Old Navy—but a widespread fee-for-service model similar to the airlines completely ignores the value of brands. Also, I wonder how popular the airline model is with frequent users—I’m not a fan of it.

Although I ‘get’ where Katz is coming from, seems to me he made that statement as an attempt at getting some valuable P.R. vs reality. And FastCo fell for it. Now, if he would’ve said that poor retailers (long list) would go the way of the airlines, that would sound more plausible.

You don’t need to look further than your local Apple store to see that good service goes a long way, or Nordstrom, or Whole Foods, or Chipotle, on and on. It actually enables you to charge more without saying so overtly. So I think that the reverse is true; that aware retailers are on the verge of realizing that good associate help is THE key to success. Even Home Depot increased the amount of people on their sales floor last year and turned in a great year, especially vs. Lowe’s.

To me, those that go the way of the airlines will be in fact going out of business…or just going online in the near future; a self fulfilling prophecy.

I agree with David Dorf from a personalization point of view. Retail is becoming personal with targeted offers, curated assortments online and loyalty-based pricing. However, charging fees for services which were once free of cost might not be the best strategy a retailer could adopt.

Differential pricing has been in retail for sometime now, though not so on the face, but through loyalty programs. Customers are trained now to accept the fact the customer with loyalty cards gets a bigger discount/certain privileges which others don’t. Any change to the existing model needs to be derived from understanding the needs of the customer for it to succeed.

What is driving retailers to the bottom on price? It has NEVER been about margin to the most aggressive retailers. And the reason is that the most successful mass retailers have mostly driven for ZERO margin on sales to drive MASSIVE volume. They then profit from these behemoth engines by sharing in their suppliers’ profits through trade allowances, promotional fees and the like. This in turn, has created a business culture where the SUPPLIER is the REAL customer, buying space for their products in the neighborhood warehouses (aka stores), using the stores’ circulars for advertising, and paying for other “services” from the retailer. The airlines do not have supply-side customers paralleling the stores’ suppliers. So they have to nickel and dime the traveler to offset their drive to zero margins, but they still can sell some advertising, and some are doing better with in-flight deli services and the like. So my conclusion is that airlines are moving in the direction of the retail stores more than retail stores are moving in the direction of the… Read more »

Retail is unlikely to go the way of airlines. Airlines had a great model, but fell into the low price trap. Flying went from an enjoyable experience to a bus ride in the sky. Yes they expanded their market but most went broke chasing low prices and no customer loyalty. Flying is a commodity today with lots of nickel and dime add on charges. There are plenty of retailers that will not go this way.

Just like Club stores in the early ’90s, Amazon and eBay will not take over the world of retailing. They will get a good market share but Walmart still has more sales from stores than online.

Unsustainable union contracts contributed greatly to the airline industry’s inability to run profitably. Same with the US auto industry.

In retail, the classes of trade where unions dominate will accelerate toward the Andreesen apocalypse faster than others. But all will get there eventually.

I hardly believe that Neiman Marcus, Nordstrom, etc. will start following the airlines’ model of customer service. People will choose price or value—value being in the form of customer service, experience and quality of product.

Low price shoppers will continue to be loyal to low price retailers and focus on price over just about everything. Other customers will be willing to pay more for quality. The retailers who haven’t defined their value proposition—the ones stuck in the middle—will most likely have the hardest time, unless they have a niche following.

Reid Hoffman, another Silicon Valley entrepreneur, rebuffs Andreessen’s prediction and states “it’s a mistake to think that the offline retail industry—which currently represents 95% of retail buying versus e-commerce’s 5%—will shrink to next to nothing.”

I think that if retailers adopt the airline industry’s best practices for driving true loyalty, both retailers and consumers will win.

Retail is a far different enterprise than airlines. While airlines have an extremely high cost to enter, retail now can be entered at virtually no initial cost—thus driving the amazing plethora of options constantly sprouting up. While there will always be the price-only models out there, they will be driven mostly by the largest players. While those in search of “value,” however defined by the individual consumer, will always find it in their distinctly unique ways. Some online, some offline, and usually some combination of the two. Hooray for the ever-evolving options of the retail universe!

“OMG, you must check out the retail industry strategy advice from these two guys, an Airline CEO who went to MIT and the guy who invented the Internet browser—they really get shopping!” Said no one. Look, airlines are to retail as logistics are to Victoria Secret—except when it comes to flying, I do not aspire to go to NYC. I go to NYC. To be sure, the authors mentioned have deep roots in service innovation, but retail…I don’t know. So, now it’s my turn to offer some unqualified advice to the airlines: 1. Create a club along with Costco – allow regular flyers to group buy foods and fuel! What I save buying wholesale gas, and eating food that does not cause gas, sounds like a win/win. 2. Become a showroom for retailers and others. Start by creating informative, entertaining and actionable content – deliver it via a few loaner tablets to a captive audience that might be motivated to visit an old fashioned bricks and mortar store once they leave your rivets and aluminum.… Read more »

Yes. This is an interesting perspective which we should not ignore, even at first blush. There are clear similarities between the two models, even if retail is not disappearing. Nonetheless, retail is clearly changing and adapting to today’s technologies, often with price leading this change, but certainly not ignoring customer service (which is vital in all modes of retail).

There is a fundamental difference between airlines and retail: there are only a handful of airlines giving us a handful of options, and we fly only when we must and when there is no other choice. This is why we put up with additional fees and add-ons and yes, with the little customer service we get. A look at airline e-commerce initiatives proves the point; all they seem to have done is improve their websites and I’ve yet to enjoy a personalized experience with any airline, even with those with whom I fly frequently. Retail cannot afford such an approach; it needs to customize every customer’s experience in order to attract and retain their custom. A more apt comparison, I believe, would be with Hospitality. Hotels have recognized the need to change how they acquire customers but, more importantly, they realized that the key to their success is in having them return. To that end, hotels are harnessing modern technologies such as Mobility to give their customers instant choice and information, they are analyzing Social… Read more »