Cost of Purchase vs. Price
While price is very important in any purchase, the total cost of purchase should also be considered in communicating value to customers. Southwest Airlines does both—they recognize and communicate their price and total cost of purchase.
The example below was created based on a sample of airline travelers. It is for educational purposes only and we have omitted the names of competing airlines and referred to them by letter. The ratings in the lower portion of the table were obtained using a rating scale that ranged from zero (no cost) to 10 (extremely high cost). These air traveler ratings were based on their perceptions, which may differ from the actual price and cost features shown. While these ratings are of value, creating a relative performance metric allows for greater strategic insight.
Relative Cost of Purchase Metric
We created the Relative Cost of Purchase above by dividing the rating for each area of cost of purchase by the average performance of competitors. For example, Southwest Airline’s relative ticket price is 72.4. This means it is roughly 28 percent below the average of competitors. Competitor A is 32.7 percent higher than the average competitor with respect to average ticket price.
The overall cost of purchase is computed using the cost of purchase for each cost component and its relative importance. Since Southwest Airlines has no cost associated with Seat and Luggage Fees and has a very competitive ticket price, its overall cost of purchase metric is 50.7. This means it is roughly 50 percent lower than the average index of 100.
To learn more, go to www.marketingmetricshandbook.com, view the Intro Video, and download a 30-day demo.
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