Are you pricing your products right or are you leaving money on the table?
The Concorde was one of the most innovative machines ever built. The first and only supersonic commercial aircraft capable of flying at twice the speed of sound is also one of the most beautiful machines ever built. The Concorde story provides an interesting lesson on pricing.
During the first 6 years of operation, the fantastic Concorde lost money for British Airways. Losses were so bad, in 1982 BA’s boss Sir John King gave the responsibilities of the newly created Concorde division to Captain Brian Walpole and gave him two years to turn Concorde losses into profits. If he failed, BA would terminate operations, shutting down Concorde for good.
The Concorde team decided to do some market research. They asked businessmen how much they thought a Concorde ticket cost. The answer, “Most of them didn’t know. It was their secretaries or travel companies doing the bookings. When they were asked to guess, because they were senior, very important people, they all guessed that the fare was higher,” explained Captain Jock Lowe, Concorde resource & Planning Manager.
This insight led to a new pricing strategy. Captain Lowe described “So very simply, we said, we’ll charge them what they think they are paying. And so, we put the fares up”. There was a discrepancy between what the company was charging, and the value customers saw in the product. Have you asked your customers how valuable your product or service is for them?
Concorde ticket prices were doubled to over $7,000, one way, in today’s prices. As a result, Concorde was repositioned to provide a super-elite class for bankers, the rich, and the famous. Concorde became the place to be seen.
Despite the high price, sales were very strong. For one particular day, half the tickets for its first fare-paying London-New York flight were sold out in the first two hours of booking, (source).
Concorde started making money. Lots of it. Estimates point to £50 million in profit per year. “We made about £500 million in net, clear profit.”. This is the estimated cumulative profit over 20 years of operation. Despite having only about five aircraft actively operating. That’s significant, even for a company the size of BA.
Many companies build their pricing strategies based on cost + margin. Often, there is a predetermined margin based on an overall pricing strategy or on a corporate profitability target. The story of Concorde shows us the power of market-based pricing and the importance of understanding the true value of the products and services your company offers.
The lesson is not simply that British Airways could charge more for Concorde. It is that price is part of positioning. Customers already perceived Concorde as an extraordinary product—a faster, more exclusive and fundamentally different way to travel. The original price simply failed to reflect that perceived value. By raising the price, British Airways brought the economics of the product in line with the position it already occupied in the customer’s mind.
The result was a powerful virtuous cycle: higher perceived value supported a higher price; the higher price reinforced Concorde’s premium positioning; and that positioning helped produce sustained profitability.
Sometimes the biggest pricing mistake is not charging too much. It is charging less than your customers already believe your product is worth.
Price elasticity measures how much demand changes when price changes. For many products, you expect raising the price would push enough customers away so that total revenue suffers. Concorde was different. Its customers were relatively price insensitive, and the reason comes down to what they were actually buying.
They were not purchasing transportation from London to New York; they were buying time, convenience, exclusivity, and status — an experience that could not easily be replicated elsewhere. For a business executive whose time was extremely valuable, saving several hours could be worth far more than the incremental cost of the ticket. The price didn’t need to make sense against a coach fare, because a coach fare wasn’t buying the same thing.
That is also why Concorde is such a good example of value-based pricing. Cost-based pricing starts with what a product costs to provide and adds a margin. Competitor-based pricing asks what alternatives charge. Value-based pricing starts somewhere else entirely: what does this actually buy the customer, and what is that worth to them? Comparing Concorde’s price to a first-class airline ticket understated its value, because Concorde wasn’t competing on the same axis. First class buys comfort. Concorde bought time, arriving before you left, and the ability to say you’d flown it. Once BA understood what customers were really buying, the old cost-plus-margin math became irrelevant.
British Airways eventually priced to match that value, and in doing so demonstrated an important principle: the right price is not necessarily the price that maximizes the number of customers. It is the price that captures a fair share of the value you create. When customers perceive your offering as meaningfully differentiated, and alternatives are poor substitutes for what they’re actually buying, demand can be far less price-sensitive than conventional pricing logic would suggest.
Source: “Concorde, Flying Supersonic” – Smithsonian TV, 2010
Additional source: https://www.heritageconcorde.com/concorde-british-airways
As always Captain Lowe identified the problem. It wasn’t the actual cost in £s and $s; it was the perceived costs that mattered. By rushing so quickly to measure the worth of any project in this way we immediately identify the wrong parameter. Money is simply a measure to make trade easier; it is not real as in real estate, or a car, or a mature child; it is simply a way to measure the achievement.
The bean counters will tell it cost some $100 billion to put Neil Armstrong on the Moon. Quite right – it was definitely at least a $100 billion effort by all involved. I certainly wouldn’t to go to the Moon in $1billion vehicle. Concorde, we’re repeatedly told, soaked up £100s of millions of tax payers’ money: such nonsense. It was at least £1 billion worth of effort by the engineers and scientists and should be valued as such. In any case it wasn’t the taxpayers’ money. Money just flows to make the projects work. If you said Concorde cost three hospitals and a school you’d be closer. Then instead of being worried about money squandered on rich men’s toys we would be balancing the value of producing the first supersonic commercial transport against our healthcare and education needs.
When Captain Lowe asked his customers how much they thought they paid he was asking the right question – what was it worth to cross the Atlantic twice in a day with a four hour stopover to do top level business. Let not the accounts measure our worth.