Fairness and reference profits

price discrimination, where enacted differently by the two logics arguable due to their focus of attention.

Albatros’ perception ‘there is too much trouble’ doing tourism in Greenland, which indicate that the ratio between contribution and profit in their perception is to low, and therefore there are less inclined to ‘use their energy’ on Greenland. The distribution manager, argued:

“…Albatros is tired of selling Greenland, there is god damn it - excuse me – too much trouble, they don’t want to make an effort because they can’t earn enough money. They can’t multiple with that factor…they can’t make a profit, and then there is too much trouble. Because, when they can take a lot of different destinations and make it work and multiply with that factor, then they want to use their energy on that.”

Albatros’ reference point for calculating a fair profit and hence a fair price, was not based on a comparison of volume with Air Greenland, but of what they earned on their other destinations.

In Albatros’ perception of rationality a fair profit and hence a fair price for the tickets, should be calculated in such a way that their profit on cruises in Greenland should be approximately the same as they earn on their other destinations around the world. The problem from their perspective was that the profit on cruises in Greenland was too low, and therefore they would not expand their business in Greenland because they could not maintain their (fair) reference profit, which they were able to make on other destinations.

The distribution of profits was also an object of conflict in the price negotiations between Air Greenland and Greenland travel. The manager of NRM states his version of the conflict between the two logics:

“There is a huge communication problem in relation to the subsidiaries…and I know that some of them are tired and disappointed, but we cannot sell everything for half the price, so they can make a profit.” (NRM manager)

The NRM expectations to what a reasonable profit should be when Greenland travel used their tickets in products for package tourist included references to Greenland travel’s work (contribution) in selling the packages:

“If a travel agent is working with packages, then they must still provide the same revenue plus new revenue….Therefore we have kind of like a sticker price that we would like them to follow, as we see no need for them to advance with profit that high, when buying a ticket from us for kr.1.000,- and selling it to the customer for kr. 8.000,-. Our reasoning is that they should have profit that resembles their actual work of selling the individual ticket, which is most reasonable….…if they say: ’Give me 1000 tickets for 1200 DDK each’, but it turns out that they are actually moving sales they have in other segments, and then they optimize their own revenue, that is no good for us.” (NRM manager)

The manager’s argument highlights that a ‘traditional’ pricing issue is linked to fairness issue and made sense of through the Airline logics frames of reference. The ’traditional’ part of the argument relates to potential “buy downs” a central obstacle for a price discrimination strategy (Kaplan and Atkinson, 1998; Salvatore, 2015). A buy-down takes place if cheaper tickets intended to increase overall capacity utilization moves tourists willing to pay high/full prices from expensive to cheap tickets without creating extra demand. The second part of the argument relates to argument also discussed above that many people take into account the relative contribution when discussing the sharing of profit – ‘they should have profit that resembles their actual work of selling the individual ticket’ (Luft and Shields, 2009; Adams, 1965). The buy-down problem is linked to the fairness discussions, because the travel agencies ratio between the profit and their contribution (‘actual work’) according to the Airline logic changes in favor of the travel agencies, due to the perception that lower prices resulted in buy-downs,

The manager in Greenland Travel did not share the Airline logics’ perception that a low price from Air Greenland should be followed by a low price to the customer and subsequently a lower profit to Greenland travel:

“… it’s the strangest thing I have heard, when the airline argues that if we want a low price then we shall decrease our profit…Where did that come from? Please deliver the seats, calculate the price of the seats, and then we will calculate our price. I mean Airline must have an idea of what they can do it for, and then we must have an idea of what we can do it for. None of us are rubbing our hands because we are making a fortune.” (Manager in Greenland Travel)

The quotation from the manager of Greenland Travel highlights that they don’t share the perception of the Airline logics that they receive an unfairly large share of the profit since ‘none of us are rubbing our hand because we are making a fortune’. The manager in Greenland Travel further argues that due to slow calculation of prices in NRM they lose several orders:

“I think we make many offers to tourists that we do not close, because we cannot deliver….one of Air Greenland biggest problems is the response time. The customers blame me for long response time. If you ask Air Iceland they answer within 48 hours.”

In the manager’s perception Greenland Travel actually are doing a lot of work (contribute) without selling anything. In this way of enacting the contribution of NRM and comparing it with their own contribution, the prices they request is not to low vis-à-vis their contribution, on the contrary the manager conceive NRM contribution to the sales as the problem. Again the Airline logic enacts the situation differently:

“Greenland Travel is just in another age. They are fiddling with individual persons and special packages, which takes too much time and resources because it is not standardized, which means that they cannot make money on it and therefore they lose contribution margin” (Commercial director).

Summing up the analysis it has been illustrated that the discussions of fair prices for package tourists also enacted references related to distribution of profits. The conflicts between the Airline logic and the Tourism logic (Albatros as well as Greenland travel) illustrate that they both adhered to the idea that contribution is a relevant reference point for the sharing of profit and subsequently price setting. However, the competing logics enacted contribution differently.

In the discussions with Albatros the Airline logic enacted volume (revenue) as the reference point for sharing of profit and hence price setting. Since Albatros earned the same as Air Greenland with 20% of Air Greenland’s volume the prices were perceived to be too low.

Albatros on the other hand being in the tourism industry, reasoned that the relation between contribution, profit and hence price, should be the same as in the other destinations they were doing business in.

In the discussion with Greenland travel the conflict also arise due different enactment of contribution. The Airline logic is sceptical towards lower prices to package tourists since they reason that it will result in buy-downs that subsequently will provide Greenland travel more profit without contributing more. This way of enacting buy-downs underlines the Airline logics little focus of attention on package tourists, and the idea that there are no growth opportunities in tourism, otherwise there would be no reason to argue for that low prices would result in ‘buy downs’. Greenland travel on the other hand perceive that they are working hard to further tourism and thereby contribute to creation of profit, but the problem in their perception is that NRM does not deliver the prices in due time. In the following, we analyze a particular negotiation about prices between NRM and Albatros travel in order to illustrate how competing logics and views on fairness affected concrete interactions.