Bags Fly Free: The Profits in Purpose

Consultants recently told Southwest Airlines (NYSE: LUV  ) executives that they were leaving $300 million on the table by not charging for bags. That's $300 million in potential revenue for a company competing in a ravaged industry. But Southwest CEO Gary Kelly held firm -- bags would fly free. Southwest would find the $300 million elsewhere.

And how has that decision played out? Kelly says that the policy of not charging for luggage has helped the airline increase its share of the domestic market by about 1%, or between $800 million and $900 million.

"Bags Fly Free" has been a profitable decision for Southwest. And it's a decision rooted in the airline's deeper purpose: to make flying more affordable and more accessible.

Southwest is a purpose-driven business. The company tasked with marketing Southwest's purpose is GSD&M Idea City, a Texas-based advertising firm headed up by Roy Spence, author of the book It's Not What You Sell, It's What You Stand For.

In addition to Southwest Airlines, GSD&M's clients include BMW Creative Worldwide, the U.S. Air Force, AT&T (NYSE: T  ) , MasterCard (NYSE: MA  ) , and Deere (NYSE: DE  ) . The company created the iconic "Don't Mess With Texas" campaign.

Turning purpose into profits
Spence recently visited Fool HQ to talk about the power and profits in purpose-driven businesses. Spence says purpose is necessary and should be kept simple. He describes purpose as the "definitive statement of the difference you're trying to make in people's lives."

According to Spence, purpose allows companies to do three things in particular:

  • Make decisions more simply and clearly.
  • Scale the business more quickly.
  • Execute decisions more easily.

"What's simpler is clearer, and what's clearer gets done," he said. "If you have a purpose in your organization and everyone knows what it is, it makes decisions simpler." Are you going to violate the purpose of the company or not?

Case in point: When Southwest started flying long-haul flights, Spence told the CEO, the legendary Herb Kelleher, that passengers were hungry and Spence proposed the idea of serving Snickers candy bars. Kelleher, however, calculated the cost of serving a Snickers versus a package of peanuts and found that Spence's chocolate suggestion would cost the company millions.

Serving in-flight Snickers would increase costs, which would increase fares, which would violate the company's purpose. Kelleher instead told Spence that Southwest would offer passengers an extra bag of nuts --- a decision that kept costs down and fulfilled the company's deeper purpose.

"Consumers are going to Southwest because they believe in the purpose of this company," said Spence. "Yes, it's tough to cut costs and balance the business. But at least if you have a purpose, you'll know when you're violating it or supporting it."

A purpose that benefits all parties
Spence says he does not believe any company will thrive over the long run if it's not in the business of improving people's lives. He points to Procter & Gamble (NYSE: PG  ) , whose purpose is to "provide branded products and services of superior quality and value that improve the lives of the world's consumers." Spence says when the CEO of a huge company like P&G states that purpose is going to be the thing that drives its brands, it bodes well for the long-term trajectory of the company.

Invoking poet Robert Frost, Spence says that companies and individuals have two roads in front of them. "If you look for enemies, you'll find them. If you look for hate, it will ruin your heart. If you look for gossip, it will consume you. If you look for fear, it will follow you."

But there's another road. "If you look for friends, you'll be befriended. If you look for love, it will lift you up. If you look for the truth, it will set you free. If you look for hope, it will take you to higher ground. That's the road I want to be on," said Spence. "That's the road that all consumers, companies, and investors want to be on. That's the road to purpose."

Related Foolishness:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Procter & Gamble is a Motley Fool Income Investor pick. The Motley Fool owns shares of Procter & Gamble and has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2009, at 3:53 PM, ras3098 wrote:

    "Kelly says that the policy of not charging for luggage has helped the airline increase its share of the domestic market by about 1%, or between $800 million and $900 million." Thats funny becuase none of the airlines that charge for bags has seen there domestic market shrink. Also if they had you can bet your dollar that they would reverse their policy.

  • Report this Comment On December 23, 2009, at 3:07 PM, globalsailor wrote:

    Good luck to Southwest. I just hope that the federal government doesn't think that airlines are too big to fail because they should lead the next recession.

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