(Dec 22) "Late last week, Frontier Airlines became the first U.S. airline to unveil a new “menu-pricing” fare structure, in which passengers can choose from among three different pricing levels: Classic Plus, Classic, and Economy. Each ticket level comes with a certain number of amenities—the more you pay, the better services you get."
"...Air Canada has had a similar price structure for years, and other U.S. airlines are rumored to be thinking about moving in this direction, including American Airlines. For Air Canada, menu pricing has not only proven to be a money-maker, it’s also relatively popular among passengers. If passengers are willing to forgo all the extras, they can actually save money on their flight."
Other industries are starting to follow suit, believing this new pricing structure to be a sound profit model. I pointed out the stirring of this pricing in the NFL a few weeks ago. Some college teams seem to be dipping their toes in to test the waters, as well as the performing arts industry: "Performing arts charging more for premium seats":
"Just like airlines, many performing arts venues are beginning to charge more for ticket-holders to stretch out their legs."
"..."Demand pricing" is taking hold, said Alice Kornhauser, marketing director of the Portland Symphony Orchestra. "If people are willing to pay more for an aisle seat, then it's pretty irresponsible from a business standpoint not to charge," Kornhauser said."
"It should not be a surprise that arts organizations use sound business principles to have a more substantial financial foundation," Steller said. After all, other businesses including airlines and hotels have based their pricing on demand for years, she said."
Demand pricing is a very profitable strategy in some industries, although as I pointed out in a recent post, price increases can backfire if not thought through completely. We we keep a close eye on these industries as 2009 progresses, as this trend seems to be spreading quickly.
One of our PPS archive articles, "Pricing In Highly Competitive Markets", has this to say about these types of pricing strategies:
"Unbundle Everything You Can - In a price competitive market place it is important not to offer anything that customers don't value. One way of doing so is by making sure that every element of the product or service is sold individually. This approach lets customers choose which features and benefits they want to pay for and which ones they don't need.
"You gain because you no longer have to provide those features and benefits where they are not warranted and get revenue when they are. Remember - just because your competitor offers these features or benefits doesn't mean they will get the deal. If the customer is truly a price buyer, they will give the business to the company with the lowest price, provided that the minimum standards for quality and service are met."
Even Blockbuster, who has been fighting an uphill battle ever since the on-demand services and tiered pricing strategies introduced by Netflix ripped the carpet out from under them, have moved towards a tiered pricing structure:
"Blockbuster tests new tiered pricing":
"Blockbuster is testing a pricing scheme in the Metroplex that lowers prices for older movies but brings back per-day late charges.
"Under Blockbuster’s "Any Way You Want It" program introduced this month, customers pay a daily or weekly rate to rent DVDs and Blu-ray discs. There’s a charge for each additional day they keep the item without returning it, and there is no grace period before those charges kick in.
"The Dallas-based company hopes that the new pricing structure will make the rental pricing easier to understand and help keep popular movies and new releases available for renters."
More to come - EM
1 comment:
We've been watching a similar trend in demand pricing. See this excerpt from our December newsletter:
Just the Ticket
by Steve Haggett
Many service providers operate without an ability to store inventory–an unbilled hour cannot be stored, no more than an unfilled flight can add customers after take-off.
The airlines have pursued a fine-toothed pricing strategy to address this problem, defining the value of a seat based on the time remaining until take-off, gradually increasing price as customer value increases and price-sensitivity drops.
Now performance and entertainment providers are adopting this strategy. A stadium or theatre offers a fixed capacity, but the value of the performance can change significantly from day to day. This is immediately recognizable in the scalper’s market. While the face value is the same, when the Red Sox play the Yankees, the street value of the tickets is orders of magnitude higher than the same seats the next week, when the Royals are in Boston.
Teams are now exploring variable pricing systems, designed to fill capacity when perceived value is lower, and maximize revenues when perceived value is higher. With the ability to reflect ‘street value’ on ticket prices, teams can both attract more fans and increase total revenues.
This strategy can work for any company facing changes in demand and perceived value for a static-priced offering. By matching the pricing metric to customer value, rather than offering cost, companies can improve satisfaction, demand, and profits. In the case of an airline, the value is based on advance purchase time. In the case of a theatre, it’s weekends vs. matinees–so a pricing approach offering different fees for Friday at 7 pm from Tuesday at 10 pm makes more sense than two simple prices. In the case of a sports team, it’s related to opponent. All the while, the cost of providing that service doesn’t vary.
Identifying the way your customers perceive value, as opposed to your basic cost, is a win for everyone.
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