Be prepared to flex your pricing

Written on the 2 September 2009

WHEN you take the $79 discount fare aboard a low cost carrier from the Gold Coast to Sydney, chances are that the person sitting next to you paid $279.

Seated around you will be people travelling at a range of prices all sitting in similar seats, eating the same snacks and getting the same level of service you are enjoying. This situation is not unusual.

You will find similar pricing models being used by rental cars agencies, hotels, cinemas, restaurants and cruise ships. It is all based on a pricing model called ‘revenue management’.

Basically, pricing is set to encourage a range of different consumers to buy based on a variety of conditions. Buy early, get a discount. Come to happy hour and get $1 off your drink.

This is a very powerful sales tool. The question for you is – can you use this model in your business?

Revenue management can be used for any ‘time-expired asset’. That is, anything which you are paying for which is just sitting there waiting to be used. If it isn’t used, it earns nothing but you still incur expenses for it to be available.

Thus an airline seat, a theatre seat, a restaurant table, a rental car and so on, are all time-expired assets. This concept applies to service-based activities. Inventory retains its sales potential even if just sitting on the shelf, but the shelf doesn’t. An hour of shelf time can never be recovered. The shelf space is only of limited quantity and we pay for it to be there and it needs to earn its way. If one product is not selling, we need to discount it, get it off the shelf and replace it with something which will give us a better return for our investment in shelf capacity.

You should not think that discounted prices mean selling cheaply. The objective is to increase revenue by differentiating the offering to each sector of the market. Typically, you apply different conditions and different timing to segment the market.

Customers who are looking for a bargain have to take the risk of missing out. Remember, there are only a limited set of cheap tickets on airlines.

Any asset which sits idle gives you nothing in return but incurred costs. By using a little creativity, you should be able to come up with a pricing scheme which reflects consumer demand.

For example, a plumber could charge three times his normal rate for a guaranteed appointment but only half that if he can come anytime he is available.

Talk to your customers and find out what their views are. You will be surprised how much interest you will uncover. Think of price as a way of reflecting different forms of demand and package your services accordingly.


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