Is Variable Pricing Right for Your Business?
Uber has made headlines — some good and some not so good — on its variable pricing policies. Its version works like this: when demand is high, it increases the price for a ride. The company says this is not only profitable for it, but the financial incentive to make more money helps get more drivers on the road to provide more vehicles for more customers. Think: I need a ride in Manhattan on New Year’s Eve. Good luck getting a cab!
On the down side, the variable pricing (Uber calls it “surge pricing”) has come under some fire, mostly for the amount of the increase. The internet is littered with stories about relatively short rides costing hundreds of dollars due to surge pricing that increases fares not just by a few percent, but by multiples, with some fares being more than five times normal price.
Variable pricing is nothing new. Many events offer early-bird discounts and charge more for a ticket the day of the event. Restaurants offer specials during slower times of the day. Theaters offer discounts for screenings at less popular times, and seasonal businesses offer incentives to bring people during “off” times (the price of a ski lift ticket in October vs. January).
Those are all examples of what could be called surge pricing. The difference? Customers perceive those examples as discounts off the regular price, not increases to the regular price. Think about it: a movie theater advertises an “early discount” for a 5 p.m. showing on Tuesday, not a “surge price” for the 8 p.m. showing on a Friday. The economics are the same, but the message sent to your customers is very different.
Could variable pricing be right for your business? Here are some ideas:
• Stock Up and Save Promotions. This is also called taking people out of the purchase loop early. Let’s say you own a liquor store and you’re always busy on late Saturday mornings as people make purchases for the college and pro football games that weekend. You — and probably most of your competitors — offer discounts to get people to your store. But what if you discounted your most popular football season items on Wednesday through Friday and charged full price on Saturday and Sunday? Many shoppers will see the deal and purchase in advance for the weekend, and those that stop in at the last minute will probably buy from you anyway. The customers that bought early aren’t shopping deals at your competitor, and those that buy on game day represented a higher profit for your business. This works for all kinds of time sensitive things: Halloween candy, Valentine’s cards, etc.
• Happy Hour Variations. Nothing hurts a business owner more than to watch people leave because the line is too long. If you know you have long lines at certain times of the day — let’s say the lunch rush is 11:45 a.m. to 1 p.m. — offer an incentive for people to get their food early. Give a discount for all orders placed before 11:30 a.m., for example, and see if you can shift some of that traffic a few minutes earlier. That way, you’re keeping the business, reducing the line (and, as a result, the walkaways) and increasing your peak time capacity without any additional labor costs.
• Conditional Need Opportunities. It sounds cliche, but sometimes an increase can be the right thing to do. If it’s raining, consider raising the price of umbrellas a little bit. Same thing with sunscreen on the first really sunny day of the spring. Local sports team make the playoffs? Those sweatshirts probably should cost a little more. However, it’s important to make sure your customers don’t feel gouged, and that’s where Uber got criticized. If umbrellas are $5 when it’s sunny and $50 when it’s raining, your customers will notice and not be happy. However, if the price increases marginally, most people won’t notice and will be happy to pay a couple of extra dollars to stay dry.
• Even service businesses can benefit. It’s only logical that a plumber will cost more at 2 a.m. for an emergency call than at 2 p.m. for scheduled-in-advance routine maintenance.
Variable pricing done correctly can help improve your bottom line while providing people with the good or service they want at the right moment.
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