Better forms of differential pricing that don't punish flexibility so much

Differential pricing occurs when a company attempts to charge different prices to two different customers for what is essentially the same product. One place we all encounter it a lot is air travel, where it seems no two passengers paid the same price for their tickets on any given flight. You also see it in things like one of my phones, which has 4 line buttons but only 2 work — I must pay $30 for a code to enable the other 2 buttons.

The public tends to hate differential pricing, though in truth we should only hate it when it makes us pay more. Clearly some of the time we’re paying less than we might pay if differential pricing were not possible or illegal.

So even if differential pricing is neutral, one can rail if it punishes/overcharges the wrong thing. There might be a better way to get at the vendor’s goal of charging each customer the most they will tolerate — hopefully subject to competition. Competition makes differential pricing complex, as it’s only stable if all competitors use roughly the same strategy.

In air travel, the prevailing wisdom has been that business travellers will tolerate higher ticket prices than vacation travellers, and so most of the very complex pricing rules in that field are based on that philosophy. Business travellers don’t want to stay over weekends, they like to change their flights, they want to fly a combination of one-way trips and they want to book flights at short notice. (They also like to fly business class.) All these things cost a lot more in the current regime.

Because of this, almost all the travel industry has put a giant surcharge on flexibility. It makes sense that it might cost a bit more — it’s much easier to schedule your airline or hotel if people will book well in advance and keep to their booking — but it seems as though the surcharge has gotten immense, where flexible travel can cost 2 to 4 times what rigidly scheduled travel costs. Missing the last flight of the day can be wallet-breaking. Indeed, there are many arguments that since an empty seat or hotel room is largely wasted, vendors might be encouraged to provide cheaper tickets to those coming in at the last minute, rather than the most expensive. (And sometimes they do. In the old days flying standby was the cheapest way to fly, suitable only for students or the poor. There are vendors that sell cheap last minute trips.)

Vendors have shied away from selling cheap last-minute travel because they don’t want customers to find it reliable enough to depend on. But otherwise it makes a lot of sense.

So my “Solve this” problem is to come up with schemes that still charge people as much as they will tolerate, but don’t punish travel flexiblity as much.

One idea is to come up with negative features for cheap tickets that flexible, non-business travellers will tolerate but serious business travellers and wealthy travellers will not. For example, tickets might come with a significant (perhaps 10-20%) chance of being bumped, ideally with sufficient advance notice by cell phone that you don’t waste time going to the airport. For example, the airline might sell a cheap ticket but effectively treat the seat as available for sale again to a higher-paying passenger if they should come along. You might learn the morning of your trip that somebody else bought your seat, and that you’ll be going on a different flight or even the next day. They would put a cap on how much they could delay you, and that cap might change the price of your ticket.

For a person with a flexible work schedule (like a consultant) or the retired, they might well not care much about exactly what day they get back home. They might like the option to visit a place until they feel like returning, with the ability to get a ticket then, but the risk that it might not be possible for a day or two more. Few business travellers would buy such a ticket.

Such tickets would be of most value to those with flexible accomodations, who are staying with friends and family, for example, or in flexible hotels. Rental cars tend to be fairly flexible.

Of course, if you’re willing to be bumped right at the airport, that should given you an even cheaper ticket, but that’s quite a burden. And with today’s ubiquitous cell phones and computer systems there’s little reason not to inform people well in advance.

This technique could even provide cheaper first-class. You might buy a ticket at a lower price, a bit above coach, that gets you a first class seat half the time but half the time puts you in coach because somebody willing to pay the real price of first class bought a ticket. (To some extent, the upgrade system, where upgrades are released at boarding time based on how many showed up for first class, does something like this.)

Any other ideas how airlines could provide cheaper flexible tickets without eating into their business flyer market? If only one airline tries a new idea, you get an interesting pattern where everybody who likes the new fare rules switches over to that airline in the competitive market, and the idea is forced to spread.

Source:ideas.4brad.com