Tag: pricing

Pricing the friendly skies

The dynamic pricing of GoGo’s inflight Wi-Fi is a marker for the future of many industries.

Possibly the holy grail of business is to find a product that your customers will pay almost anything for.

In flight Wi-Fi service provider GoGo may be close to achieving that with a product that business customers depend upon. The New York Times describes how the company has found it can use dynamic pricing to customise its prices for each flight.

One of the limitations GoGo faces is the connections between the aircraft and the ground stations is narrow so a plane full of bandwidth hungry travellers will quickly bring everyone’s service to a crawl.

To overcome this – and to make more money – the service has developed algorithms to anticipate the demand on each flight and then customise the charges to suit.

In many respects what we’re seeing with GoGo is similar to services like Uber where fast, intelligent systems can analyse traffic patterns and use the predicted demand to set prices. It’s the ultimate demand driven economy.

Over time, this model is going to flow out across many industries – the airline industry leads the way in pricing around demand management – and consumers need to get used to the idea of a fixed price tag being a quaint memory.

 

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Uber’s New Year’s test

New Years Eve 2012 is going to be a tough test for the Uber hire car booking service as prices surge.

Update: It appears Uber passed the New Year’s Eve test without problems. There were almost no complaints at all.

New Years Eve 2011 was a tough night for customers of the Uber hire car booking service in New York City when fares surged as partygoers headed home.

This year, Uber hopes to overcome problems by making sure customers are aware with big warnings of prices and even a sobriety test so users can confirm they know what they are doing when they agree to catch a cab.

Uber’s dynamic pricing matches supply with demand, which means a more reliable service but also opens the company to allegations of price gouging during busy periods.

Those allegations are exactly what happened in New York last year and in 2012 Uber’s risks of bad publicity are far higher as the service is now international with operations in cities like London, Paris and Sydney.

Sydney will be the first city to encounter the effects of surge pricing and big risks lie in the Harbour City as Sydneysiders are used to fixed cab fares and enjoy a good whinge when things don’t work in their favour.

Over a million people are expected on the shores of Sydney Harbour to watch the New Year’s Eve fireworks which means cabs and hire cars are at a premium.

If Sydney has the triple fares expected in New York then Uber’s fare from Circular Quay to Bondi Beach will be around $150. This compares to the standard cab fare of around $30.

Those markups will be exploited by the incumbent taxi companies and booking networks. We can expect a wave of stories over the next few days from tame journalists regurgitating the incumbents’ media releases.

How Uber’s Australian management deals with this will be worth watching. One hopes they are prepared a tough week and don’t enjoy the festivities too far past midnight.

Another problem for Uber is going to be Sydney’s mobile data networks which are horribly unreliable during peak periods. It may well be that Uber’s customers and drivers never get a fare anyway.

Last year I was near the Habour Bridge and didn’t have a Vodafone signal from 8pm onwards. I’ll be comparing the performance of all three Aussie networks from the same place tonight.

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Fiddling the prices

Has the Internet’s promise of transparency failed as online retailers vary prices.

Discriminatory pricing is nothing new, a good salesperson or market stallholder can quickly sum up a punter’s ability or willingness to pay and offer the price which will get a sale.

Anybody who’s travelled in countries like Thailand or China is used to Gwailos and Farang prices being substantially higher even for official charges like entrance fees to national parks and museums.

The Internet takes the opportunity for discriminatory pricing even further arming online stores armed with a huge amount of customer information which allows them to set prices according to what the algorithm thinks will be the best deal for the seller.

Recently researchers found that the Orbitz website would offer cheaper deals for people searching for fares on mobile phones and prices would vary depending of which brand of smartphone people would use.

Writers for the Wall Street Journal did an experiment with buying staplers and found the same thing.

Interestingly, one of the factors Staples’ seems to take into account is the distance customers live from a competitors’s store – the closer you live to the competition, the lower the price offered.

There’s also other factors at play; sometimes you don’t want a customer, or you don’t want to sell a particular product and it’s easy to guess the formulas used by Staples and other big retailers do the same thing.

One of the great promises of the internet was that customers’ access to information would usher in a new era of transparency. In this case it seems the opposite is happening.

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How group buying can work for a business

Online vouchers can be good for a business when planned well

Online deal finding site The Dealmix has an excellent blog post analysing how daily deals can work for a business.

As the Dealmix points out, “daily deals can either hurt or help small businesses, depending on how they’re structured.”

In figuring out whether a deal will work, Dealmix breaks a group buying deal into four elements; expiration, quantity, terms and price;

Pricing the deal

Of all the areas, the pricing is the most critical. Get this wrong and you won’t achieve your objectives and it could be very quickly drive you out of business.

The Dealmix recommends two ways of pricing an offer – by making a net profit on the deal or structuring it a way that the customer’s total spend  offsets the cost of the offer.

Using Average Customer Spend, or ACS, to estimate how much a customer will spend is problematic with specials and group buying deals as the takers are not going to be your average customers.

It’s likely group buying customers are going to be far less open with their wallets than your regulars. Trying to upsell price conscious is probably what brings cafes and restaurants unstuck with many of these deals.

Both methods rely on knowing the Cost Of Goods Sold and the Average Customer Spend. Notable in the stories of group buying disasters is just how many business owners don’t understand these basics.

If you don’t know what the total cost is to your business in providing the goods or services, you should be talking to an accountant before going near these deals.

Also keep in mind the group buying service is going to take their cut which will be between 15 and 100% depending on the size and nature of the deal. For many businesses the commission is a deal breaker.

Quantity

The biggest complaint from customers about group buying offers is the deals are booked out for months – it’s also how service businesses find themselves overwhelmed by the response to a keenly priced offer.

Again, before launching a group buying offer, understand the spare capacity of your business and ensure there is a maximum limit to the number of deals available – as The Dealmix points out, a sold out deal is a great marketing tool.

Terms

Conditions are probably the trickiest; put in too many gotchas and you’ll scare customers away or find yourself fighting with the 90% of clients who buy the deal without reading the T&Cs.

You can guarantee some of those fights will end up being public and it’s unlikely your business will win the public relations battle. This is not your business objective.

Make sure key terms like what days the deal is available on, maximum limits, types of service are reasonable and clearly defined at the time of the offer.

Expiration

When the deal expires is the key condition, it’s madness offering deals that never expires as they can come back to haunt you for years and it may even affect the resale value of your business.

The Dealmix suggests not restricting it to a month as you’ll be overwhelmed with customers while leaving it too long will dilute the value and any measurements.

Ideally the deal will last three to six months, which is another reason for understanding your business’ capacity at various times of the year.

Timing the expiry is important to, as The Dealmix suggests, the deal shouldn’t finish on a busy day and equally you should consider when your business is the quietest. If things are slow during school holidays, summer or Christmas then that might be the time you want to have the last minute rush of redemptions happening.

Business Planning

Probably the most important aspect of a group buying deal is how does it fit into your business objectives. Are you intending to build a customer base, contact list, pubicise your business, clear stock or give sales a boost? Those objectives are going to determine how you structure the offer.

As The Dealmix’s diagram shows, group buying deals are complex and the merchant has to give some thought on getting the offer right. Those business who do get the mix right can do very well from a well thought out online offer.

Like all business tools, group buying sites can be really useful when done well. The key is understanding what you’re doing with that tool.

We discuss group buying and building your own campaign in e-business, Seven Steps to Online Success. If you need help or advice in building an offer, Netsmarts can help you.

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