Travel Pricing Should Be Based on Value, Not Supply and Demand
March 1, 2011 by Alexi Huntley Khajavi
Next time you’re lounging around a hotel pool, gently ask the person at the chair next to you what they paid for their hotel stay. Odds are, they paid a different price. Then ask them what they paid for that iPad they’re reading. You don’t even have to ask the latter, do you?
Recently, Apple announced a mobile subscription service for publishers, a plan the Wall Street Journal said would lead to a battle with media companies who would be absent from the mobile devices if they decide not to share 30% of the revenue and cede control of consumer data.
The very next day, Google announced its own version of a subscription service plan. Google’s plan, called One Pass plans to take only 10% of the subscription revenues and more importantly, publishers will own all the customer data.
Why such different approaches to the same challenge?
It’s called brand loyalty.
Apple knows its iTunes environment is superior to other platforms. Apple has been able to maintain an advantage by continuously improving its mobile store and by creating a legion of brand loyalists who will do nearly anything to stay engaged with Apple’s products and services. Android, Google’s mobile solution, while growing fast is simply not able to generate the revenues from its current user base, nor generate the type of consumer loyalty, that Apple’s consumers possess. So, despite all the grumbling, several publishers have already signed up for Apple’s subscription plan and more will follow.
So, what do you get when you add brand loyalty, more conversions and constant improvements to the consumer ecosystem? Higher prices for your products and services. And 9 times out of 10, the higher priced companies are more successful than those fighting for the lowest prices.
Who in their right mind would fight to offer the lowest price you might ask? Well, if you work in travel you don’t have to look far. The travel industry has, hands down, the worst pricing model of any industry around. Take for example a common pricing model for destinations that struggle with seasonality. For my curiosity, I searched for a 7 day trip to a well known Caribbean island this past January and found a package for a hotel with activities and international air-included for $14,500 USD. That same package in July however is priced at $5,750 USD. Nearly one-third the price for the same room, the same hotel and I presume the same island. Unless July is known for ghosts roaming the island drunk on rum and terrorizing guests, I can’t help thinking what is so bad about July or rather what could be so good about January to justify that premium?
There goes the boat, suddenly the price in January seems outrageous when compared to July. They didn’t get undercut by the competition, they undercut themselves!
The fact is there’s probably no difference in product or service between January and July, the only difference is that January has more demand. That’s an understandable challenge/opportunity. So, how does one assume the only solution is to drop your prices and actually lose money on guests for half the year so that you can make money off your clients the other half? Enter stage left, Executive VP of Marketing & Sales, Mr. Jekyll and Hyde.
The problem is not with demand but with their marketing, or rather lack of it. Supply and demand is important, particularly for high school economics students. However, in business, unless you’re trading in commodities you shouldn’t base your pricing model off of the forces of supply and demand. But that’s exactly what destinations and the private sector travel companies in these destinations do every day.
This lost opportunity of a 365-day marketing strategy is destroying travel destinations faster than any natural disaster or crisis ever could. Price is determined by the perceived value of a product or service. When a travel brand continuously undercuts its prices via its own transparent sales channels or the opaque ones of third party distributors, it sends a message to its consumers that the price you are paying is not based on value but on a number of variables that the consumer doesn’t care about or trust.
The opportunity for destination and travel brands is enormous. Craft a strategy that finds new markets. Improve your product and services that cater to an unmet need or desire on the part of your consumers. Keep it simple and stay true to your brand values. Believe us, we know millions of travelers that want to experience your destination in January and July.
Ultimately, your brand is the collection of perceptions in the mind of the consumer. Do you want to sell those perceptions for pennies on the dollar or do you want to start making some money?
Interesting ideas. Having been one of the folks who booked in the Caribbean in July, there really is difference in product quality: it rains everyday for portions of the day and is about 90 deg with high humidity. In winter, it’s probably about 70 deg and rains infrequently. Additionally, frankly, most people are willing to pay more for a Caribbean vacation when it’s minus 25 back home in Bozeman et al. In July, when it’s a balmy 75 at the lake house, it’s harder to get me to fly 7+ hours to sit by the ocean. So, while I agree that the travel industry is not always smart in it’s marketing and pricing strategies, I do think the reality is that you have to have flexible pricing based upon the time of year and supply/demand. If I own a vacation property (and I do), I’d rather break even in the off season that lose money. Industries with a high fixed capital cost (hotels, airlines, railways, etc.) have a huge incentive to generate revenue when demand is low. And, price is often the most effective lever to generate consumer action when they are otherwise not very motivated.
Dear Alexi,
You certainly make some cogent and convincing arguments. While I don’t wholly disagree with your argument, there are some aspects which don’t stand up to close scrutiny.
With regards to the iPhone – yes Apple does have a strong brand following. However, the marketers of the Android phones now outsell iPhones. Indeed, the iPhone has recently fallen to 4th place in UK smartphone sales. This is because you can get a FREE Android phone with a new 24 month contract whereas Apple insists on customers paying approx GBP 65. The result has been a massive and sudden loss of market share for Apple. Oooops!
When it comes to holidays, I agree that the weather in the Caribbean is pleasant year-round. (apart from the odd Hurricane). However, not all destinations are like that. I challenge you to make a case that demand for all destinations in the world is the same. This is wrong and one can cite inumerable destinations where demand is indeed very seasonal. (not to mention airlines.. hotels.. train tickets.. restaurants…the list goes on)
So, while I appreciate your argument in support of value, I suggest that customer decision making processes can also be more complex than your article suggests.
If your goal was to incite your reader, you certainly did that. I will shorten this by saying that I have to agree with Doug and Nick. I would also like to add that making comparisons across distinctly different product lines can be meaningless.
We can all agree that Apple has created a marketing machine. For an interesting comparison, pick up the podcast “This American Life” did on Coca Cola’s secret recipe. In the end, the Coke quality control tester admits they came close, but goes on to say that it’s not all about taste: it’s about the can. The feeling you get through your other senses—seeing, feeling, and touching.
Those feelings do not come easy and are not all about the marketing. They have to consistently deliver on their product; otherwise, their reputation becomes marred by the fact they make big promises and do not deliver on them. We all know companies who have done that. Coke products consistently taste the same, and Apple consistently is on the front end on innovation.
Back to your original story. As someone in the travel business, we struggle with pricing almost on a daily basis. During the Montana mud months, we are taking business strictly as a driver retention tool; meaning, to keep good drivers, we have to keep them employed. In order to do that, we may have to take work at a reduced rate because the demand is so low. President’s Day weekend we know we are going to sell out, so we should probably charge a premium beyond our rack rate. We struggle with it because we do not like the perception of price gauging. The interesting part of it is that the same consumer who does not care that I am struggling a certain time of year and will beat me down for a price, is offended when I charge a premium.
That is at the heart of the marketing problem I am curious about: how do we maximize price without offending people when we are going to sell out. Plan your family vacation in the Bahamas during hurricane season, and you’ll understand what we’re talking about.
I did want to incite conversation and hopefully inform as well. I do agree with you all, not all destinations are the same throughout the year, most places in fact are affected by natural changes in weather, waves, wind, heat and humidity. My point was that except for some extreme destinations, most destinations have market potential for their products and services throughout the year.
The challenge is not how to persuade the same audience that visits you in January to also visit you in July. You are absolutely correct that winter in North Dakota is a natural motivator to get people to travel to your tropical island. Yet I stand by my opinion that there are attributes in July that can and must be told to a new audience before you resort to price slashing.
When price becomes based purely on supply and demand you shift the focus away from the value of your product and services and create exactly the opposite perception from your consumers that you want to. Dan’s point is spot-on, the consumer cares about his experience only so far as it doesn’t cost more than someone else’s. By playing with your fares and by actually trying to drive demand by lowering your prices you end up upsetting a lot of the high end consumers that should be valuing their spend on what you delivered and not what Mr. Jones in Room 4 or Seat 7B paid vs. what they paid.
In travel, you maximize revenue by creating demand for your products and services. This is done successfully when you understand your market, find unmet needs in the marketplace and craft a compelling story that emotionally engages these people to value your product because of what you do, not only what you charge.
For the record, I have been to the Caribbean in July and found it to be really enjoyable with fine weather, some rain and less crowds. The price was good too but I probably would have paid more.
I agree with some of your argument about branding being important…same goes for marketing…but I do disagree with your comparison model. Here is why:
While I have access to unlimited amounts of downloads of say the iTunes product…I don’t have unlimited amount of access to the 6 tent Kenyan safari camp that boasts the best views of the great migration during the month of July and August, or access to the best hotel in town during New Years Eve with free access to the swankiest party. The hotel isn’t able to up and create more “space” (rooms) or take those rooms away. They are limited. That means, the value of that room is able to go up based upon the demand.
So regardless of wanting to stay away from the supply and demand model…we in the hospitality industry who deal with the physical limitations of hotels/lodges and flights (into and out of certain destinations) still have to play the supply and demand game. That is, unless you are able to provide a like experience at all times of the year (weather, entertainment, culture, adventure, events, amount of people, environment…the works – think the movie Ground Hog Day) and like air access to that experience at any time. We know this isn’t possible. Locales have rainy, snowy, sunny seasons; events are hosted in the region which attract guests…etc. You get my drift. There are certain times people want/need to be in a destination for some specific reason and are willing/have no choice but to pay more.
So as much as we in the hospitality industry want to lessen the effects of supply and demand, we can only do that bearing in mind we will still have to succumb to it during times, and even the best marketer can’t overcome this challenge. We can only embrace it and try and lessen the blow by getting creative and holding fast to exclusivity of experiences, providing excellence in service, providing adventures beyond our wildest dreams, and ensuring an appropriate diversification of product that will help offset the demands.
But to your point…price should NEVER be based solely on supply and demand. If that’s your business model, take a second look before it is too late – if it isn’t already.