Operations

Segmenting Prices Can Add Big Value To Your Service

Sara Eastwood-McLean
Posted on January 2, 2014
Today, airline pricing varies based on seat locations, leg room, boarding priorities and client preferences which have been mined to be monetized.

Today, airline pricing varies based on seat locations, leg room, boarding priorities and client preferences which have been mined to be monetized.

Today, airline pricing varies based on seat locations, leg room, boarding priorities and client preferences which have been mined to be monetized.
Today, airline pricing varies based on seat locations, leg room, boarding priorities and client preferences which have been mined to be monetized.

Look around you and you will see a changing environment in every sector of the travel industry. Just yesterday (it seemed) airlines set pricing based on sections of the aircraft – namely first, business and coach classes. Today, pricing also varies on seat locations, leg room, boarding priorities and client preferences which have been mined to be monetized.
 
“Segmenting” clients in other parts of the travel world such as the hotel industry is nothing new either. There are boutique and luxury-based hotels and mid-tier to economy hotels such as motels and inns. Hotels know that not all clients are created equal. In fact, almost none of them are. Travelers have their individual likes, dislikes and preferences, which are more often being used to maximize yield. The practice of targeting different groups of travelers with various pricing strategies has grown in sophistication during the past few years in all travel sectors, with one exception – our industry! As customer relationship management systems extract more data from clients, revenue managers have found themselves armed with more ways to extract revenue.

I recently met up with Doug Anderson from Limos.com (who I invited to talk at our International LCT Show next month on segmentation and what that can do for this industry). Doug concurs that the limousine industry is behind the pricing strategy curve. While surge pricing is a new term that Uber recently made fashionable, it’s far from a new concept. Pricing should be based on supply and demand and works best when you really understand the demand piece of the equation. What a mid-level business traveler values may not be the same as the CEO when using your service. Uber targets the least discerning client – the retail public looking for instant gratification and something that beats standing in the rain while hailing a cab.

Uber does get credit for changing the perception of chauffeured car service – some may argue for the better by making it more mainstream than a service only for the affluent and the elite. The demand or rather the new expectation of the customer also has changed, thanks in part to Uber. Mobile apps that track a car give people peace of mind and make them feel better about chauffeured car service. Doug told me that, “Customers are less focused on how fast the car can get to them, than being able to track their vehicle from the point of booking it." I agree. When LCT surveyed the Global Business Travel Association (GBTA) and asked them what they least liked about doing business with the limousine industry, the runaway response was the lack of consistency with on-time arrivals.

Price Segmentation: Justify it or hide it.
Price Segmentation: Justify it or hide it.

Many of you already may be thinking about your client book and your inbound work and wondering how to segment them to better monetize the business. Here are some suggestions on pricing that I think are great for limo operators:

  1. Stop marking up costs. The most common mistake in pricing involves setting prices by marking up costs (“I need a 30% margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, profits are left on the table daily.
  2. Set prices that capture value. Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.”
  3. Realize that a discount today doesn’t guarantee a premium tomorrow. Many people believe that offering a discount as an incentive to try a service will lead to future full price purchases. In my experience, this rarely works out (use Groupon as an example of what not to do). Understand that customers have different pricing needs.
  4. Offer service versions. One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions.
  5. Know thy customer and implement differential pricing. Again, some customers are willing to pay more than others and base the value of the ride only on what they care about, not what you want them to care. Differential pricing involves surge at rush times, on-demand responsiveness, amenities and type of vehicle.

Since pricing is an underused strategy, it is fertile ground for new profits. The beauty of segmentation or client profiling is that you can better understand who will appreciate premium-level experience and who could care less.

Sara Eastwood-McLean
[email protected]

Related Topics: business strategies, LCT Publisher, revenue growth, Sara Eastwood, service pricing, surge pricing

Comments ( 7 )
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  • sara mclean

     | about 4 years ago

    I am thrilled to have feedback on my opinions! Thank you. Remember I write to the masses and thus in general, I feel we are behind the pack with respect to pricing - comparing our business to the rest of the travel industry. Hotels, airlines, even car rental... I just returned from Puerto Vallerta. It was (obviously) packed. I went to the beach to "haggle" with the wave runner vendor on behalf of my kids. He was NOT negotiable. $50 per for 1/2 hour. I ultimately paid it BUT tongue in cheek I asked him what he would charge me after the holiday rush...he said, "No comprendo" hmmmm.... I agree that there needs to be a FUNCTIONING pricing model - we can be all over the map and still maintain our credibility. Here too I say we can learn from other travel segments and be logical and consistant. Key take aways from your posts: 1. We need to become an industry that collaborates. Tough sell to a group of entrepreneurs but it is the smart way - strength in numbers. 2. Discounting below your margin IS not the answer. I wholeheartedly agree with Dan. Personally, I think we should be charging Premium rates (going UP from normal rates) during seasons and/or critical days/hours....when demand exceeds supply. I think that is touching some peoples nervous system.

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