What the Airlines Can Teach You About Pricing
Price segmentation, one of the most powerful tools you have at your disposal, can generate big profits for you. Initially you might be hesitant to employ it since you're literally charging different prices for virtually the same product.
But history and human behavior prove it works, and customers often expect to see it.
Classic example: airlines. I recently looked up the price of a five-hour flight from San Francisco to LaGuardia Airport in New York City. The coach seat was $310, the first class seat was $3,000. WOW! That's price segmentation.
How is this possible? Human behavior. People who are price sensitive will search for the cheapest fare possible, regardless of flight conditions (middle seat, red eye, etc.) Those who value comfort above all else will gladly pay a 1,000 percent premium, or roughly $500 MORE per hour in this example!
Extreme Segmentation
Price segmentation is nothing new. In fact, it is as old as capitalism itself. The following is from Jules Dupuit, an economist writing about European rail travel in 1849:
"It is not because of the few thousand francs which have to be spent to put a roof over the third-class carriages or to upholster the third-class seats that some company or other has open carriages with wooden benches. What the company is trying to do is to prevent the passengers who pay the second class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich."
Did you catch that? Third class rail travel in the 19th century was hard benches WITHOUT A ROOF.
Extreme Even Now
Think such extremes don't happen today? The European discount airline Ryanair unapologetically price segments for virtually everything. Passengers pay extra for pillows, water, any type of snack, and so on.
Ryanair has even petitioned sanctioning airline boards to allow them to install pay toilets and to allow standing room seating (like a bus).
Yet for all the controversy and passenger grumbling, Ryanair is one of the most profitable airlines in the world. Price segmentation works and always has. Just remember to ALWAYS know your customers' price sensitivity before you implement it.
