12 January, 2019

Dynamic pricing in winter sports resorts: No trivial "exercise"

More and more winter sports resorts are implementing dynamic pricing systems to strengthen their profitability. However, the dominant orientation towards demand-dependent sales maximization is not enough. Prices inhibit a large number of different properties, which should be integrated into pricing. And then there is another important ingredient missing from any “normal” dynamic pricing (in other serice industries): limited capacities.

Various media have been reporting about the increasingly widespread dynamic pricing systems at Swiss winter sport resorts (mountain cableways). The journalists and experts all had the same tenor: companies have woken up to pricing issues and are currently in the midst of a innovation push.

In essence, mountain cableways are trying to maximise their turnover - depending on demand. Two central directions determine their actions: (1) High demand - however it may arise - may result in higher prices (et vice versa) and (2) guests who are prepared to buy admissions early (without refunding) and thus to forego options ("loss") may be rewarded with different discounts ("gain") on these very prices. These directions, which are aimed at controlling demand and earnings, are logical and comprehensible, but fall short in regard to other properties of pricing.

On the one hand, in such a kind of pricing one potentially neglects the value orientation, just intervening in the price controlling events instead of focusing on differentiated guest needs. A price always has a positioning function and is an important signal for the quality and quantity of the service. Sooner or later one ends up with a demand-oriented thinking in the commodity corner. Many airlines, for example, have "landed" there; they are now trying almost desperately to get out of this corner with the help of sellable and performance-differentiating additional services (keyword: mass customization).

On the other hand, rules relating to "fair pricing" should also be increasingly taken into account.

A large majority of guests are aware that mountain cableways must generate enough revenue to cover their very high costs. This is why, for example, investments that are noticeable to customers should always be communicated visibly ("we build for you..."). However, pricing that is primarily perceived as a means of absorbing high demand is generally perceived as unfair, especially if capacities are not technically or deliberately limited - for whatever reason (e.g. to prevent overcrowding; in hotels or airlines, for example, there is a technical limitation due to the number of room nights or number of seat kilometres respectively). If there is no such capacity limitation and thus no anchor, a price anchor should be set in the form of a cap price (maximum price), otherwise - in the worst case - high paid prices could even be interpreted as a demand premium (i.e. surcharge and thus "loss").

These anchor or maximum prices can be transactional (e.g. a day ticket purchased at the cash desk) or relational (e.g. seasonal or annual pass). They must be carefully chosen (if necessary differentiated according to guest segments) and then widely communicated, for two reasons: On the one hand, an offer is positioned (service and price; cf. value orientation in pricing), on the other hand an external reference price is communicated to the guests, to which they can relate their individually paid prices (discounts) (with many winter sports offers I see reference prices, if at all, only late in the booking process...).

Setting such a reference price and discount mechanisms is therefore a truly strategic challenge. Ultimately, there is an optimum to be found between value orientation/ positioning and demand management, whereby two extreme worlds are conceivable from the combination of these two orientations: (1) Low maximum price, little discounting vs. high maximum price, much discounting.

The ideal solution, namely price demand management combined with value-based pricing, should consequently result in an artificial limitation of access to a winter sports area. It will be interesting to see which mountain cableway will be the first to have the nerve not only to limit the number of discounted daily accesses to a winter sports area, but also to align access as a whole and thus pricing increasingly to the management of pre-defined capacities.

No comments:

Post a Comment

Thanks for sharing your thought!