Dynamic and unbundled pricing: following in the wake of airlines

A semi-satirical article on possible outcomes in other industries adopting the pricing model of airlines appears in the Wall Street Journal's latest "Middle Seat" column. Although the article at times conflates dynamic pricing and unbundling (more on that later), its  lampooning of the airlines' apparently inexhaustible appetite for gouging on customers via fees, penalties and continual price fluctuations makes for some informative reading. 

Emulating any aspect of an industry notorious for its insensitivity to customers may seem like a non-starter but as the Middle Seat's simulations in other industries show the airline pricing model is one that is gaining ground not just in hotels and restaurants but also in major sporting events, banking, wireless phone services and consumer electronics, most notable Apple. 

The latter's strategy of unbundling is one that tantalizes rather than coerces (as is the case with the airlines) customers with possiblities promising, for instance, "incredible performance" with a $150 upgrade to a 1.7 GHz processor instead of the "standard" 1.3GHz; presumably it is safe to infer that the standard processor is not incredible. It is a strategy with spectacular outcomes for the company's bottom line.

Dynamic pricing is particularly apropos for industries with a perishable commodity or service with the presumption of occurence of peak-load situations whereas unbundling is not predicated on either peak-load or perishability but on customers' inclination to expend discretionary dollars based on their desire to fullfil "needs".

Arguably the latter is a more efficient use of services and products that maximizes revenue with little likelihood of one group of customers cross-subsidizing other supposedly price-elastic customers. That at least was the premise behind the legacy pricing structure of airlines when they socked it to the business traveler to "pay for" the price-sensitive leisure traveler.

Hotels are a long way from unbundling in the manner of airlines but the WSJ's fictitious Hotel L'Aire offers more than a sense of the possibilities for customers and owners. The hotel "has made all amenities a la carte so customers only pay
for what they use. They call it GuestMegaChoice. Want a bed with your
room? That's an extra $50 per night. Plan to take a shower? There's a
hot-water surcharge of $15 per 10-minute shower. A TV is included, but
if you want to use it, you can either bring your own remote control or
rent one for $3 a night.

At L'Aire, reserving a room of your choice in advance will cost you a
$10 fee. You can pay $10 extra for early check-in. Want to ride
priority elevators? $10, please. Checking out online is free, but
talking to a desk clerk carries a $25 real-person fee."  Reads like a clear path to profitability and customer satisfaction.  

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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