Tiered pricing can help business sell out its service

Some consumers get upset when they learn the price listed may not be the best price.

After all, in this economy, most everyone is looking for a bargain. Yet for some businesses — large and small — tiered pricing can make all the difference for business success.

Tiered pricing is used commonly by airlines and hotels to fill seats or rooms in order to maximize their revenues. There are typically multiple dimensions to their strategy.

One common strategy is to set prices that are connected with commitment. Pay ahead for the service and you’ll often receive a special rate, typically losing out on a chance for a full refund if plans change unexpectedly.

Early bookings are also often rewarded with lower rates. Sometimes the service level may play into the pricing to differentiate price points with enhanced customer experience. Whether flying coach, business class or first class, each provides their special perks — or lack thereof.

Last-chance special deals are also used to entice customers who perhaps were undecided or unsure about making plans too far in advance. These offers also work well with impulse buyers who jump at a special offer for the sake of getting a great deal.

The big challenge for most in a service industry is perishability — the unused or under utilized service is revenue opportunity lost and it cannot be recovered. The empty airline seat and vacant hotel room are prime examples.

My wife and I travelled to Colorado earlier this summer. And like many bargain hunters, I used several online websites to shop for a reservation. Then I checked Craigslist for listings and found numerous vacation values.

One bed and breakfast in Breckenridge caught my attention. We had never been to Breckenridge or to any of the resort towns nestled in the Rockies.

The place sounded idyllic: large three-story lodge with open beams and log construction, private decks off of every room, hot tub, afternoon baked treats and a hearty morning breakfast. What could be better?

There were multiple listings over the course of a month on Craigslist that quoted several rates ranging from $149 per night to $99 per night. The lowest rate was noted as “Last Minute” rate, typically a few days before the planned arrival.

I called the number on the listing and spoke with Allaire Timber’s inn keeper, Jenn Franklin. I let her know that I had seen the tiered prices and that I hoped to receive the last-minute pricing a week in advance of our visit.

“We’ve had tremendous success filling vacant rooms by simply dropping our best rate to $99—remember, $99 is better than zero,” Franklin said. “It’s just a great vehicle to hit capacity.” The B&B’s website at www.allairtimbers.com has several ongoing special offers.

“We start with a fair and competitive price point that those who visit bed and breakfast would see as a good value. One of our goals in tiered pricing is to convert travelers who’ve never tried a B&B.”

She noted the importance of making a memorable experience that would cause guests to return in the future. The tiered pricing strategy appeals to a certain clientele that would “never pay retail.”

Value is critical regardless of price. In order to build a brand and develop a strong following, customers need to be impressed with the experience and the service quality in order to grow the enterprise.

“We use the tiered pricing. We also use special package offers with ski and play, massage, romance packages and other seasonal highlights. And we use value-add in some situations like a $10 Starbucks gift card for your next two-night stay,” Franklin said.

It’s obviously important for a business operator to learn what is important to their customers. And some of us are just stuck on getting a great deal.

Juergen Kneifel is a senior associate faculty member in the Everett Community College business program. Please send your comments to entrepreneurship@everettcc.edu.

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