Magazine article Phi Kappa Phi Forum

Tailor-Made Prices

Magazine article Phi Kappa Phi Forum

Tailor-Made Prices

Article excerpt

Booking online for a seat on a Scandinavian Airlines (SAS) flight from Copenhagen to Madrid last summer cost around $165--if you lived in the United States. If you lived in Denmark, however, you would have paid $436! In other words, a Dane paid almost three times as much as an American for the same European flight. This price was not a one-time special offer for Americans. Rather, SAS's online booking system, until recently, quoted different prices depending on the country of residence entered when you logged on. When consumer-advocacy groups in Denmark demanded an explanation, SAS management claimed that a software glitch was to blame.

Software defect or not, SAS's online booking system was perfectly consistent with a basic tenet in marketing known as "segmented pricing." To illustrate the notion behind segmented pricing, consider the different circumstances between an American and a Dane booking this flight. For the American, this flight is likely part of a European vacation route, while for the Dane, it may well be a routine flight for a business or work-related meeting. Vacationers have flexibility for travel dates and destinations, while business travelers are subject to fixed meeting or conference dates. Flexibility allows the vacationer to be more sensitive to the price of a flight than the business traveler. The distinction in price sensitivity may be further exaggerated because business travelers often are reimbursed by their employer, rather than paying directly out of pocket as vacationers do. The implication is that, on average, a Dane values a flight out of Copenhagen more than an American does. For SAS, identifying this difference in value--and pricing accordingly--is more profitable than setting a single price for both types of customers. Segmented pricing is thus identifying segments of consumers with different purchasing characteristics and setting segment-specific prices. It is no different from the notion of price discrimination taught in Economics 101.

This pricing strategy is nothing new for airlines, and the story above also explains the now classic "Saturday-night stay over" criterion that airlines require to get a lower fare. Business travelers are less inclined to stay away from home over the weekend than a vacationer is.

Airlines have always been the best in the business at this marketing tactic because the time, date, and flight route reveal a lot about the price that a traveler is willing to pay. However, through the growth of Internet technology and improved customer databases, many other types of firms can practice segmented pricing as well as the airlines do. Take a recent example of e-commerce giant Amazon.com's use of Internet browser cookies to determine the shopping attitudes of its customers. (Amazon.com has since abandoned this practice.) If you regularly visited and purchased from Amazon.com, cookies dropped on your computer indicated that you were a loyal buyer. Upon your next purchase, you would be quoted a higher price than a shopper whose computer did not possess the "loyalty cookie."

This practice is indeed upsetting for customers who feel that their loyalty should be rewarded, not exploited. You might recall, for instance, the days when you received a calendar, pen, or desk caddy at Christmas from your insurance agent thanking you for being a long-term client. But the agent's cost of providing these rewards is easily covered by the exorbitant premiums you pay as a long-term policy holder. …

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