An Unusual Strategy for Price Tiering

Tuesday, September 15, 2015

I'm always excited when a company tries a new business strategy. Not long ago I examined Amazon's efforts to hide the price of its products from consumers. Not to be outdone, European discount airliner Germanwings is experimenting with hiding the identity of the product being offered.

That's right, the airline has customers pay for tickets to... somewhere. Only when payment is received does a buyer discover his promised destination. Though quite unusual, the firm is not alone in its tactics. Online video game warehouse Gog, for instance, is currently promoting its piñata sale whereby consumers have the option to pay $3 for a mystery video game.

If there is any steadfast rule in marketing, it must be that sellers should never go out of their way to hide the positive aspects of their products. Beneficial traits make products more desirable and allow sellers to charge more for them.

So why is Germanwings selling tickets without revealing their associated destinations?

• The airline can attract a new customer segment. I'm not a transportation economist, but I'm willing to bet that most travelers have a very specific destination in mind when purchasing their tickets. Business travelers have meetings in specific cities. Families have relatives and acquaintances in specific towns. The mystery tickets are not for those types of travelers. Mystery tickets are likely targeted to adventure seekers instead. As such, the firm does not have to worry about cannibalizing its existing market. This is a fantastic form of price tiering in action. Rather than changing the product, the firm is essentially changing the level of risk (the risk of winding up in an undesirable location). A traveler who purchased a ticket with a revealed destination and another who purchased a ticket with a mystery destination could be charged very different rates and both would accept this difference in price without hesitation. The traveler who buys a ticket with a known destination values his ticket at a much higher rate than does the buyer of a mystery ticket, thus he is willing to pay significantly more to reach the same destination.
• The airline's costs are almost entirely fixed. Whether one person or many are on each flight, the company still has to spend the same amount of money for the airplane, fuel and airport surcharges. For this reason, any money - any money at all - that the firm can obtain for otherwise empty seats is beneficial. The marginal cost of each additional passenger is approximately zero, so why not bring in some extra cash?
• There is an immense possibility for brand promotion and awareness. The firm can target a handful of customers and deliver tremendous value to each of them. Any person who buys a mystery ticket and receives a flight with a high retail value would blog, tweet and shout about his good fortune from the rooftops. The airline would receive the type of marketing that cannot be bought - and would be paid to receive it.

Now that we've seen companies that don't reveal their prices and others that don't reveal their products, I'm waiting for the next great innovation. Would any company like to hide both at the same time? It could make for a very interesting business case!

Pricing is not a science. It's an art. If you'd like to apply pricing strategically to your business, contact me for a consultation. Alternatively, you can grab a copy of my book on software pricing.