Saturday, June 02, 2007

The Hostage Theory of Pricing

Josh Hallett wrote about the price of wifi at a hotel recently - a price that, like so many hotel charges, seems unconnected to either a service's value to the customer or cost to the provider. (In this case it was $1600 for three people to use wifi in a meeting room. Yes, you read that right.)

As I read his post, I was reminded of an experience last year in a hotel in London. My partner had to call home in an emergency and his mobile wasn't working, so he picked up the room phone, thinking, how bad could this be? It was just supposed to be a 10 minute call, but it stretched to more like 20.

The total charge was something north of $200. He questioned it upon checkup, and was told rather brusquely that this was what any four-star London hotel would charge. (I don't doubt it; London is one of my favorite cities on the planet but every time I'm there I'm just appalled by the expense.)

It's quite simple: a hotel can do this because you have no choices. If you are picking up that phone, you probably don't have a mobile or calling card handy. If you are buying wifi from them, you have to be there and have no other option at hand.

It's not just hotels, of course; American movie theaters with their "no outside food" policies are another example. Ban outside food, and the only snacks during the show are $5 sodas and popcorn and $4 boxes of stale candy. Or airport concessions, where you pay an astonishing fee for fast food. Or at a ball park, or... you get the picture.

It's pretty easy to make a business case for this. Will I refuse to go to an Astros game because the hot dogs are too pricey? Well, where else am I going to see baseball in Houston? I'm not someone who's going to pack a lunch to the airport, either. (I have been known to smuggle food into the theater. Note: remember that in summer chocolate will melt in your pocket.)

No, they don't need to stop doing this, at least not soon. But there is a pitfall.

Treating your customers as hostages and pricing accordingly creates a great opportunity for competitors. Some months after that London trip, I was in the slightly lesss globally-known metropolis of Syracuse, New York. I stayed at one of those little bare-bones hotels because I was not planning to spend any time awake in the room anyway, it was convenient, and it was cheap.

And, oh, there was free wifi throughout he hotel and free domestic long distance calling in my $40/night room. (It was spartan and the 80s mauve color scheme didn't do anything for me, but really, who cares? It was clean and handy.)

Now, the $40 a night chain is not really a competitor of the four-star London hotel. But people do cross categories that way a lot, and eventually, people start to notice that somebody charging $40 can give away long distance (as they should - it costs nearly nothing) while the $400 people can't. And they'll ask, why is that?

And when a direct competitor does it, you're in trouble.

As it happens, that free long distance was an amazing boon. On the last day of the trip my mobile phone battery conked out and I was unable to even turn the phone on. And there was an old fashioned desk phone in my room that I could use to call home to Texas at no charge.

I'll probably stay there on my next trip.

If you're engaged in hostage pricing, be careful. You will make some nice revenue off of it, but be ready to give it up at a moment's notice when your competitors start doing the same.

And remember that there's a long term brand karma cost: nobody likes feeling ripped off, and some of your customers will find a reason - legitimate or not - to simply never come back. (Even if the next guy rips them off, too.)

If, on the other hand, your competitors are doing it, then there's an opportunity waiting for you. Be the player who frees the hostages and make sure everybody knows about it.

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