Uber’s been doing it, and now even Disney’s theme parks and the Open Table reservations app are contemplating surge pricing. It’s not surprising to find that one product and one price doesn’t fit all, and the prize for companies getting it right can be 3%-7% organic revenue growth.
But before everyone goes mad over surge pricing – the mere mention of it puts a bitter taste in the mouths of some consumers and executives – it’s important to understand where we might see (and not see) the next push for this controversial pricing strategy in which prices spike during high demand.
The truth is, while the technology exists to make it possible, we are unlikely to face a digital menu above the concessions stand or restaurant counter with prices fluctuating by the second based on the length of the line. At least not anytime soon.
That’s because industries considering surge pricing have to perform an important, yet fundamental, Revenue Management balancing act between scarcities of the product whose pricing they seek to “surge” and the true value of that product to consumer segments willing and able to pay premiums
At the same time, it’s clear that surge pricing is here to stay. Uber continues to weather storm after controversial storm, while Disney’s mere consideration of it at theme parks in California and Florida is a tacit endorsement of the strategy. And now we learn that Open Table – the popular app for making your lunch and dinner reservations – and its partner restaurants are experimenting with premium pricing for those busy Friday and Saturday nights.
And why not, since organic revenue growth is derived from surge pricing. What company would pass that up?
This undoubtedly is the thinking behind Disney’s flirtation with surge pricing. An anonymous survey sent to customers earlier this summer suggests the company is considering a tiered pricing system based on demand for admission tickets. Want to go to the park regardless of day or time of day? Then it’s Gold pricing (the most expensive) for you. Are you okay with not going to the park during popular holiday weeks or peak days? The medium-priced Silver package is the answer for you. Bronze, of course, would be your cheapest option but also have substantial restrictions.
The caveat for Disney – and any other company contemplating surge pricing – is to calculate the scarcity of their product. That is, to find the intersection of inventory scarcity vs. customer lifetime value. In terms of inventory, the considerations include the number of alternative options, or in this case, what other entertainment can consumers find if they don’t like the higher surge price at Disney?
The fewer the options, the greater the scarcity. The greater the scarcity, the more you can conceivably charge. That is what Open Table and its restaurant partners are playing off in terms of high demand for tables on weekend nights.
But the potential customers also must be considered. There are customers who assign a high value to your service or product – and are willing to pay more – and there are those who don’t.
Fast Lanes Were Just the Start
Surge pricing can produce organic revenue growth from 3 to 7 percent when done right. However, when companies go about it the wrong way, the result can be catastrophic. That’s what happened when Coca-Cola introduced surge pricing to vending machines in 1999. As the thermometer rose, so, too, did the price of a beverage. The strategy produced an immediate backlash, and Coke was forced to abandon the strategy.
For theme parks, customer experience and customer lifetime value are critical for organic revenue growth. The industry has done a stellar job of creating customer lifetime value and investing heavily to ensure visitors have an experience worth repeating over and over. They also have been creative in terms of demand-related pricing, such as the introduction of fast lanes. This has captured the value of society’s time-poverty and need to experience these events on specific days of week or time of day. Don’t want to wait in long lines because you want the best experience possible, but the only time you have to get it is the same as the rest of the country? Want to cut the lines? Pay an extra $59.99 at and you’ll zoom to the front of the line at the busiest attractions.
Yet even with express lanes, the theme park industry could go further. The customer perception of surge pricing is at times seen as negative, however if done right, it creates an opportunity to lower pricing tiers on the other days to increase customer awareness. Theme parks have applied limited analytics to guide them, and have not fully optimized the potential. The pricing is fairly static for fast lanes, not dynamic nor based on such things as the day of week, hour of the day, the weather, or what’s happening at nearby attractions.
The demand and a company’s ability to service that demand within a certain time window is essential for the success of repeatable business and to ensure customer lifetime value. If the price you’re charging isn’t high enough – or can’t surge when demand spikes – then not enough people will be excluded from the perk. All of the lines will be long and, for the consumer, it will feel almost like a denial of service. For example it makes sense on peak days to charge more, because if customers want to be in the park during a holiday season they are willing to pay more.
That isn’t to say fast lane pricing – or any pricing, for that matter – should go up and down like a thermometer. Coca-Cola taught us that. Yet more investment is needed in Revenue Management tools that can produce organic revenue growth and manage staffing, products, discounts and, shudder to say, surge pricing.
Uber, Mistakes and All, Sets Enduring Example
So what’s stopping theme parks? Why is Disney only contemplating the move now – five years after the birth of Uber and its surge pricing algorithm?
It’s possible they are concerned about consumer risk, i.e., scaring away customers who already believe they are paying a marquee price tag for admission. Declining attendance won’t be tolerated by theme park owners, not with all of that ancillary revenue from concessions, games and productions that is derived once visitors are inside the park gates.
Theme park owners also cringe at Uber’s very public missteps. The list includes New Year’s Eve 2011, when Uber surged prices seven times the normal rates and produced an ugly outcry. And last December in Sydney, Australia, when the company quadrupled the normal prices during a hostage crisis that paralyzed the city. Uber later apologized, but PR damage was done – something theme parks work night and day to avoid.
Yet Uber lives on, even overcoming a recent challenge in New York City to regulate its pricing. Such success makes surge pricing seem all the more inevitable and attainable. Even at theme parks.
If you think about it, surge pricing makes sense at Disney, Universal, Six Flags and others. After all, it’s no secret that if people value the product or service, they will pay a higher price.
Additionally, theme parks serve a very broad customer base, from lower-income individuals to wealthy families to everyone in-between. Yet every guest is charged the same price regardless of their ability to pay – which is at odds with the goal of maximizing revenue.
Conditioning Consumers the Key to Surge Pricing
To get comfortable with surge pricing, theme parks will have to change their business mindset, and then adapt to innovative technological advances. Currently, most theme parks have very stale pricing displays. It’s difficult to quickly change the price when it’s painted on a wall or a billboard. So if you want to change the price, an update will be required. Digital displays, such as those installed in some auto dealerships and retailers, have the flexibility.
Theme parks will also need to mix science and technology with human brain power, also known as collaborative analytics. By leveraging collaborative analytics, they’ll avoid Uber-like mistakes and not do something silly like hike umbrella prices when rain starts falling inside the park.
Some additional steps also seem prudent for theme parks:
- Create a products or services (and bundles) targeted to different service levels. For example, Uber offers an array of car services, from the least expensive UberX to UberBlack (luxury black cars) to UberPOOL, where you share a ride with strangers;
- Build robust analytical data repositories to enable core analytics like behavioral customer segmentation which is key for determining which segments are more/less price sensitive and how to target the right product, to the right customer, at the right time, for the right price
- Invest in decision support analytics and tools to systematically and consistently identify opportunities and prescribe actions in real-time
- Start moving toward dynamic pricing and ultimately to full-out surge pricing;
- Condition customers, as well as your employees, to surge pricing. A dramatic change like this is difficult for organizations to make and even tougher for consumers to swallow. Theme parks must keep reinforcing the message and reason for surge pricing – and show customers the reward they receive for the added cost, or the choices they have to still pay bottom dollar when supply far exceeds desired levels of demand
The hotel industry illustrated the power of conditioning customers when it adopted dynamic pricing. Suddenly, consumers realized the same room carried different prices on different dates. Yet the industry helped consumers make the transition, and customer satisfaction scores for hotels have never been higher.
With the right messaging – and the right finesse – surge pricing can work for anyone. Look no further than Coca-Cola, which despite that early setback began testing a vending machine in Spain in 2013 that charges a different price depending on the weather. Only this time, the hotter the temperature, the lower the price for the Minute Maid lemonade inside the machine. This seems counter-intuitive, until you realize Coke’s goal was to increase sales of a trial product it was touting as a summer thirst-quencher.
In the end, the use of surge pricing at theme parks and elsewhere across corporate America might simply come down to a name. Surge pricing is too polarizing, too beset with negative connotations for Mickey Mouse and others to even contemplate saying it out loud.
We suggest something that sounds like a thrilling ride, although “Revenue Rollercoaster” might be a stretch.