Everything on Earth Should Have Variable Pricing

by Darwin on June 21, 2011

variable-pricing

I was reading a story the other day about how utility companies are starting to put “smart-meters” on the homes of Americans, in many cases against their will.  See, the power grid isn’t very good at “storing” energy, so during the day when businesses are buzzing and everyone’s running their central air units, that energy is much more expensive to generate and deliver than energy dispensed at night.  For that reason, these smart meter devices are meant to entice consumers into doing their laundry, running their bandsaw or whatever it is they do that consumes energy – during off-hours.  In doing so, they’ll enjoy a lower energy cost per unit.  Conversely though, they are charged more for energy use during the day.  Well, this led me to start thinking about other areas where this type of relationship could, should, or already applies in everyday life.

  • Happy Hours and Early Bird Specials – The bar and restaurant industry seems to have been onto this philosophy for years now.  See, they have pretty high fixed costs, and even pretty high variable costs to service a flexible customer base.  If you want to serve a single patron or ten, you need that one bartender and that one chef.  Perhaps during peak hours you need 2 or 3 or more.  But at 4PM, you might as well offer patrons a discount to just come in and cover the overhead and provide some incremental revenue as opposed to having to basically subsidize the cost of your overhead and staffing during off-hours just to accommodate a select few patrons.  By dropping prices enough to entice additional customers during those hours, it increases the profitability of the business – and at the same time, it provides customers with a way to enjoy a discount meal or drink!
  • My Brother’s Tree Service – Fail – When I was younger, I worked for my brother’s tree service during summers.  He always seemed to charge the same price for various sized jobs no matter what time of year it was.  He would often complain that he was so backlogged he didn’t even bother calling customers back and some points in the spring and summer.   I had a real simple solution (I thought).  I said he should basically up his price quotes substantially during his busy times to the point that his backlog diminished or was manageable.  As long as new inquiries kept coming in, he could always drop his quotes again if he was too high and stopped getting work for the next week or two.  He was completely against that and said it would aggravate customers and be too tough to manage.  Since most of his customers were one-time clients (a tree fell down from a storm or they wanted their lot cleared), I didn’t view this as a major risk.  He never gave in and continued to run his business the same way – and leave money on the table IMO.
  • The Gym – As a guy who works normal daytime hours and hits the gym at night, it’s eternally frustrating to try to get on a machine or a bench with so many people buzzing about.  On a whim, on a half-day, I popped in the gym and it was completely empty.  Empty!  This shouldn’t come as a surprise, but there were only a few people mulling about.  Stay at home moms, night shift workers, college students and the like.  I was thinking about how our gym has a fixed pricing policy and how the owner could probably make some extra money with no effort by catering to these daytime gym rats.  He could attract new clients by offering very low cost memberships that can only be used during the day.  After all, an incremental gym client costs him nothing, most people stop going to the gym right after they sign up, and the time of day wouldn’t present any crowding issues.  If he went around to local colleges, coffee shops and stores, posted a few signs with an early-bird special type deal for daytime only memberships, he could probably increase his profitability with no effort at all.

These are just some basic services, but this could apply to goods as well.  After all, couldn’t Apple get more for that iPhone during a launch weekend than 3 months in?  Shouldn’t bottled water cost more in the summer than it does in the winter?  Couldn’t my cable company charge me less if I used my bandwidth during off hours?  The net effect of this type of economy would be increased profits for businesses, more efficient use of goods and services by consumers and perhaps even a lower net spending world for consumers as well, as they adjusted to known changes in market pricing over time.

 

What Are Your Thoughts?

Would This Work?  Would Consumers Revolt?  Are Business Just Being Lazy?  … Or Are They Scared?

 

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{ 3 comments… read them below or add one }

1 Max June 23, 2011 at 10:13 am

Anyone with a 9-5 job would absolutely despise this type of service. I know that I would. With my commute each day, the only time I could run my laundry is during peak hours. As I ponder more on the business model, I realize that it really is a fantastic one. For the gym to increase day time business, it would take very little marketing effort. The nightclubs have been doing this right for many years now!

[Reply]

2 Squirrelers June 30, 2011 at 3:38 pm

Looking at capacity and demand, it’s clear that there are many cases where money is just left on the table. The gym example is great. Of course, when looking at a brand image, business owners might look at it differently in some cases, in offering different pricing options. I tend to like such ideas, and think they might work well in some cases, but could hurt long-term value in others.

I seem to recall somebody trying to offer differential pricing on cans of soda from a machine, based on the weather. If I recall correctly, there was some kind of sensor that gauged the temparature and ultimately increased the price of the cold drink based on the temperature reaching different levels. I thought it was a great idea, but remember a couple of people just bashing it. So, I think such strategies could work as long as they don’t bring a backlash in some way.

[Reply]

3 Paul July 20, 2011 at 1:03 pm

Holiday companies have been doing it for many years with peak time prices substantially higher than off peak. Airlines too with companies like easyjet and ryanair offering first seats at the cheapest and gradually increasing prices as plane fills.

Not sure it would work on low value items but high value items out of season maybe.

[Reply]

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