Change the Way Your Offerings Are Used to Expand Consumption with Pricing
Pricing can be used to change the perception of the value involved in using your offering. This example explains how reducing incremental prices as low as possible can expand use and profits.
You cannot improve your business model to better use pricing until you find a concept that expands your competitive advantage, regardless of what competitors do. Let's look for that important breakthrough concept.
Although we have been focusing on the potential value of the right pricing tests, please realize that those are actually very hard to do well. Only if the demand elasticity is very great will you be able to tell the different between one pricing structure and another. Also, beyond a certain point, you cannot effectively run any more tests and before then measuring the results can be costly.
Because of these limitations, you need to do a lot more thinking about what pricing could do to expand demand than actual testing. Let's consider how changes in your pricing structure could change your customer's and the end user's behavior.
Disneyland's historic pricing structure might be a good starting point. If you went to Disneyland (the one in Anaheim, California), for many years you were offered the choice of a one-day, multiple-day, or annual passport. The most expensive way to buy a visit by the day was to purchase the one-day passport, and the least expensive per day was the annual passport. If you knew that you were coming back for several days during a vacation trip, you would usually opt for a multiple-day passport. If you lived nearby, you might consider purchasing an annual passport.
Disney always advertised these structures. So, if you were planning a vacation to Southern California from far away, you would often plan the length of your stay to match the longest multiple-day pass available (usually three days). If Disney had only offered two-day passports, many people would not have stayed for a third day.
If you lived nearby, you might never visit Disneyland again (having been there too many times to count) unless it seemed like a visit was free. And that's the perception that an annual passport creates. Each entry is free after you have made the annual investment. So, you might even consider stopping by for only an hour or two. In your mind, the cost of the day has dropped from around $50.00 recently to nothing. Would that change the number of times you go to Disneyland if you lived nearby? You bet.
Why would Disney want you to come all of the time? Well, actually they don't. So, there were usually two different kinds of annual passports. One allows you to only come on days when Disney knows the park isn't crowded. For a lot more money, you can come every day. The price of the more expensive option is about the same as buying two three-day passports. The price of the less expensive option is similar to buying one three-day passport.
What benefit does Disney get from having you come on not so busy days? Well, it's almost impossible not to spend some money while you're there. You will probably pay for parking in the Disney lot. Even if you don't park there and only spend $2.00 for a beverage, Disney probably has made more money than if you hadn't been present that day.
Throughout the day, you will also be exposed to enormous numbers of impressions about other Disney products and services from Mickey Mouse shirts to Disney Channel subscriptions. In essence, you are paying for the right to receive vastly increased amounts of Disney advertising. And if you have a good time while you're receiving the advertising, you will undoubtedly buy more of those products and services.
Is this pricing strategy a good one for Disney? You bet.
Why did Disney open a new theme park in Anaheim called California Adventure? Undoubtedly, the company perceived that it could capture vacationers for longer stays and local people for more visits. Also, it had a chance to up the price for an annual passport to include visits to two parks.
With twice as many places to entertain guests when the parks weren't crowded, the chances to increase revenues and advertising exposure were enormous. By the way, a third park is under development. How do you think the pricing structure will change then?
Will the behavior of millions of visitors be changed in ways that make more money for Disney? You bet.
How can you change the pricing of your offerings to expand consumption?
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ABOUT THE AUTHOR
Donald Mitchell is chairman of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of seven books including Adventures of an Optimist, The 2,000 Percent Solution, and The Ultimate Competitive Advantage. You can find free tips for accomplishing 20 times more by registering at: www.2000percentsolution.com