Uber’s surge pricing received more attention last week with the large snow storm in the Northeast, when Uber agreed they would not “gouge” consumers. Prices would be higher than normal, but would not be excessive. Conversely, tickets to the Super Bowl on the secondary market were higher than ever. This past weekend, tickets in the upper deck, corner of the end zone were more than $12,000 each. Super Bowl tickets and surge pricing are both good examples of situational pricing strategies – adjusting prices according to the situation. How are you applying situational pricing?
I have written in many blogs that the value of your products or services is not the same for all customers, and it is important to segment your customers into groups with common value profiles. Similarly, customers are not all equally price sensitive and their price sensitivity varies from product to product. Situational pricing is really a similar concept – the value of your product or service to any customer changes depending on the situation. Nobody will pay $12,000 for an end-zone seat at a regular football game, but the Super Bowl is an epic, once-a-year event that people want to be a part of. People assign a higher value to the Super Bowl and their sensitivity to price is much lower than during the regular season.
In my last blog, I wrote about dealing with Procurement, and even these dealings are situational. While Procurement professionals will always try to find areas where they can save money, the pressure they apply is much greater in businesses that are shrinking and have huge cost reduction targets than the pressure applied by rapidly growing businesses. Pressure from Procurement will also be less robust when their own product or program has very tight quality tolerances as opposed to purchasing for overhead areas. If you are supplying products or services to both the mission critical and overhead areas, recognize that you have more pricing power when they are buying for mission critical areas. As an example, how price sensitive do you think the NFL is on sound equipment for the Super Bowl halftime show? The costs of mistakes or poorly performing products will outweigh any savings they might get from buying lower quality products or services to save money. Be prepared to call your customer’s bluff if they tell you they are willing to make that tradeoff on something mission critical.
Another area that can be situational is order patterns. When customers can order a highly predictable quantity at regular intervals, they recognize it is easier for their suppliers to plan and produce the needed products and services. Those customers will want that lower cost to serve to be reflected in your prices. Conversely, when customers ask for you to rush something, or they want to order a large increase in products in a short period of time, something has changed n their business. In those cases, the customers will place a higher value on your ability to deliver what they need, and they will be less sensitive to your prices. It is important to recognize those situations and ensure your prices appropriately reflect your value.
There is certainly value to your customers in having predictable pricing. That is why companies try to hedge the volatile price fluctuations that can occur in commodity markets. Your customers will appreciate not having to check prices for every order. However, it is important to recognize that situations change and the value to your customer changes according to the situation. Ignoring those situational differences means leaving money on the table. I did not spend the $12K to buy a ticket to the Super Bowl, so I also did not try to get a ride to the game from Uber. I doubt they left any money on the table, though.