TLDR: Price-sensitive customers will tolerate uncertainty.
Last month we learned how product-minus strategies can be used to raise the prices you charge your customers for your business’s products and services. Today we explore another technique that enables you to better utilize your more price-sensitive customers. Indeed, some of your customers will naturally be more sensitive to price changes than others. This can make incremental changes in what everyone is charged difficult to achieve without potentially upsetting a lot of customers. One way to address this problem is to offer selective discounts, a tool regularly used by those in the auto industry. Indeed, car salesmen will ask potential customers on the dealership lot a handful of questions such as “Where do you live?” and “What other cars are you considering?” This isn’t to help someone find the “perfect” car but rather to get a better gauge of what he or she is willing to pay so that a wide range of prices can be utilized. Most businesses can’t use this exact technique to identify their price-sensitive customers since one-on-one negotiating with each individual shopper would consume too many resources. Fortunately, there is an alternative approach, as the Harvard Business Review explains, “A key pricing strategy involves using hurdles to identify price sensitive customers. While everyone likes lower prices, hurdles separate those who truly won’t buy without a price break from the posers who don’t really care about price. For example, customers who take time to search for, clip, and redeem coupons are jumping over multiple hurdles to prove they are discount-worthy. Ditto for consumers who fill out rebate forms—their actions prove their price sensitivity. One way to create a hurdle is to introduce uncertainty into your product. Consider the Rolling Stones’ 2013 U.S. tour. The Stones were able to attract plenty of expense-account types and diehard fans who were willing to pay high ticket prices (as much as $2,000)—just not enough to fill arenas. The challenge the Stones faced is how to lower prices without losing these high-margin sales. The solution: They sold $85 tickets with an unusual condition. Specifically, you wouldn’t find out exactly where the seat was until you entered the arena. The rationale, which made sense, is that fans with a high willingness to pay wouldn’t play this seating-roulette game, and would instead pay full price for certainty. Uncertainty pricing is a powerful driver of new sales. Dubious? Discount travel company Priceline is now valued at over $61 billion based on a business model of using uncertainty to sell to the budget-minded. To book a highly discounted hotel room on Priceline.com, you have to select the general area in a city you want to stay in, as well as hotel quality level (1–5 stars), and then submit a non-refundable bid. Only after inputting this information do you find out if your bid is accepted—as well as which hotel you won. The process adds several elements of uncertainty: What hotel will I get? How much should I bid? The reward to consumers for jumping over these hurdles is big savings. Priceline’s pitch to hotels is just as compelling. It offers a distribution channel to discreetly sell excess capacity without having to advertise rock bottom prices. Regular customers continue paying full price and the hotel’s brand is not tarnished. No one is the wiser…except those who win Priceline bids…”
