STANDING at the gate of an amusement park, you take one more look at the fine print on the back of the admission ticket and another at the sign over the gate. Didn‘t the tour operator say, “All-inclusive?” What exactly does that mean anyway? Very often customers are sometimes puzzled by how much a product or service or, in the case of an amusement park, an experience is really costing them. They are not alone. This puzzlement is something that that also intrigues price setters as well.
Do customers, in fact, budget for the entire cost of the product or service that they are buying or just the ticket price? Also faced with a complex bundle of services, do they add up all the various components (some of which your company offers and some of which it does not) to arrive at a total cost for the products and services that they have purchased?
The answer: Price sensitive customers are more likely to be aware of the total cost, while price insensitive customers tend to be more impulsive and less calculating. This leads to some important pricing strategy considerations.
The travel and tourism industry provides a perfect example of how companies position themselves within a highly complex mix of products and services. The cost of a vacation cruise, for example, involves not just on-board costs but airfare to the cruise ship, sightseeing and shopping at ports as well. Ski resorts similarly have to balance the price their customers pay for travel and accommodation with the cost of lift tickets, lessons and equipment.
Given the intricacy of the products and services, it is not surprising that cruise operators and resorts try to package and bundle the entire “vacation experience” for their customers. How well they succeed, however, often depends on how well they can segment their customers particularly with respect to price sensitivity. Price insensitive customers, as a rule, are less concerned about the overall cost of the mix of products and services that they are purchasing. Since they look at items individually (and more impulsively), they respond better to lower barriers to the entertainment experience.
For the tourism industry, this would suggest that low cost entry packages, perhaps combining just airfare, admissions, and other non discretionary spending, will be attractive to the less price-sensitive. The lower entry price can be easily offset with higher prices for direct entertainment and incidentals. In fact, since price insensitive customers are less aware (or less interested) in the total cost of the experience, lowering barriers by reducing initial prices could actual result in higher total spending.
Price sensitive customers, on the other hand, are far more likely to be concerned about the total cost of the products and services that they are purchasing. Reaching these customers means offering relatively complete packages to reduce their feelings of uncertainty. All-inclusive really should mean all-inclusive
Destination parks, such as DisneyWorld in Orlando, for example, know that for many of their customers a visit to their park requires a significant expenditure. Their price sensitive customers will have a relatively fixed budget, allocating funds for travel, accommodation, park admission and associated costs such as meals and the inevitable souvenirs. Because they understand the customer‘s behavior, Disney can balance the various components of the trip so that they can be allocated to the customer‘s budget in the most attractive way.
Ironically, in an effort to reduce uncertainty through the ”all inclusive‘ package, the cruise operator, the ski resort operator or the amusement park owner can actually end up elevating the price sensitivity of these types of customers and encouraging substitution. Once costs have been clearly defined, the consumer can not only look at directly competing packages (comparing cruise packages, for example) but also between competing vacations as well (if not cruising, why not a ski vacation in Colorado?).
This then is the paradox. Satisfying price sensitivity can actually heighten awareness of pricing. It demonstrates just how difficult it can be to balance a pricing strategy with customer purchasing behavior.
The Lessons for Business to Business Markets
The problem of price sensitivity and the bundling of complex purchases have as much implication for business-to-business markets as it does for consumer markets.
Understanding where you fit into the buying decision and how your customers behave has a significant impact on how you price and bundle your products and services. The more complex the buying process, the more challenging it becomes to understand the elements of price-value evaluation and behavior.
One of the basic decisions that every company has to make within the context of customer budgeting and buying behavior is whether complex pricing and price balancing works better than package pricing. As with consumer sales, there are strong arguments for bundling all of the components of a business sale. Many others, however, would suggest that keeping a sale complex provides significant opportunity to appeal to a broader array of market segments.
Industrial buyers, however, should be aware of the paradox that we have seen within the consumer industry. Bundling prices and services can seem to be attractive. But beware. Clearly defining the complete cost of product or service can lead to more not less competition.
