Fenced Pricing

Almost all of us have experienced Fenced Pricing but probably never thought much about it.  Fenced Pricing is what the name implies, to create barriers or “qualifiers” for different types of pricing.  Examples include:

• Two weeks advanced purchase for airplane tickets or hotel bookings
  
• Must stay over a weekend to qualify for that price
  
• Non-refundable or penalty applies
  
• Available only on certain days of the week
  
• Available only at certain times of day
  
• Valid only with a coupon (where the marketing department targets a certain segment of customers)

So why do companies use Fenced Pricing?  The answer is simple… to prevent diluting their core revenue.  Revenue “dilution” is a term used when a company must lower it prices in an attempt to maintain competitiveness or to grow more revenue or market share.  Fenced pricing is a technique that allows companies to lower prices to a certain segment of customers without diluting its revenue from other customer segments thus improving the overall profitability.

Let’s look at the airline and hotel business as an example.  Airlines and hotels make most of their revenue from business travelers.  That is their bread and butter.  Business people often travel on short notice (no advanced purchase) based on the needs of their customers, and want to leave no sooner than Monday and return no later than Friday so they can spend the weekends with their families.  And they are not as concerned about price since the company is paying for the expenses.  Historically, airlines and hotels have about a 60 percent occupancy rate from their business travelers, but if those airlines and hotels were to lower their prices overall to attract more tourists, they would dilute their revenue from the business segment.

That is why airlines and hotels offer cheaper fares with conditions attached such as staying over a weekend, or requiring purchase of more than two or three weeks in advance, to fill extra seats or rooms to prevent diluting the revenue from their core business segment.  Tourists often don’t care about spending a weekend or advanced purchase when planning a vacation with their families or friends.

In the 1980’s the travel industry suffered with the “yield-discount see-saw”.  Companies would lower prices to improve occupancy, but yields would suffer.  Then those companies would raise prices and occupancy would suffer.  Then one day somebody had a bright idea to offer prices to a certain segment of customers without diluting their existing revenue base by attaching conditions.  This was the invention of fenced pricing and also what is known as Revenue Management.

But let’s take the hotel example further.  In various countries hotels offer a choice of Standard rooms, Deluxe rooms, Superior rooms and Executive rooms.  What many people don’t realize is the rooms are exactly the same!  The only difference is the Standard rooms are quite basic.  The Deluxe rooms provide free coffee and tea at the minibar.  The Superior rooms come with free coffee and tea plus a fruit basket.  And if you are a frequent visitor then the General Manager may place a bottle of wine in your room on the house!  The Executive rooms give you access to the Executive lounge with free drinks and nibbles during Happy Hour from 5pm to 7pm.  And, of course, the prices for each type of room goes up as you climb the ladder.

These industries have found a way to segment their customers and create fences to maximize their revenue and occupancy rates without diluting their core revenue streams.  Segment pricing and fenced pricing go hand in hand.