Pricing Hurdle: Real World Example From The Airport

In pricing hurdles are used to separate those who are really serious about saving money from those willing to pay full price. Here's a real world example.


Pricing Hurdle: Real World Example From The Airport

Airport car services have the same problem as anyone else who sells a product or service. There are lots of people that aren't price sensitive and will happily pay full price for their service – a business traveller on an expense account for example. There is no reason to discount to this customer, they want to get full price.

Then there are other travellers that are more sensitive to price – those that might be inclined to take public transit or a shared shuttle bus service. The car service will, if supply allows, discount to these travellers. They won't get full price, but they still get a profitable sale they would lose if they clung to their standard price. Rides are perishable – if the car sits idle for thirty minutes they can never make up for that missed revenue – so this is a deal the service is willing to make. Less revenue is better than no revenue.

The goal is price discrimination, in which different buyers pay different prices, but how do they stream the travellers? If they make the discount available to everyone then everyone will take it, including those expense account travellers that were prepared to pay full price. This is referred to as cannibalizing full price sales. And they can't spot which travellers are focussed on price and which ones are not – it's not like they wear signs.

The solution is a hurdle. A hurdle is used to let buyers stream themselves according to the importance they put on price. Only a price sensitive customer, one serious about saving money, will jump over the hurdle. Anyone else will choose to just pay full price.

In this case the hurdle is convenience. On exiting the terminal building there is, as shown in the picture, a long line of cards ready to take you wherever you want to go. Just jump in and be on your way. At full price.

One car service offers a $10 discount for anyone that calls in to requests a car. That's the first hurdle – rather than just climb into a waiting car you have to call in to the service.

That's just where it starts. You then have to walk all the way down to the other end of the terminal. And then you have to wait for the car to arrive.

None of these things are terrible, but they are enough to make just jumping into one of the waiting cars, and paying an extra $10, pretty tempting. It's a great example of how a hurdle can be used to stream buyers according to their willingness to pay, as part of a larger pricing strategy.

Price Discrimination Hurdles