When you are purchasing a car you expect a certain amount of back and forth with the salesperson. They might suggest a certain model, trim level, package or accessory in the hopes that you will value it highly enough to buy at their opening price.
What happens if they see that you aren't interested? Often they will reduce the price, trying to come up with a number more closely aligned to the value you place on what they are trying to sell.
This is called differential pricing and it means selling the same thing to different people at different prices depending on how they value the product. The goal for the seller is to get as much from each buyer as they are prepared to pay, and that means adjusting prices. They will go lower if that is what is required to secure a lower margin, but still profitable, sale.
The same thing happens online in a kind of virtual haggling. Take a look at this screenshot, taken in the early stages of trying to reserve a hotel room. (also look for the great way they invoke the scarcity principle)
As you can see they suggest two upgraded rooms:
2 Double Beds Executive Floor
This upgraded room is priced at $169, a $30 premium over the standard room rate of $139.
1 Bedroom Suite With Sofabed
This suite is priced at $239, a $100 premium over the standard room rate of $139.
Travellers who place a high value on upgraded rooms or the associated amenities are likely to select one of those options. They pay the full price, which in this example could also be considered the "opening offer".
But what about a business traveller that just needs a place to stay? What happens if you choose the cheapest $139 room? Does the hotel settle for that or, like a good salesperson, do they make a counteroffer?
After you have committed to the least expensive room and completed the reservation this is what they show you – a second chance a upgrading:
See what happened? Just like the car dealer that waits until you are ready to walk out the door and then makes a counteroffer they now offer you lower prices on those same upgrades.
2 Double Beds Executive Floor
This upgraded room is now offered as $25 option, a savings of $5 over their original.
1 Bedroom Suite With Sofabed
This suite is now offered as a $75 option, $25 less than their original offer.
Everybody gets a second chance. They traveller that is somewhat interested in an upgrade, just not enough to pay full price, now has a chance to purchase the upgrade at a lower price. The hotel also benefits. Sure – they would have preferred to sell those rooms at full price, but they'd rather offer a discount than let those rooms sit empty.
But how does the hotel avoid cannibalizing sales? How do they stop the people who really value upgrades (and are prepared to pay full price for them) from selecting the cheap room and then pouncing on the cheaper upgrade option?
They introduce a hurdle. This is the caveat that goes along with the upgrade offer:
The hurdle is that the upgrade is not guaranteed. You only get the upgrade if it is not sold to someone else.
This protects the hotel in two ways. First it lets them keep trying to sell the upgraded room at full price to someone else. If they do... great! They get more revenue and higher profits. If they don't... still good. The upgraded room still gets sold and, while they are settling for a little less money, revenue and profit are still better than with a standard room.
It also helps prevent cannibalization. If a traveller really values the upgraded room they aren't going to risk losing it to save a few dollars. They would rather just pay full price.
It is a great approach to revenue management that lets the hotel stream travellers according to how much they value their product and charge them accordingly.