The Center for Pricing and Revenue Management sheds light on trending articles and/or companies that are relevant to the Center’s areas of focus.
Last November, Samoa Air was the first airline in the world to institute a “pay-by-weight” pricing policy. The policy charges passengers and their cargo at a per kilogram rate. When booking a flight, passengers estimate their weight and that of their luggage and are charged by the kilogram. Any overweight baggage is calculated at the same rate as the passenger's personal weight. At check-in, passengers are asked to “weigh in” to confirm the estimate.
The Samoa Air website deems this policy “the fairest system” and uses the motto “a kilo is a kilo is a kilo” referring to the fact that weight of any kind drives cost in air travel. They claim that a heavier passenger will pay more but will have more space, too, since there will be more empty seats to accommodate the extra weight of certain passengers.
Not everyone, however, is on board with the Samoa Air policy. Advocacy groups, such as the National Association to Advance Fat Acceptance (NAAFA), believe the pay-by-weight policy is discriminatory. After a class-action lawsuit by obese passengers, Canadian courts ruled that Canadian airlines must offer a second seat free of charge to obese passengers (a doctor’s note is required.) According to the Canadian Broadcasting Company, the ruling could cost Air Canada about $7 million a year. Samoa Air reports that customer feedback has mainly been "amazingly positive" and that heavier passengers recognize that they are getting more comfort for the money.
Many industry analysts question the impact on savings for airlines. Samoa Air and some economists argue the policy maximizes the cargo a plane can carry and still meet the weight limits of its planes. The airplane then operates like a UPS aircraft which bases its pricing on the size and weight of its packages. Samoa Air has not released figures that quantify the fuel savings or increased capacity resulting in the weight policy. There has also been skepticism about the ability to apply the policy to larger airlines. Passenger weigh-ins, compliance and other complications could create operational inefficiencies.
However, Bharat P. Bhatta, associate professor of economics at Sogn og Fjordane University College in Norway, supports Samoa Air’s decision in his article, published last November in the Journal of Pricing and Revenue Management. Bhatta argues that it is a matter of time before airlines adopt the pay-by-weight structure in some form. He suggests three ways to implement such a plan: the Samoa Air pay-by-weight system, an “average” fare with a discount or surcharge according to a passenger’s weight, or pricing based on three weight categories (low, average and high.)
In the meantime, airlines are implementing other policies that reduce aircraft weight and translate to fuel cost savings. American Airlines has trimmed weight in their “fuel smart” program. The airline has removed extraneous items such as magazine racks, redesigned catering carts with lighter weight materials, and replaced pilots’ flight bags with iPads. Other airlines are switching to iPads from seat-back screens to reduce weight. These changes, however, don’t address the bigger issue of fluctuations from flight to flight in passenger weight.
American carriers are inching toward the pay-by-weight policy by implementing fee-based surcharges. For instance, many airlines now charge passengers baggage fees for checked luggage. Some airlines even require obese passengers to purchase two seats if they cannot comply with seatbelt regulations. However, Samoa Air remains the only company to institute the pay-by-weight policy. Is it a matter of time before all airlines follow suit? Is it worth it to implement such a policy?
Samoa Air Website: http://www.samoaair.ws
Dynamic Pricing Finds Space in Parking Management
Finding a parking spot in big cities may finally be getting easier. New companies and some municipalities are fusing mobile technology with dynamic pricing and analytics. San Francisco is piloting a system that adjusts prices in response to demand while identifying available parking spaces to residents. In other cases, cities are allowing private companies to set prices in order to drive profit. Both approaches highlight the expanding use of dynamic pricing in new and possibly unexpected places.
In 2011, the San Francisco Municipal Transportation Authority launched SFpark as a pilot program. A computerized collects and distributes real-time parking data; this information is then used to manage demand by adjusting parking rates. Drivers can use a smartphone to find available spots faster.
The goal of the program is to adjust rates in order to maintain one available parking space per block (the optimal), while keeping rates affordable. The city has imposed limits to prevent rates from increasing too much or too fast. Rates can only be modified once a month and are now capped at an hourly rate of $6. Overall, nine price adjustments have been made since implementation. Each rate change is announced on the SFpark website, and is accompanied by maps as well as by spreadsheets that show occupancy and rates block by block.
Overall, rates have remained relatively low: only 2% of meters have charged the top price. After two years, the pilot program is almost breaking even: a decrease in revenues from parking violations is almost entirely offset by an increase in additional parking meter revenues. A citywide rollout has not yet been announced, but support for the initiative is strong among both citizens and government officials.
Streetline, a California-based, for-profit company, is looking to manage all aspects of parking for cities. They claim to maximize efficiency and profits for municipalities and garage owners, while minimizing wasted time and frustration among consumers. Streetline embeds low-voltage sensors in parking spaces. The data from the sensors are used to analyze and modify prices according to demand. A smartphone application provides drivers with the location of available parking spots as well as options for payment by phone. The integrated system is being used in varying degrees in several American cities already, such as Los Angeles, New York City and Washington DC.
Pango, an Israeli company, is currently introducing “pay by phone” technology to city parking in the United States. They have successfully introduced this technology in 50 cities around the world. The smartphone application allows the driver to pay for parking for the exact amount of time they park, without feeding a meter or using a muni-meter. Municipalities who contract with Pango don’t have to maintain meters or collect cash. Pango is looking to expand their service by using dynamic pricing to charge different rates based on demand.
The parking landscape is changing as new technology and dynamic pricing are enabling cities to manage parking demand. Results from these pilots will help determine their efficacy for the future.
What do you think about dynamic pricing for parking? Should private companies be allowed to set prices to maximize profit and/or return to the city?
Find out more:
The holiday shopping season is in full swing and online retailers are using dynamic pricing tools and strategies to edge out competitors. But a new wave of consumer sites and apps are helping price-conscious customers to outsmart the system.
Online retailers, determined to attract more shoppers, are investing in pricing software that changes prices hourly and responds to competitors’ promotions. A recent New York Times article describes how e-tailers are using pricing tools to improve positioning on price comparison tools, increase volume and attract more customers. The article charts the daily movement of prices at three big retailers over the Thanksgiving Holiday weekend. Amazon.com, Target.com and Walmart.com changed prices several times over the 12 day period, sometimes undercutting a competitor by pennies to win a customer over. But price breaks don’t always mean a sale. Consumers are catching on. The New York Times article suggests that consumers are identifying good prices when they see them. They tend to act when a price is low, regardless of the promoted markdown (which can change depending on the “original” price.)
And there are more ways for price-conscious consumers to find the lowest prices on their online purchases. Sites like Decide.com (founded by University of Washington professor Oren Etzioni) and Shopobot.com (funded by Google and AOL) track historical pricing data in order to advise subscribers on when to buy. Apps like Ratemizer and sites like Leaky.com help consumers to compare service contracts and help consumers migrate to cheaper providers. While Leaky.com is still not operational, its website claims it will use pricing models as a way to estimate what car insurance companies would offer a consumer.
As retailers continue to count on pricing tools and strategy to attract customers, they will still need to understand what is driving the purchases and how to cultivate customers when there are no more price cuts to make.
A Closer Look:
Clifford, Stephanie. "Retail Frenzy: Prices on the Web Change Hourly." New York Times, November 30, 2012.
Mattioli, Dana. "Black Friday ‘Doorbusters’ Don’t Always Hold Up.” Wall Street Journal, November 22, 2012.