Crazy pricing is the right pricing

My accountant friend KS Srinivasan invited me for a quiet dinner at a restaurant to seek my advice. He described his large ancestral property in Kodaikanal and told me he was converting it into a resort. Now that his children had left home, he and his wife wanted to move there permanently from Chennai and run the resort.

“But I have no qualification to be an hotelier,” he said.

“Nonsense, Srini!” I said. “You own the property – that’s the most important qualification. And you’re an accountant, able to count the money as it comes pouring in. That’s all you need. Hire people for the rest. How many rooms in the resort?”

“30, with half of them air-conditioned.”

“How will you charge for the rooms?”

“`5,000 per night for AC and `3,000 for non-AC rooms.”

I shook my head gravely. “You should charge `7,000 for rooms without air-conditioning.”

“That’s crazy!”

“Crazy pricing is the right pricing today,” I said. “Say Person A flies from Mumbai to Hong Kong, via Singapore. Person B takes the same flight, but gets off at Singapore. Who pays more, A or B?”

“A!” he said immediately. “He’s flying a much longer distance.”

“Wrong! B pays more because his flight from Mumbai to Singapore is non-stop, whereas A’s is not! Pricing based on the logical cost of providing the service is so old hat it smells of mould. Pricing today is based on perceived value only. The trick is to name your rooms appropriately. Call the cheaper room ‘normal air-conditioned room’; call the other ‘premium natural weather room’ and describe it as: ‘Kodaikanal’s natural beauty and fragrances brought inside your room’.”

Srinivas nodded and started writing notes in his pad.

“What are your room views like?” I asked.

“The rooms on the inside overlook the hotel courtyard, which is pretty but not as picturesque as the mountains facing the rooms on the outside. I’ll charge 20% less for the courtyard-facing rooms.”

“No! Charge 20% more. Call them ‘serenity rooms’, ideal for ‘taking a calming break, away from all distractions, including beautiful mountains’. I hope you will provide wireless – people need connectivity to browse just as they need air to breathe?”

“Yes,” he said. “And I’ll charge a daily rate for it.”

“Don’t! When something becomes as necessary – and ubiquitous – as air, people expect it to be free. But some people pay to climb Mount Everest where there is no air to breathe. Using that principle design a few rooms with no wireless. I’d suggest you pick a few of the ‘serenity rooms’ with a poor view – perhaps the ones with the worst view – remove wireless connectivity and call them ‘super serenity rooms’. Promote them ‘for people who dare to go where few have ventured – away from everything, including the internet!’ Charge 40% more than normal for these rooms.”

“Wow!” said Srinivas.

“Always adjust prices upwards when demand increases. When occupancy crosses 80%, charge double the normal rate for every type of room and, at 95% occupancy, double the rate again. People who decide late to go on a holiday expect to pay atrocious prices.”

“Thanks,” said Srinivas, writing in his book.

“Let’s talk about the restaurant now,” I said. “There you should promote healthy living. Eating healthy is a fad that you might as well capitalize on. Also, calling your food healthy allows you to charge more for putting less in it. But ensure you also serve the normal version because there are still some people who eat food for its taste. Offer healthy options at a premium price. For example, you could charge `150 for ‘normal cheese dosa’ and for ‘cheese dosa with low fat cheese’…”

“Charge `200!” cried Srinivas.

“Yes!” I beamed at him. “And charge `250 for the super-healthy version – ‘cheese dosa with no cheese’. Similarly, offer normal coffee and, at 50% surcharge, ‘organic coffee’.”

“What is organic coffee?” Srinivas asked.

“No one really knows,” I said. “But when people know they’re drinking organic coffee, they automatically feel healthy. Similarly provide all types of tea – like green, Darjeeling, oolong, jasmine, peppermint, apple and ginger fusion, camomile flowers – many of which don’t even have tea leaves.”

He was writing furiously.

“Discourage people from eating outside your hotel. Offer packages that include breakfast, lunch and dinner. And offer packages that include a free pick-up from Coimbatore and Madurai airports.”

“Why?” asked Srinivas, puzzled.

“People in their own cars tend to drive out looking for places to eat; if compelled to hire a taxi for every meal, they hesitate. And maintain a small shop selling typical holiday necessities – like toothpaste, banana chips and playing cards – at three times the normal price. People will happily pay up, especially if you simultaneously stock their room minibars with the same items at five times the normal price.”

With four pages of his book filled with scribbles, Srinivas happily paid for the meal and left, shaking his head in wonder at my grasp of the hotel business. I could have enlightened him that my deep insights were due, not to genius, but to mere observation while traveling, but I didn’t.