Rafi Mohammed

OK, I’ll Say it Again….Hey Warren Buffett: Here’s a Simple Pricing Idea That Will Make You Millions in Additional Profits

Posted on December 13th, 2006 (0 Comments)

I believe the key to unlocking future profits and growth in the fractional jet industry lies in using peak/off-peak pricing, a standard pricing technique used for fixed capacity products with varying demand. Candace Jackson wrote an interesting article in today’s Wall Street Journal titled Crunch Time for Fractional Jet Owners. Reinforcing what I highlighted in my previous blog on fractional jet ownership, Candace notes that NetJets’ revenue rose by 13% but the company suffered a pre-tax loss of $80 million. She squarely points to the costs that NetJets incurs in chartering additional aircraft to satisfy demand on peak travel days as a key culprit for this loss.

In addition to offering fractional jet ownerships, companies like NetJets and CitationShares also offer a prepaid card pricing option - a wonderful idea and exactly in line with my notion of segment based pricing. A prepaid card (e.g., CitationShares offers 20 hours for $96,000) serves a new customer type: private jet travelers that are not interested in purchasing a fractional ownership. Candace’s article mentions that fractional jet ownership has been flat (approximately 4,000 fractional owners) since 2002. Conversely, prepaid cards have enjoyed strong growth with an estimated 5,000 sold since its inception 5 years ago. Offering this new pricing strategy has indeed uncovered dormant customers. Remember the key point of segment based pricing: new pricing options = new customers.

Candace’s article mentions that companies are beginning to impose peak travel day restrictions on their prepaid card programs (e.g., black out days, wider latitude on pick-up time, and requiring advanced purchases). This is definitely a great step towards controlling the costs of peak travel demand. But here’s my question, why not charge a premium on peak travel days? Why not profit from the value that prepaid customers place on traveling on peak days?

As you will recall, my original post on this topic suggested that fractional jet companies offer peak and off–peak (with an option to pay additional for peak travel) ownerships. Candace’s article points out that some companies are offering discounts for flying during off-peak times. While this is definitely a good start, I believe there is more room to “mine” profits by offering more off-peak options.

After my first blog on this topic, I received a few e-mails indicating that fractional jet customers would not be interested in off-peak options. I’d generally agree that current customers may not be interested in an off-peak program. The great news is that I bet a new crop of customers would be interested in an off-peak program. Much like prepaid cards have done, an off-peak option could drive growth by attracting new customers and better utilize fractional jet companies’ networks. I’m sure that many individuals and companies would be willing to forego peak travel to enjoy discounted private jet travel.

Price is a wonderful motivator to consumers. Many fixed capacity industries (airlines, hotels, power plants, gyms, etc) use price to drive consumers to off-peak usage. Don’t think that price will influence a CEO’s decision? Simmons, the mattress manufacturer, uses a more expensive jet when it is traveling with customers and a lower cost slightly older jet when Simmons executives are traveling alone. With competition increasing in the fractional jet ownership market (companies are resorting to offering perks like frequent flier points and extensive marketing), offering innovative pricing strategies will be a key driver of growth.

Finally, Candace’s article mentions that fractional jet companies are starting to offer discounts on long haul flights and on commonly traveled routes (e.g., New York area to Miami area), presumably to reflect lower costs. Here’s a shout out to fractional jet companies, please don’t forget my fundamental pricing mantra: “pricing is all about value.”

Have a question or comment, please feel free to send them to me!

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