Rafi Mohammed

Want to Solve Congestion Problems? It's All About Pricing My Friends...

Posted on June 15th, 2008 (2 Comments)

The other night, my guilty pleasure of being on a flight that actually departed on time was punctured when the pilot announced “bad news folks, we are number 53 in line to takeoff…just another Friday night at [New York City’s] LaGuardia Airport.” 90 minutes later we finally took off for the short 37 minute flight to Boston. Lots of wasted fuel, lots of wasted time, and most definitely not Green.

Most businesses have peak periods – restaurants, florists, health clubs, cell phone networks, subways, power plants, movers, barbers, doctors…the list is virtually infinite. Everyone wants your product or service at the same time (e.g., hire movers for a weekend day)…so what’s an overworked company to do? Use price to manage your demand! Why not raise price during these peak times (instead of using a “first come, first serve” policy) and lower prices during off-peak times to better utilize capacity by garnering customers who might otherwise have not used your services. Not only will this solve your congestion problems, it'll also improve your bottom line.

In May 2008, the Department of Transportation advocated that New York’s airports auction off some of their peak landing and take-off slots to better manage demand. Responding to this proposal, New York’s Port of Authority (which runs New York airports) criticized this idea in part because it would increase fares and would not increase capacity. And the Port Authority’s point was…? This is exactly what peak load pricing does – it uses higher prices to reallocate demand in fixed capacity environments.

A similar congestion problem is starting to affect the Internet. While most of us use the Internet to check email and do a little surfing, a growing number of “bandwidth hogs” are using the web to watch movies, play interactive games, and hold video teleconferences. In today’s New York Times, Brian Stelter reports this trend is going to require AT&T to increase its network bandwidth by four times in the next three years. Astonishingly, Brian reports that 5% of Time Warner’s Internet customers account for using more than 50% of its network’s capacity.

So how should Internet companies deal with these costly “bandwidth hogs”? Charge them…of course. In Texas, Time Warner is retreating back to a loose form of usage pricing (much like the per-minute charges imposed in the early days of the Internet). Customers can buy 5, 20, or 40 gigabyte monthly plans. Any usage overages are charged $1 per gigabyte. To place your usage in terms of gigabytes, an hour long television program purchased from iTunes consumes roughly half a gigabyte. Time Warner estimates that 95% of its consumers use less than 40 gigabytes per month. So while we all enjoy the freedom of all-you-can-use pricing, as bandwidth clogging opportunities and adoption increase, expect more Internet providers to price by usage.

On another note, I’ll be discussing how to price for profit and growth on Anita Campbell’s Small Business Trends Radio on Tuesday, June 17 at 1:30. The show will also be archived on Anita’s site as well as be available as a Podcast. Please join if you can!

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Readers' Comments on This Blog Entry

From Steve on June 15th, 2008
I actually agree with all of this, especially of the bandwidth problem. I also agree on the airfare pricing, but remember, I'm retired and can take mid week and mid day flights or even move entire trips up or back by a week or two. I now think of having to go out on the road on early morning flights or having to take Saturday to Saturday vacations and it seems so foreign. There are going to be a lot of things that you haven't even thought of that will have to be regulated by pricing.
From Donna on June 16th, 2008
Rafi...I agree with your assessment but you are going to run into thefolks that will claim these pricing practices are discriminatory to middle-class and poor people who can not pay and thus will be treated unfairly and not given equal access. This is the same argument that is happening in the physicians that are going into subscription-based private practice.