This past weekend my wife and I attended a college swim meet, and in the process I found an interesting study in what happens if you do not pay attention to the competition when setting prices. The study of competition revolved around parking. There were examples of customers ignoring competitive alternatives and choosing the high-priced option, as well as declining volume for a parking garage whose pricing strategy did not include adjusting to competitive changes.
The swim meet took place over 3 days, with preliminary races in the mornings and finals in the evening. That meant driving to the natatorium twice each day. The college is in an urban setting, so parking can sometimes be an adventure. Metered street parking is available, and there are a few parking garages within 4 of 5 blocks of the pool. The first day the nearest garage was full for both the morning and evening sessions, with the vast majority of spaces occupied by daily permit holders. However we found a spot on the street approximately 2 blocks away, and the meter price was $5 for the morning session. When we fed our license plate and credit card information to the meter for the evening, we were pleased to learn that parking was free after 6 pm, so our total fee was only $1. We also learned parking would be free all day Sunday, the 3rd day of the meet.
The second morning we went to the parking garage, where they were charging an event fee of $10. It was more than the street meter, but the garage had security which was not available on the street. So we paid the higher price. However, when we returned in the evening we learned the garage would be charging another $10 event fee, because once you leave, returning is another event. I mentioned to the attendant that parking on the street was free after 6 pm, which made his event fee awfully high. He told us we were free to park on the street, which we did, in a spot that was even closer to the pool than the garage. Interestingly, we still saw a number of cars enter the garage and pay the full $10.
We talked with other people in the stands about their parking choices. A large number of people opted for the nearby garage for the day 2 morning session, but when they learned street parking was free at night and all day Sunday, they decided that was the better option. We saw a bunch of cars parked on the street Sunday morning and evening.
It was interesting that a few people we talked to parked in the garage Sunday. There was a mix of snow & rain most of the day, and the people using the garage wanted their cars to be covered. It was worth $10 for them to have a covered spot. They did agree, however that the parking garage was nowhere near capacity.
So what does all that parking have to do with pricing? To me, it provides 2 good examples – 1) it is important to pay attention to competitors, and 2) customers will often choose the highest price for something that seems to be a commodity, so set your own pricing strategy. The parking garage has a marginal cost of zero, and they should try to get all the revenue they can. Keeping a flat price of $10 per event undoubtedly resulted in a large number of potential customers choosing to go with the lower-priced competitive offer on the street. My estimate is Saturday evening and Sunday morning customers were less than half the Saturday morning volume. However, if the garage had dropped their price dramatically, it could have been even worse as their revenue from the customers who were willing to pay $10 would have been much lower. If the parking garage had acknowledged there were much cheaper options at night and on Sunday, they could have offered a discount of 25% or so for customers returning for the next session. They would still capture the full $10 from those customers coming for the first time, but many of the customers who defected would have returned if the premium versus street parking were smaller.
Whether selling parking spaces or anything else, having an understanding of the competitive options available to your customers is always helpful. Customers will often choose higher priced options because they value certain features, or sometimes because it is not worth the effort to switch to a different supplier. If the price differential gets larger or smaller, pay attention to how your customers react. We don’t advocate matching competitive price changes move for move, but you also should not just ignore them. Have a strategy for managing competitive actions that reflects the value you bring, and the loyalty of your customers.
Leave a Reply
Want to join the discussion?Feel free to contribute!