I recently heard the expression that a particular enterprise was "doing the airline game". I had to do a double-take, since I hadn't heard that in many, many years....and it's not a compliment.The airline game is simple: you charge different prices for your services/goods under the guise that the higher paying customers have already covered your expenses. And "since the plane is going there anyways..", it's better to have some amount of income, rather than empty seats. That's the airline game -- some people pay $1500 for a ticket, others pay $300.
I first ran into this strategy when I worked at Intelligent Electronics. IE was a wholesale distributor of personal computers to a network of resellers in the U.S. and Canada. Business was basic: we bought billions of dollars of computers from IBM, Apple, Compaq and so on....warehoused the inventory and then shipped these products to a bunch of stores nationwide. Being as big as we were, we got the vendors "best" prices. To cover our expenses (those big warehouses cost money...) we marked up the price to resellers. The larger your volume with us was, the better your price. So our big customers paid something like cost plus 3% and smaller guys paid plus 8% and up. As we grew and got more and more successful, the executives decided that to woo some rather large independents (that's what we called them) we would have to sell to them at cost plus 2% and in some cases, even lower. The sales guys were happy because they could bring in a ton of new business to our network, since that's how they got paid. Vendors were happy because they saved money delivering to our 2 warehouses rather than all the various outlets. And the new reseller was happy since they would receive better service from us at a slightly higher price.
For years, we were told that the best price we could afford to sell at was around 3%, since that's what it took to cover our costs. So then how could we sell to these new guys at a much lower rate? The powers that be declared this a "airline game" strategy. Their logic was that since our costs were already covered, this business was truly incremental. Our infrastructure didn't incur any new costs with the new business, so a lower rate was no big deal...it was "found" money.
Sounded good to a newb like me. But one problem reared it's ugly head. Remember how everyone was happy? Actually, everyone was happy except for the loyal customers who were still paying the higher price, and had been for years. They would've loved a price decrease, more profit for them or whatever. The thinking was that the new guys would "never talk their deal" to others, so we'd be fine...no one would ever find out. Just like gentlemen "never" talk about their exploits or employees never discuss their respective salaries....
The airline game works for the airlines because they've built in an accelerator of sorts. If you book your flight early, you get a better deal. Under the auspices (and there's probably some truth in it) that early bookings let them plan their needs better. If you book at the last minute, it's going to cost you. They are counting on some number of later bookings, to help cover their overall costs. Everyone knows this game and when you book early, your loyalty is "rewarded" by recieving a better price. The flaw in IE's playing of the airline game was that loyalty was not rewarded at all. IE had been through a number of trials and tribulations, and a lot of these resellers had stuck with us (through a lot of cajoling, mind you). But now, they were being penalized, price-wise, and a new customer was getting a significantly better deal, primarily because of the old reseller's price. Needless to say, this blew up in their face.
To calm the ire of the resellers, the company embarked on a massive campaign to fundamentally lower their prices, so these resellers had less to bitch about. It worked with some, others it did not. Some of the newer resellers were told they were exempt from the "we're going to lower your price" campaign...they had already got their deal. Some of the old, big resellers left the chain (they could do that...it was a weird business). And ulitmately, it ended up being a big reason that Intelligent Electronics is no longer around. They were gobbled up by another company in the mid 90's after stumbling and bumbling around for a few years. It all started when they decided that they could grow their business at a significantly lower profit "since the plane is going there anyways...".Now imagine this scenario: a company is going to move in this same direction, lowering their price for new business. But their existing business isn't sufficiently paying the expenses today. In my IE example, at least the company was profitable. In this new case, they are not. So they're going to play the airline game, make their existing, loyal base mad, all the while their business isn't strong enough to support itself.
Maybe they should realize that just like in the airline game, sometimes your plane crashes.