Pricing For Profit Maximization

I want to discuss a great example of profit maximization pricing strategy I saw. There is a main parking lot right in front of the Boardwalk, Santa Cruz that charges $10 for an all day parking. Parking right in front of Boardwalk and crossing the street to enter the beaches is a great convenience to customers. Is $10 the price for the convenience? I am not fully sure, it could be more. Definitely it is not less than $10 judging by the occupancy rate of this lot.

As you drive into the town and drive towards Boardwalk, you see several signs advertising $5 for  all day parking. Those parking lot owners know their lot is of less value to a customer because of the walk (however short) from the lot to the beach. So they price their offering to reflect the “negative differentiation value”. Those with lower willingness to pay and do not mind the walk will pick this option.

But the most interesting pricing is the one practiced by a hotel on the street that parallels Beach st and on the other side of the $10 parking lot. Clearly their lot is no way near the size of the commercial lot that charged $10. They only had handful of spots. They advertise a price of $30 per day and clearly one can see that the sign they had outside is not hard-coded, it allowed changing the price figure at their will. They are practicing dynamic pricing, based on the demand.

Their advantage is, by 2 PM the main parking lot is all full and the hundreds  of cars are routed through the street the hotel is located. As one can judge from the traffic backed up miles away from the exit to Santa Cruz, there was practically unlimited supply of cars coming in. The traffic on the Beach street was inching its way around the block, as people kept driving in with the hope of finding a nearby spot.  After spending 30 -60 minutes inching around the Beach st, some of the drivers are bound to feel their time and convenience is worth the additional  $20.

Clearly the hotel’s pricing is based on the observation of years of traffic pattern  and pricing based on customer demand. Note that the marginal cost for each spot is $0 and if they had priced the spot for $15 almost everyone would have taken it. But they only have limited supply of parking spaces. Clearly they did not want to reach the wider market and targeting only those with a high willingness to pay so they can spend time on the beach instead of driving around for a $10 spot. The dynamic pricing option allows them to drop prices as they see traffic slow or when they still have empty spots near the end of the day.

That is pricing for profit maximization!

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