Do not use pricing to address operational problems

You see long lines at ski lifts or at amusement parks. One common conclusion most go for is, “Demand exceeds supply, let us increase prices until the lines go away”.  Quite possible, if you have done the due diligence and eliminated operational inefficiencies as the reason for your lines.

Pricing is a marketing lever. While it will help a firm address marketing issues related to managing demand

and capturing consumer surpluses, it will not help with solving operational issues.

In his book Blunder, Zachary Shore talks about cognitive traps that could lead a firm to commit blunders. The two key ones I want to quote here are “Causefusion” – confusing the causes of complex events and  “Cure-allism – thinking that one-size solutions can solve all problems”.

It is true that any congestion can be addressed by increasing prices until congestion goes away. There is a very good discussion of congestion pricing in the Freakonomics blog. But before applying a pricing solution the firm must exhaust all other reasons. For example, the long lines at ski lifts could be due to slippery loading and landing zones,  too many single skiers choosing to sit alone,  mixing kids and novices in the lift line for others etc.  These are all operational issues and require operational solutions. Changing the pricing  will not address the root cause.

If you are going to increase prices then you should understand the elasticity and customer segments and do the numbers on how much your profits will change. If you have not done that for setting your original price, it is likely you will not do that for this price increase and hence mostly likely will end up with sub-optimal profits.

Sometimes just a simple operational change is better than a pricing strategy overhaul.