Unbundling offerings can be a great way to increase revenue by charging people for what they value. Hotels are experts at this. They offer a room at a relatively low rate, then charge $10 for breakfast, $9.95 for internet access, and $4 for a bottle of water or a bag of peanuts in the minibar. While often frustrating to consumers, this allows the hotel to charge $129 for a room instead of $149 with everything included. Customers who don’t want the extras get cheaper rooms.
However, this strategy falls apart when the competition bundles and charges $129. They know they make less money per transaction, but they hope to drive a higher transaction volume.
The natural reaction to such a challenge might be to lower prices to prove the futility of the low-priced, bundled strategy. But what if you had a big investment in the unbundled infrastructure and business model?
The New York Times has an interesting article about What Starbucks Can Learn from the Movie Palace. The author, Randall Stross, notes that decades ago, movie theaters installed air conditioners at great expense, to lure the public in summer months. They did not charge extra for the air conditioning. It was part of the glamorous experience of going to the movies. Starbucks charges for access to its wireless hot spots (run by TMobile). McDonald’s charges also, but less. And Panera Bread and Scholtzky’s Deli provide free access. The free internet access helps keep patrons in place during off-peak hours, long enough to buy enough to improve the yield management of the capacity of the restaurants.
So shouldn’t Starbucks bundle free wireless along with the coffee? Surely some of the people sitting in Panera and Scholtzky’s (along with numerous local coffee shops) might be buying coffee from Starbucks if the internet access was free. However, as Neil Yanofsky, Panera’s president, notes in the article, Starbucks is full enough that they benefit little from having even more customers try to sit down. Giving the increasing number of free wireless locations, and the improving speed of cell networks, the days of charging big bucks for data access points are numbered. But why not milk the infrastructure while it lasts?
But if you want a great example of charging for think we take for granted, Randall notes:
Today, the outer frontier of pricing innovation can be found at the Dallas-Fort Worth International Airport, where some electrical outlets are accompanied by a small sign: “To Activate Pay $2 at Kiosk.” This is an experimental service, “Power Up My Portable,” which provides chairs and outlets for laptops; $2 buys 20 minutes of juice.
But what about the many other wall outlets scattered around the terminals and originally installed for vacuum cleaners? Zenola Campbell, the airport vice president who oversees concessions, demurred last week when asked whether travelers could always count on having free access to those outlets. “I can’t tell you where we’re going to be in the future,” she said.
As a business traveler, I am of course horrified about someone trying to charge me $2 for 20 minutes of electrical power. However, this illustrates that everything is bundled to a certain degree. For example, companies that sell “commodities” but don’t differentiate rush orders from regular orders are missing a prime unbundling opportunity. Finding the right degree is the tricky part.