Between Mountain and Valley: The Art of Pricing in Ski Resorts

December 11, 2023
In the Alps, where each ski day unfolds its unique dynamics, pricing in ski resorts faces a complex challenge. The second article in the series "The Art of Price Optimization in Times of High Inflation" sheds light on crucial questions: When and why does a customer decide to buy a ski ticket? We delve deeper into the concept of perceived value and explain why customers do not simply pay for production costs, but how their consumption behavior is influenced by the perception of this value. Discover how traditional cost-plus models do not meet the market complexity in the ski resorts of the Alps and how a deeper understanding of perceived value leads to more effective pricing strategies.

The Key to Success: Mutual Benefit

Although we are firmly convinced that tickets should preferably be sold through online channels, a deeper trading truth reveals itself at the ski resort ticket counters: mutual benefit. When a guest buys a ski ticket, he thanks the seller – not just out of politeness, but he expresses his genuine appreciation for the purchase. Similarly, the seller thanks because each sold pass means not only revenue but also confirmation that the ski resort creates a coveted value. This mutual appreciation reflects a fundamental principle of trading: a transaction is most successful when both parties feel that their need for value is fulfilled.

The Limits of Cost-Plus Pricing

The traditional cost-plus pricing model, where companies calculate their costs plus a profit margin, hits its limits in the dynamic world of ski resorts. This approach ignores a crucial component:

the value from the customer's perspective. If cost-plus pricing were optimal, for example, corporate bankruptcy would be almost unimaginable, as customers would always be willing to pay for the company's costs. However, reality shows that customers pay for perceived value – a combination of quality, experience, and emotional connection that goes far beyond mere production costs.

Frank Frohmann, a recognized expert in pricing, very aptly identifies three central risks of this approach, which are crucial for ski resorts:
  • Loss of efficiency gains: Instead of utilizing the potentials of efficiency improvements (especially through personnel deployment), these are often passed directly to the customer in the cost-plus model. This ignores important nuances in demand and possible profits are given away.
  • Underestimation of willingness to pay: If the price of a ski ticket is below the customers' willingness to pay, the ski resort misses out on additional margins. Frohmann emphasizes that the ability to create added value and reflect it in the price is crucial to fully exploit profit potential, especially in a market where products and services are becoming increasingly similar.
  • Risk of overpricing: If a ski resort sets its prices too high, based on exaggerated cost or margin expectations, it risks losing customers to competitors or out of the market, as they can no longer afford or want to pay. This leads to a loss of market shares and/or market volume.

Frohmann's analysis underscores the need for flexible, value-oriented price management, which finds excellent application in ski resorts. Such a model considers perceived value and dynamically adjusts prices to offer the greatest possible benefit to both customers and operators.

The True Driver: Benefit and Value

A customer's decision to buy a ski ticket is based on the benefit they derive from it. Customers measure the value of a ski day by how well it meets their expectations for a unique experience. This perceived value is crucial for pricing in ski resorts for two reasons: First, the perceived value varies considerably on average depending on external factors (such as weather) for the same person, and second, there can also be significant heterogeneity among different individuals.

For example, let's look at how the benefit of a skiing experience changes based on the weather forecast. It's not surprising to see that the benefit increases significantly and statistically with better weather forecasts. At the same time, we also recognize based on the blue shaded area (IQR = 50% of the data) that there are considerable individual differences in the evaluation of the weather forecast among guests.

Moreover, it's very interesting that the perceived value of an unknown weather forecast almost provides as much benefit as skiing in slightly cloudy weather. This circumstance can be used to realize early bookings, as the consumer has a quite positive expectation and consequently a pretty high benefit with an unknown weather forecast.

Ignoring these significant differences in the perception of value when setting prices leads to not fully exploiting revenue potential and consequently results in opportunity costs. A uniform, static price excludes the possibility of benefiting from early bookings (risk reduction) and increased perceived value under optimal conditions (revenue increase).

Demand as a Result of Perceived Value

But how can perceived value be observed and included in pricing? Here, demand plays a crucial role. Because it can be considered a direct indicator of perceived value. When guests perceive the value of a ski day as high, the demand for tickets increases. This dynamic confirms that perceived value and demand are closely related. Dynamic pricing recognizes this connection and adjusts prices accordingly to achieve an optimal result for both guests and ski resorts. In our next blog post, we will explore the phenomenon of demand even more.

Conclusion: Pricing must reflect the perceived value from the buyer's perspective

Dynamic pricing in the Alps goes beyond mere price setting. It is a philosophy that recognizes that the true value of a product lies in the eyes of the beholder and that demand is a direct result of this perceived value. It's an adaptation to the actual market conditions, with the clear goal of providing value to both guests and ski resorts.

Stay tuned for the next part of our series, where we will take a closer look at demand and examine concepts such as the price-sales function and the elasticity of demand. Are you ready to revolutionize your pricing? Contact us at Pricenow to learn how we can help you.

Written by Reto Trachsel and Jonas Meuli in collaboration with co-author Veronika Büchi

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