#12: Why Does Airport Water Cost $6?

How much would you pay for a bottle of water? Write it down.

Now ask yourself: would this change if the context were different? What conditions would lead you to pay more or less?

There’s a funny little balance between perception of value and willingness to pay.

I was reminded of this while scrolling on Instagram this week. I came across this beautiful illustration from Mounika Studio.

The product - a bottle of water - remains the same in all three scenarios, whether you’re at the supermarket, the movies or the airport. However, the buyer’s willingness to pay increases as the location and context changes.

At the supermarket, we don’t expect our food to have significant markup and water is abundant, so our willingness to pay is lower. On the flip side, at the airport we’re faced with the possibility of a long flight without anything to quench our thirst. The value of that water bottle increases significantly, and with it, the purchase price.

Airline tickets are another great example of this. Depending on the context and perceived value, we’re willing to shell out different amounts for the same ticket.

If you’re booking a flight several months in advance, you’ll likely look for a deal. You have time to book, and the trip still feels far away, so your willingness to pay is lower. Now image that you’re at the airport, and your flight has been cancelled. You’re dying to get home and sleep in your own bed. Your willingness to pay for that ticket has just doubled. Or, what if you find out that a family member or loved one is ill, and you need to see them immediately. I bet you’d pay whatever you could to get to them as soon as possible.

This relationship between perception of value and willingness to pay is what makes pricing so challenging. And, it’s one reason why dynamic pricing has become so popular.

Dynamic Pricing in Action

In a nutshell, dynamic pricing is a strategy where businesses set a flexible price structure based on market demands. Essentially, you’re selling the same product or service to different people for different prices.

Several factors can affect the price a customer pays - for example, location, time of day and current level of demand.

Not every product is a fit for dynamic pricing. It’d be pretty difficult to dynamically price water. But, there’s one industry that uses dynamic pricing constantly: hospitality.

Think about ride-sharing services like Uber. The cost of your Uber ride will fluctuate based on supply and demand (are there enough drivers for riders) and things like weather. Have you ever noticed that when it’s pouring rain outside, your Uber ride costs 4X the price? That’s dynamic pricing in action. The value the buyer places on that ride is higher during a rainstorm than when it’s dry outside.

Dynamic pricing is also the reason why hotel room prices are different day to day, and why airline ticket prices to Florida during march break are sky high.

PMM Considerations

How do you know if dynamic pricing will work for your business? Here are a few questions to consider:

• Are you able to measure fluctuations in market demand? If you can’t actually measure or predict these fluctuations, you won’t be able to adjust price accordingly.

• Are there specific use cases or customer segments that may be a better fit for dynamic pricing?

• Does your billing system allow for dynamic pricing?