I feel like some of what they are talking about is just upselling. Someone walks into the store to buy WD40 and you hit them for an extra dollar for a fancier straw.
But this is real
Subprime buyers are increasingly falling out of the market, in a sign that poorer people, who tend to have lower credit scores, are struggling for a foothold.
Five years ago when the hotel I was working for expanded, it was to add 54 “keys” (cabins… basically suites) at 2-2.5x the price of existing rooms. The previous expansion had also been an all-suites expansion five years before that. Why? We had already priced out the low end. And indeed, it was easier to sell out 2-room suites at $1000-$1200 per night than a single room at $400-500 per night.
For a time we, like lots of the lodging industry, jumped on the flash sale bandwagon with operators like Groupon and Travelzoo. But they require such a discounted package and take a substantial cut, so those offers lose money. Parts of the package like a massage in the spa can’t be discounted too much because the therapist won’t adjust their fee. So the shortfall often came out of the marketing budget effectively as a customer acquisition cost.
The problem is that customers who buy the discounts typically will not pay full price ever. So you’re acquiring customers who will be at the bottom of you lifetime customer value, in a lot of these cases, negative LCV.
After a while it became apparent we were training customers to shop the discount. So the idea of the discount was to get them in the door and teach the customers that we were worth what we charged at full price. What we actually taught them was that if they waited, they could always get a deal.
And that’s why discounting failed as a path to profitability in hard times, while premium offerings succeeded.
The problem with premium is that you are going for the top, so when a newer, nicer, hipper place comes online, you’re no longer the premium option.
M
