If you’re not taking your pricing seriously, these two stories will explain why you should
I’ll cut to the punch line: yes, there is a real person who increased revenue from his business by 150% in a week. Like, one week, he made $100. The next week, $250. And he only did 1 thing differently.
But you won’t believe me, so let me start with a story from the 1990s about a car rental service that went from near-bankruptcy to a billion dollar exit using the same method.
It’s all about pricing
In 1993, there was a company called National Car Rental. Yes, the same one you see in airports all over the country. Back then it was owned by General Motors, and it was losing money at an insane rate. They were burning $1 million a month, which in today’s dollars is $14.2 million. That’s $168 million per year, within spitting distance of what Amazon loses.
They were facing imminent liquidation. GM had already written off $744 million of the value of the company. (Maybe they got tax advice from Donald Trump?). Their next move was to shut down the ailing company, lay off its 7,500 employees, and get out of the car rental business entirely.
But then someone asked the question that started the turnaround. “What if we think a little harder about prices?” they asked.
Traditionally, National’s local managers had been given freedom to set their own prices. Because they were competing with other local car rental businesses, they mainly used the competition’s prices to set their own. It dawned on some at National that there could be a different way.
Rather than set prices according to the competition, they could use customer data and this new thing called the Internet to make prices track supply and demand closer than ever before.
The first modern car rental business
With virtually nothing to lose, GM contracted an outside firm to overhaul the way National set its prices. Two major initiatives went into what became the first ever revenue management system designed solely for a car rental company.
First, they collected data. The goal was to have an accurate picture of demand on a granular, day-to-day basis. That meant understanding, for any given day:
- how many reservations were made
- how many reservations were initiated but abandoned
- how many cars actually were rented
- how many cars couldn’t be rented due to inventory restrictions
Then analysts used that data to create inventory predictions and pricing recommendations for the future. Using both historical models and recent, short-term results, National’s revenue management team was now able to intelligently segment demand. They were able to do things like calculate the perfect price for a luxury sedan rental on a Monday (when a businessperson will want it for work) vs. on a Saturday (when they won’t), and adjust on a day-to-day basis to maximize revenue while maintaining enough inventory to function.
One month after implementing their new pricing system, National’s bleeding turned into money. After a year, National had made $56 million in profit, or $816.5 million when adjusted for inflation.
Two years later, GM sold National — but not for spare parts. For $1.2 billion dollars.
Learning about the future
The one shortcoming to National’s revolutionary revenue management system was that it was a little ahead of its time. While their new data-informed pricing strategy had saved the company, it had faltered in its secondary goal of creating reliable forecasts for future pricing changes. They simply didn’t have the kinds of statistical experts you would need to continually adjust the models based on their underlying mathematics.
But you can’t really blame National for that. They didn’t have Udemy courses on machine learning or data science back then! What they accomplished was very significant for its time.
Today, however, entrepreneurs and businesses can do the same type of data collection, with the same kind of analysis, and use machine learning to forecast demand and adjust prices in real time. And they don’t need to bring in huge consulting firms from outside to do it.
The new rent-a-car
Back to our friend from the beginning. So the business we’re talking about is something very simple–he rents his car on a peer-to-peer car rental platform. It’s just a car, it rents for a few bucks an hour.
That car rental platform got together with a company called Perfect Price that helps businesses forecast demand and adjust prices accordingly. They looked at how many people think about renting cars in specific neighborhoods, how many tend to actually rent a car there, and historical usage patterns across the board. And not on a day-by-day basis, but on a real time minute-to-minute basis.
Our friend didn’t have to do anything special for that 150% increase in revenue. He goes to work. He comes home. Sometimes he buys groceries, sometimes he just orders pizza. But his car is being rented, more often and for more money than ever before. And all it took was someone saying “Hey! What if we think a little harder about prices?”
Perhaps you’re thinking, “I should list my car on a peer-to-peer car rental platform!” And sure, you probably should. You’ll make money, especially if you’re not using it.
The other thing you should ask, as a business owner or an entrepreneur, is “Do my prices reflect demand?” If your pricing strategy today is clicking “refresh” on your competitor’s website every morning, you may be leaving a ton of money on the table.
There are very few levers which when pulled can grow a business by 150% in one week. Price is one of them. Are you using it?