¨You and I travel by road and rail. Economists travel by infrastructure¨.
The 3 Reasons Travel Prices Are So Complex and Irrational
This blog was written before the COVID Pandemic. The COVID epidemics played havoc on the travel business. In 2022, Fifty Plus Nomad decided to focus on traveling and living in Mexico and language learning posts. We will only update these long-term travel-related posts on a time-permitting basis. We would appreciate your comments and updates on these posts.
Travel Prices Change Randomly
While prices for most things vary depending on where and when you buy them, travel prices change seemingly more frequently and randomly than any other consumer commodity.
A couple of times in my life, for example, the cost of my airline ticket changed significantly within just ten minutes.
Yet, unless you are in a country with extremely high inflation, the price of most other consumer purchases never changes so rapidly.
Usually, the reasons why prices for most consumer goods vary between stores are also relatively transparent. We know, for example, that:
- Consumer prices are higher in high-rent locations (like the center of a big city) than lower rent locations like many suburbs.
- Areas, where many stores sell the same products (malls, for example), are usually cheaper than places with a monopoly business.
We also usually understand why we spend more on a product at one type of store than another. For example, if you want to buy milk and bread, you will pay more at the corner convenience store than at a large box store, like Walmart, to avoid:
- The time and trouble of traveling to and finding a parking spot at Walmart.
- The time to find the right aisle at Walmart to buy just milk and bread.
- Waiting in a long check-out line.
Why Do Travel Prices Seem So Bizarre?
However, this is not the case for travel products. Two people sitting next to each other on the same plane will probably find they paid vastly different prices for their seats.
The two customers receive no notable difference in service. They may even discover they bought their tickets on the same day. While usually less dramatic, the same differences in travel prices occur in rental cars, hotels, and other travel products.
Why are travel prices so different? The answers lie in three travel industry realities:
- The travel industry’s products are highly perishable.
- The industry has high capital costs.
- The industry uses highly sophisticated yield management algorithms to determine its pricing.
One Reason Travel Prices are So Bizarre: Perishability
Travel prices are random because travel is the most perishable commodity on Earth.
Generally, most people think of fruit or meat as perishable because they will rot if unsold after a short time. However, travel is even more perishable than fruit.
If a hotel does not rent a room for the night or the airline does not sell a seat for a flight, they never will be able to make that sale again. They can’t, like many industries, store the product in inventory and wait for purchase later.
Travel Prices are Also Highly Affected by the Industry’s High Capital Costs
The industry also has exceptionally high built-in capital costs. Hotels, airplanes, and cars are expensive. Every day, the industry needs to rent many rooms, sell many seats, etc., to cover their initial investment.
To be profitable, they need to charge many fees and offer consumers the opportunity to buy many other non-travel-related products and services.
The Industry Solution (The Customers’ Nightmare?): Yield Management
As a result of the product perishability and high capital costs, travel companies have to find a price that:
- Maximizes their profit.
- Ensures they sell as much of their inventory as possible daily, flight, etc.
Determining the right price to meet these criteria is complex, and it requires the travel industry to understand its clients and their purchase patterns. To achieve these goals, the industry has developed a pricing model called yield management.
Yield Management 101
The travel industry determines prices through a system called yield management.
Yield management is pervasive throughout the travel industry. However, Fifty Plus Nomads will most likely encounter it when buying an airline ticket.
Though the prices seem random to consumers, travel providers put a lot of effort into determining their pricing.
The travel industry functions as a computerized version of an old fashion bazaar. The vendor determines the price based on what they believe the customer is willing to pay.
The travel industry wants those customers who can afford to pay high fares or are desperate for their services to pay through the nose. At the same time, they need to charge less money to attract customers for their highly perishable products.
As a result, unlike most purchases, the same hotel room, car rental, or airfare will be sold for several different prices. The price depends on many factors, including:
- When you want to use the product.
- When you make your booking.
- Increasingly, what kind of perks do you want?
What Does This Mean for Consumers?
Some of these variables are easy for the consumer to anticipate and do not change much. For instance, the lowest airfares require you to buy the service in advance (this is truer with airlines than hotels).
Why? Airlines know that travelers with little flexibility will pay more than those with more options. Typically, businesspeople have little flexibility and need to be at a meeting at a particular time or place. Thus, they will pay more than someone who can wait to fly until the price is more reasonable (usually leisure travelers).
Airfares and hotel rooms will be at their highest cost around holidays and when the weather is at its best at your destination. You can expect the highest prices in the US, for example:
- Around the Fourth of July Holiday, Thanksgiving, Christmas, Spring Vacation/Easter.
- Since schools are out of session throughout most of the summer and the weather tends to be better. (Note: Airfares and hotels will have high prices in the summer even where the weather is scorching, like in Southern Florida, because kids are out of school).
All travel providers use computer algorithms to compare their current level of demand with the past. They will offer cheaper alternatives if they have more space than expected. If they have sold more seats (or rented more rooms or cars) than on the same day or flight as in the past, they will reduce the number of low-cost options.
Airlines Versus Hotels, Cruises, and Car Rentals
Some critical differences between booking airlines and the rest of the travel business affect consumers:
Hotels, Cruises, and Car Rentals
Hotels are often cheapest a month or so before you travel, and there are sometimes good deals for last-minute hotels. Also, the prices don’t change dramatically depending on when you book a hotel.
Unless there is a cancellation fee, you should check prices frequently even after you make your reservation. If the price drops, cancel your reservation and create a new one at the reduced price. (You should do the same with cruise ships. Instead of canceling the reservation, call the cruise line and ask for a rebate or an upgraded cabin).
Cancellations frequently occur with hotels and car rentals. Therefore, you sometimes can get a good deal just by showing up at a hotel or renting a car at the last moment.
Airlines, in contrast, usually do not have many low-cost, last-minute options. (They hope business people will buy seats at the last minute for “beaucoup” bucks).
Airlines also do not have a lot of cancellations. (I have often paid less for a one-way flight than the cancellation fee. When that happens, I do not show up for the flight. There is no incentive for me to cancel the flight),
Low-Cost Airline Tickets
During the 335 days that a flight is open for sale, there are likely some periods when airlines offer a special fare. Sometimes, these special fares are available for just 24 or 72 hours. Airlines will only promote these sales if they have difficulty selling the tickets.
These sales explain why prices can be high when a flight opens for sale 11 months in advance. It is impossible to determine when these sales will occur; however, most experts maintain that the best time to buy a flight is often between one and four months out.
Of course, there is always a slight risk that the prices will go up if a flight is more popular than expected. (This is why it is usually advisable to book travel during the high season more in advance than during the low season).
Want More Information About Travel Pricing?
Check out this post from Trip Central.