UF Researcher: Firms Profit By Giving Early Discounts Like Airlines

April 7, 1999

GAINESVILLE — Twenty percent off the price of a steak dinner Saturday night if you make reservations mid-week? Discounts for oil changes or dry cleaning if you arrange for the service a couple of weeks ahead of time?

A new University of Florida study finds that the discount super-savers and advance bookings that work for the airline and cruise industries could benefit most businesses.

“The advantage to the seller is they get a commitment from the buyer early, and the advantage to the buyer, of course, is they pay less,” said Steven Shugan, a UF marketing professor who did the research with Jinhong Xie, also a UF marketing professor.

For example, by offering a substantial discount to people who commit on Thursday to dinner on Saturday, a restaurant stands to attract customers who otherwise might be uncertain about going out on the weekend, Shugan said. On Saturday night, the restaurant would end up with more revenue than if it had just waited to see who was in the mood to show up, he said.

“We’re actually a little bit puzzled by why more businesses don’t offer this kind of pricing,” he said. “They may be afraid of the public-relations problems of not granting a refund. Someone could come in and say, I’ve got a cold, I can’t use this ticket, you should refund it,’ and then they’d be sort of stuck.”

A clever solution to the ticket nonrefundability problem that is used by the cruise industry is cancellation insurance, which qualifies the buyer for a partial refund, Shugan said. Restaurant customers, for example, would pay a penalty rather than be out the cost of a meal if they couldn’t make it, he said.

One marketing strategy cruise lines occasionally use that isn’t so smart, in Shugan’s opinion, is making blocks of tickets for a ship’s few remaining seats available to consolidators, who in turn resell them to the public at very low prices. In time, consumers learn about this, he said.

“The airlines have figured that out,” he said. “That’s why they don’t offer last-minute discounts at the gate. If someone were to offer $50 for a seat that otherwise would go empty, the airlines could get some extra money. But they won’t do it because they know in the long run everyone would be there at the last minute.”

Although charging lower prices for tickets purchased early is little-used outside the transportation industry, computer-simulated mathematical models developed by the UF researchers show almost any type of business could profit from it.

Shugan believes early discounts will become more common as big corporations continue to control a greater share of the economy. Its new breed of managers often have broader vision than small businesses — concerned with bookkeeping and day-to-day operations — about how marketing principles can be applied across industries, he said.

“It would even probably work for medical services, although there is a host of regulatory problems there because insurance companies agree to pay set amounts for procedures,” he said. “The buyer would have no real incentive to go to a checkup a month early to get a discount if the insurance company says it will pay for it anyway.”

Advance discounts discriminate according to whether people are in the mood for service, with businesses figuring that people who wait until the last minute to go out to dinner, for example, are in the mood and willing to pay more, he said.

Actually, the concept is not entirely new, Shugan said.

“If you live in Boston or Chicago and contract for snow removal services ahead of time, you don’t pay very much,” he said. “But if the morning it snows you want someone to plow your driveway, you pay a lot. People always have a choice. What we’re saying is that not enough firms offer consumers that choice.”

Although Richard Griffin, chef and owner at Ivey’s Grill in Gainesville, said he doesn’t know of any restaurants that offer such discounts it could catch on. “The size of the restaurant would be a factor because of the need to hold tables,” he said. “We’ve found that reservations can sometimes work against you if you have people standing at the door. But if a percentage of seats were set aside it could be mutually beneficial.”