Revenue Analytics: The Problem With Fixed-Tier Pricing

Abstract

With the widely used fixed-tier computerized pricing system (e.g., based on the best available rate or BAR), fenced discount rates are set and updated as a fixed percentage of the base rate such as the BAR. This intuitive computer-automated solution to a complex pricing issue is, however, theoretically suboptimal. The study demonstrates why the practice of using fixed-tier pricing is suboptimal, showing that this fixed-tier approach is inferior even when the initial set of fenced rates is optimal and even in the unlikely scenario of the various market segments’ demand curves shifting proportionally. As such, practitioners should avoid using a convenient fixed-tier pricing model (BAR-based or not) where only one pricing optimization is run and the rest of the fenced prices are calculated based on this optimized price using fixed percentages. Instead, a fenced-rate pricing system where individual segments are treated independently, and optimizations are run for each segment should be adopted.