Getty Images; Alyssa Powell/BI
You know how great it is that airlines have unbundled every little option so that you can pay for things separately? Want to check a bag? That'll be $50. An extra 6 inches of legroom? $96! Board first, even though everyone's going to the same place? You'd better be part of the loyalty program. It's so fun for flying to be split into haves and have-nots.
I'm kidding. The extractive nature of the modern-day flying experience is miserable. The airlines insist that the choose-your-own-adventure model is great because people pay only for things they really want. The issue is, no one wants to cough up more money to ensure their knees aren't banging into the seat in front of them. The person in the cheap seats at the back is just tolerating their plight the best they can.
And yet, businesses and industries across the economy are following the airlines' lead. They're increasing customer stratification to boost revenues and identify exactly how much they can get out of each consumer. Sometimes, it's a win for consumers: Uber's "wait-and-save" option gives people who aren't in a rush a discount. But in many instances, it feels like a loss: People now have to pay extra to forgo ads on streaming services, skip the line at Disney, and even shop special hours at Costco. In sectors such as retail, travel, and entertainment, consumers have more choices than they've ever had — but it all comes at a cost.
"It's not that you always get what you pay for, but you don't often get what you don't pay for anymore," says Joseph Nunes, a marketing professor at the USC Marshall School of Business.
I went to Costco for the first time recently, and it was not for me. It was too cold, everything was too big, and it was way too crowded. (The free snacks situation, however, was 10/10.) I get that I'm an outlier: Costco has more than 133 million members worldwide. And for its fancier members — the people who pay $130 a year to be in its executive tier instead of the $65 base tier — it's rolled out fancy benefits, most recently special store hours. Executive members now have 60 minutes every morning (well, 30 on Saturdays) to shop among other higher-status customers, on top of other perks. A Costco-fan friend reassures me that the early hours are for the true "sickos."
It's not that you always get what you pay for, but you don't often get what you don't pay for anymore.
For Costco, the move is a savvy one, explains Z. John Zhang, a marketing professor at the University of Pennsylvania's Wharton School of Business who studies pricing strategies and targeting. Once a company has locked in a business model — in Costco's case, offering memberships to people so they can buy items in bulk at a low cost — it has to figure out ways to bring in new revenue and growth. This is especially true for publicly traded companies, which have to wow their shareholders regularly. That leaves Costco with a few options: sell a greater variety of stuff, attract more members, or, as in this recent case, split customers into tiers and then tempt more of them to opt for the pricier one.
"You have to provide some benefits that people desire so that they are willing to upgrade," Zhang says. Marketers often think of tiering with at least a trilevel "good-better-best" approach, which allows them to cater to different customers at different price points and eschews "one size fits most" thinking, so Zhang expects Costco to add on more tiers soon.
The reason companies stratify things is simple — to maximize profits via a mechanism called perfect price discrimination.
You want each customer to buy as much as they can at the maximum price they're willing to pay, Nunes says. The airlines' practice of unbundling services is now "carrying over to the retail space, where they're going to unbundle and then upcharge or provide benefits to their best customers in order to make more money," he says.
Or as Zhang puts it: "In any service industry, pretty much, it's hard not to find a tiered price, because the simple fact is that for any goods and services you have to sell, different people are waiting to pay different amounts."
In some instances, this can be appealing. If having a higher tier means Costco keeps lower prices for people in the lower tier while making the store a little less nuts for power shoppers, it can be a win-win. The same goes for if someone in the back of the plane wouldn't be able to travel at all without that ultra-cheap seat. But businesses are increasingly using their power and information advantage to take it even further.
In the era of data and AI, companies know a ton about us and are able to use that to their advantage. In some of the most egregious cases, they use surveillance pricing to identify what they can charge each individual, so conceivably, I could be steered to more expensive hotels on a travel website because the site knows I'm using a Mac and infers I'm wealthier, or an e-commerce site thinks I'm a new parent and upcharges for baby items. But even if they're not going that far, they're using our data to guess what people like us are likely to pay.
Sam Levine, the former director of the Federal Trade Commission's Bureau of Consumer Protection, tells me loyalty programs, which can be paid for or earned, deliver troves of information to businesses to split customers into groups.
They know exactly what consumers are going to be willing to put up with.
"Companies can see in these programs, and I think this is relevant to Costco, how much paying consumers will tolerate, what kind of discounts they need to spend their money, what kind of inducements work with consumers, and what doesn't work," he says. "They know exactly what consumers are going to be willing to put up with."
Stephanie Nguyen, the former chief technologist at the FTC, points out that the advertising tech industry has spent decades developing a hyper-effective targeting playbook. Instead of targeting males ages 18 to 34, they're targeting males ages 20 to 22 who live in a specific ZIP code and who are into hunting. That in-depth measurement is now being used in pricing. "You see a huge shift from mass media and crude group segmentation to more of that granular, individualized ability to target a person," she says.
If a business knows enough about you to target you with an ad for a specific pair of shoes, it may also know enough about you to guess exactly how much you'll pay for those shoes.
The road to consumer hierarchies is a winding one. As mentioned, a lot of it is revenue development. But it also has to do with a shift in the way businesses approach pricing and have managed to turn a system of perks into a system of penalties. Consumers have gotten used to this buyer's food chain, too. The economy has evolved from cost-plus pricing, when businesses add a markup to their total costs on supplies, labor, etc., to value pricing, which hinges on how much customers perceive an item's worth to be, says Lindsay Owens, the executive director of Groundwork Collaborative, a progressive think tank.
"Pricing has been increasingly unmoored from the fundamentals like costs, and it's increasingly unleashed," she says. Companies are more willing to tap into intangible ideas of value and the laws of supply and demand to get people to spend. We don't think of what the thing costs; we think of what it's worth. Owens adds that many companies already "ran their course on cost-cutting" — they've whittled down their workforces, opted for cheaper suppliers, and streamlined their operations as much as they feel they can. They've also spent the past several years dealing with inflation, pushing their costs up. Many have already raised prices, including even more than inflation calls for, so they need to come up with another price-hiking play. Premiumization is an avenue for that: Production costs don't meaningfully increase, but you can boost margins by enticing people with a better option or making the original option cost more. And, Owens says, there's evidence that offering one premium option can sometimes put a halo around an entire brand and increase its esteem in consumers' eyes, even if the regular options haven't changed.
"It's like, OK, we've sold one thing at one price. Can we gussy it up a little bit and offer a premium version? Or can we degrade the original version and then offer the original version in its non-degraded fashion as the premium version?" she says.
While some consumers' wallets are tight, there's a lot of cash sloshing around in the economy, especially as the middle class swells globally and the people nearer the top of the wealth charts increase the size of their bank accounts. A lot of money is chasing the same goods and services, and the people with that money are willing to shell out more for a better time. That's especially the case when the non-premium version has become undesirable.
Anything that's exclusive, you want to be part of that exclusive club.
There's also an element of basic human nature in all of this: People like to feel special. In the case of earned status, when you get enough points to join a certain club or level, it's motivating to have a goal. In the case of paid status, customers want to feel like they're above the crowd.
"When you are brand loyal or loyal to whatever the thing is, the airline, the retail store, you're hoping to try to get extra perks, and it's also a bit of a status symbol for you, right?" says Shikha Jain, the lead partner for consumer and retail for North America at Simon-Kucher, a business consultancy. "Anything that's exclusive, you want to be part of that exclusive club."
People have started to complain that airport lounges are overcrowded and not as exceptional as they used to be. That may wind up benefiting a company or competitor — it allows them to offer an even higher-priced option that's more lucrative.
"The top of the pyramid tends to make you more profit than the math at the bottom of the pyramid," Nunes says.
Jain warns that too much stratification can backfire, though, especially if the business puts too much out of reach. "It doesn't work when you take away something that's core to the business," she says.
It's not clear there's a way to put the genie back in the bottle on the caste system that's emerging across the consumer economy. While companies such as Delta and Wendy's have gotten backlash over being a little too cute with new pricing ideas in the recent past, the overall trend is toward more variation, not less. There's dynamic pricing, when costs swing based on supply and demand, and surveillance pricing, when companies can figure out a number that's just for you. Loyalty programs are proliferating, whether or not they actually pay off for the faithful.
For the people who can afford the better experience renting a car or reserving a movie seat or getting extra-fast delivery, this brave new world of customer rankings may be a win. And, hey, if you're willing to accept the worse product or service to save some money, by all means, go ahead. But sometimes, it's just nice for the thing to cost what it's going to cost without games or strategies or paid line-cutting.
Eventually, we'll just get used to this setup, just like we have with flying. The kids these days don't even remember what it was like to chance it on what airplane seat you'd wind up in and get a window seat in the exit row as a pleasant surprise.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.
