When you marry an MBA, conversations can take some weird turns. As my wife and I met in the MBA program at UNC Kenan-Flagler, it is not uncommon for a light conversation to turn into a Wall Street Journal op-ed. During our recent honeymoon in Costa Rica, at one point we were discussing whether the all-inclusive resort was watering down my drinks, and the next moment we were discussing whether you can truly grow an economy primarily based on tourism (we later found out that the largest industry in Costa Rica is actually microchip manufacturing, but I digress).
This honeymoon was actually my first experience at an all-inclusive resort. It was also my first experience as a high-value customer (HVC) as we spent more money on our room than we would have if it were not our honeymoon. This experience highlighted several relevant business concepts that I thought were interesting.
The Pareto Principle. This states that, in many situations, 80% of the outcomes come from 20% of the causes. This has numerous applications, but the one where I’ve heard it used most is that, in many businesses, 80% of the profits come from 20% of the customers. How is this applicable? On this vacation, we were members of that 20%. We reserved the best room in the hotel, got massages, bought expensive excursions, and left with numerous souvenirs. While spending like that was probably a one-time event for us, the hotel definitely wanted us to recommend it to other couples for their honeymoons. As such, we were treated very well when we were there: there was a basket of fruit in our room upon arrival (along with a note congratulating us on our wedding) and we were often able to get priority seats at restaurants during the week. Clearly, this hotel knew that targeting honeymooners can provide a significant boost to margin.
Value-based pricing. Nearly everyone realizes that most pricing is value-based rather than cost-plus. This means that sellers price based on an estimation of how valuable the product is to you, rather than simply adding a percentage to the cost of producing the product. All-inclusive resorts have this down to an art. The most obvious example was sunscreen. At the hotel store, there were cigars, souvenirs, snacks, and numerous other items, all at fairly reasonable prices. The one product that was priced at probably 6x what it would cost in the U.S. was sunscreen. The reason is fairly obvious: if a cigar is very expensive, I may just decide to not smoke one. But the cost to me is very high (sunburn or possibly skin cancer) if I forget sunscreen and decide not to buy it. Therefore, in this scenario I would value sunscreen very highly. All-inclusive resorts are masters of this, since most people do not rent cars as they plan to stay at the resort the entire time and therefore cannot go to another store where sunscreen is less expensive.
Spoilage. In hotels as in airlines, there is very little additional cost to an additional customer, assuming an empty room or seat is available. Therefore, hotels and airlines are incentivized to price in a manner that fills all of the capacity, while segmenting in a way that still extracts the maximum value from the customers with a high willingness to pay. We went to Costa Rica during rainy season, when these hotels tend to be less full. Our hotel partially solved this problem by offering local deals to Costa Ricans for the weekends. By offering these discounts only locally, they do not cannibalize the Americans who want to go on vacation. But a Costa Rican who may not be thinking about a vacation could be motivated to take one for the weekend and fill an empty room, preventing that room from “spoiling.” This does not work perfectly with all-inclusive resorts, as there are more substantial variable costs (due to drinks and meals), but the concept is still valid.
Outsourcing. At our resort, there was a table in the lobby with people selling guided tours throughout Costa Rica and Nicaragua. When we told them to bill our room for a trip to Granada, they said that they are not associated with the hotel. At first, this made no sense to me. But the company running the resort does not necessarily know anything about running excursions. By selecting the best company it can find, allow this company to solicit for excursions in its lobby, and then charging a hefty fee (potentially even a percentage of tour fees paid), the company can guarantee a significant revenue stream without straying from their core competency of running a resort. In fact, many companies should question why they would do something in-house when it can be outsourced to experts.
Check back in some time and I’m sure I’ll have business lessons that I learned from being married.
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