What prison taught me about discounting
Founder of Brokepacker.com Kevin Lippy explains there are three types of discounting ahead of the website’s launch tonight.
A prison yard is a tough, volatile, dangerous, cut throat and an extremely unpredictable environment… Kind of like the Australian backpacking industry during low season.
It is survival of the fittest in its purest form and your ability to adapt to the unwritten rules of this environment is crucial. On the inside you are either the predator or the prey. Reputation is everything. If you do not have one, you have to earn one… and in the prison yard everyone’s trying to earn one. You have only three options:
Option 1 – Lay low and avoid confrontation - AKA don’t Discount
This would definitely be the best solution… if only it were your decision! Sure you are just doing a five-month stretch of hard time and are eligible for parole as soon as September but in prison that can be a lifetime. You can attempt to lay low and avoid confrontation at all costs because you believe fighting is futile and at the end of the day nobody wins in a prison yard war. Avoiding scraps in the yard is not that easy and you have to accept that some of the others will perceive you as a target, steal from you and are more than likely going to cost you a couple of beatings during this period.
I reckon the “anti-discounting” argument has a lot of credence, especially when you consider the amount of ‘irrational pricing’ going on at the moment. I would even go as far as saying it is optimal outcome theoretically (for operators at least)… Now if only it were possible! So long as there is a substantial over-supply of operators facilitating every single need or want a backpacker could have during low season, it will always be a ‘buyers market’ and discounting will continue to be rife. Eradicating “discounting” all together is about as likely as asking an entire prison population to promise not to fight each other and then getting them to “ group hug it out.”
Option 2 – Go out Swinging – AKA Irrational Discounting
Head-butt the first guy that looks at you… no matter who he is. Anyone else in your path, do the same and continue to do so to every other inmate who so much as breathes near you. You want to earn the rep that you are a loose cannon that is not to be messed with. Sure, this may be effective in the short term and you might make it through a couple of scruffs but this kind of recklessness is unsustainable and eventually you’ll make the wrong enemies.
“Irrational discounting” of your ‘entire capacity’ as opposed to just your ‘excess capacity’ may lead to short term gain but it will be at the expense of long term survival. I reckon that the reason there is so much irrational discounting at the moment is because a significant portion of small independent operators simply don’t have the brand, marketing capacity or budget to promote themselves on any other point except ‘price.’
Option 3 – Be prepared - AKA Rational Discounting
When you walk onto the yard be alert and always have something up your sleeve (both in the weapon and gift sense). Be willing to give something away to the people that matter but never give too much upfront or it will cost you dearly in the long run. Work out who the big dogs are and hand them a couple of smokes. In this way you will be incentivising them upfront as opposed to waiting for them to come and take them from you anyway later, when they come to kick your ass! While you will still need to get your hands dirty and earn some prison cred, you decide to be more calculated and deliberate in your decision of who to take on. Be patient and make sure you have strategically sized up your target to ensure you are not punching above your weight.
I like the notion of incentivising those who book early rather than rewarding those who book late with discounts. I also think it is important to only offer discounts as a means of generating sales that ‘would not have otherwise been secured,” or else you are simply cannibalising your revenue. I put it to you that “discounting” alone is not what is killing inward investment. I am starting to think that “discounting” is just the a small-time scapegoat who has taken the fall to protect its more culpable associates, such as “unutilised capacity,” or “poor marketing ROI.” What do you think?
Ok… so I should come clean at this point. I have never actually been to prison but I do watch a lot of movies. I have also never actually owned or operated a business in the backpacking industry during low season but I read a lot of Thumbrella.com.au.
So it is quite possible that my assumptions are an unfounded, ridiculous bunch of tripe! However what I most certainly am is a backpacker (I have even been living at various hostels over the past few weeks and am now making them my home). I am not at all ashamed to admit that I love a good discount! Why? Because Australia has to be the most beautiful place on earth, offering backpackers absolutely anything they could ever possibly want in a destination… and then some. But let’s face the fact that it’s bloody expensive! Even though it’s most certainly great value… ultimately, it is still expensive. At the end of the day I just want to maximise the amount of experiences I can have within the limits of my budget!
Shameful Plug:
Tonight is the official launch of a new website Brokepacker.com at The World Bar. It is a website that provides accommodation, activity, tour and transport providers in the Australian backpacking industry with an online marketing solution whereby they can list for free in exchange for providing a very ‘limited’ amount of their unutilised inventory to be sold to backpackers at a discounted rate, on a first come first serve basis. In other words we deal with “rational discounting.”
If that description isn’t vague enough… here is a film that in no way, shape or form will better explain what Brokepacker.com is actually about:
By Alice Terlikowski · June 8th, 2010 at 9:48 am
Comments
13 Jun 10
8:35 am
Nice summisation of our trade. The costs to travellers doing Australia is primarily due to government regulation from local rates and taxes right through every sphere to the Commonwealth. Running a backpacking establishment is super expensive when you have to satisfy every nit picking government representative that has to justify their position to stay in a job. Every demand made by legislation costs money to implement. That cost has to come from somewhere and it ends up on the cost of goods supplied. We by comparison have endured what we have perceived as high priced holidays to Europe for decades, it is only recently where our dollar has been strong against other currencies that you guy’s are experiencing what we have for years. On the subject of discounting there are plenty of businesses who are only here to slash potential profits for a quick gain and stuff it up for everybody, only to cease to exist when they realise there is no future in it.
14 Jun 10
5:56 pm
Oh yeah, taxes… legislation… the $AUD are all making things a bit pricey . Regarding ‘Discounting’ I agree Ken and reckon part of the problem might be because even though running a business on absurd margins is unsustainable and those operators that do will eventually ‘cease to exist,’ a. it may take a couple of low seasons to learn this the hard way b. just as quickly another new one will pop up in its place and will irrationally discount just the same. So the problem is quite cyclical… not to mention bloody annoying for others trying to compete in the space!
14 Jun 10
9:44 pm
I checked out Brokepacker.com and it appears that this is one of a new wave of discounting online which is set to worsen the problem. ‘Limited’ or not this is discounting. Advertising discounted prices online takes the cut-throat nature of travel retail into a further dimension.
Your comments that “I reckon that the reason there is so much irrational discounting at the moment is because a significant portion of small independent operators simply don’t have the brand, marketing capacity or budget to promote themselves on any other point except ‘price.’…. implies that Independents do all the discounting! The major brands have huge commissions which are used to secure sales by discounting either by product or packaged products. It is naive to think the big guys are holier than though and rely on brand to make a sale…..Its not about David vs Goliath its about one sales person on commission vs another sales person vs commission. Look at Bunnings & Officeworks ‘we beat any price’ policy – it’s not just the travel industry.
15 Jun 10
8:59 am
Hi Al Royale – some fair points. Brokepacker.com being a “new wave of discounting online” is a cool title we’d unashamedly wear… although the concept is only really ‘new wave’ to the backpacking industry. Sites like wotif.com, lastminute.com.au etc have been doing it for years. I can’t see how it is going to worsen the already out of control irrational discounting problem though. By the same token I don’t really see Brokepacker as being ”THE” solution or messiah to the overall discounting problem either (Damn… how cool would that be!). Its simply “a” solution for operators to list their product / services for free in exchange for providing a very limited amount of unutilized inventory to be sold at a discount. Once that limited amount sells out it can act as a booking engine or referral website where backpackers can still purchase the products but at the full rate.
I absolutely agree that it is not just independents that are discounting. Larger brands are doing it too… and why wouldn’t they? They are not sinning… It’s low season and they have to generate business too. Surely having a lot of distressed inventory and doing nothing about it, for the sake of “not discounting” is apathetic? It’s certainly futile if everyone else is doing it. What I was trying to get at is that if you are a larger brand you may be in a position to promote on other points besides “price,” such as quality and overall value. However you have to be able to convey that to the market place. For example in the past couple of months I have seen some really cool examples of larger brands in our industry running campaigns that do not necessarily discount the price of their product, but have incentivised backpackers with things like giveaways, BOGOFs, Packages, deals. I don’t reckon a really small independent operator could do the same.
15 Jun 10
5:36 pm
“Un-utilized inventory”=empty hostel beds, in my case, I suppose?
I like your little film, Lippy: very Boyszone. And your prison analogy was brilliantly funny.
If I was a young international traveller still, I`d be looking to save as much money ‘for goon” as I could, too. Ambitions aren`t that lofty at various stages of our lives, after all.
The problem is, your site is also most likely going to cause backpackers disappointment in a similar manner to many other discount tour offers and packages: i.e. failure to walk the walk after talking the talk.
You explain it by stating “Its simply “a” solution for operators to list their product / services for free in exchange for providing a very limited amount of unutilized inventory to be sold at a discount. Once that limited amount sells out it can act as a booking engine or referral website where backpackers can still purchase the products but at the full rate.”
In other words, once the allocated “unutilized inventory” (say, discounted beds) are sold, brokepacker.com isn`t going to deliver a discount to those logged on, at least with that particular product. Have I got that right?Hmmmmmmm…..
Similarly, back on discounting, I know from personal experience that backpackers, when sold a bed at a “special” price, subject to whatever ridiculous ‘confirmation policy/subject to availability’ clause written in the small print, are definitely NOT HAPPY, JAN!! when asked to pay an up-grade. That`s why we withdrew certain product from agent sale: too many disgruntled guests.
Other hostels continue to do just that. If a hostel knowingly sells 12 discounted beds via agents when it only actually has 8,what can they expect but trouble?
As I`ve posted on this forum in detail, hostels today simply cannot afford to discount: there is no room in the overnight tariff to lower prices and remain profitable on that income alone. Hoping to make up profitability on meals/alcohol/tour sales is risky at best, a path to insolvency at worst.
As Ken has written, Australia is “expensive” due to the exchange rate, more so than inflation over the last 6 years ( you wouldn`t find a decent hostel in the UK or continental Europe for much under 20 pounds per night, after all ) and we do offer very comfortable,modern accommodation facillities, in the main.
Our icons and experiences are also unique. We are safe and (over) regulated and for that, you`ll have to suffer as we did for years (right, Ken?) when spending our yoof and undervalued Ozzie $ over there in The Old Country and its neighbours.
Those who have made the decision to travel to Oz will normally have researched the potential costs of such a trip.
My argument is that it`s pointless to lower prices to entice them when they are already here and prepared to pay full whack.
But good luck with Brokepacker. I`m sure you`ll have plenty of takers.
16 Jun 10
11:19 am
Big up’s for putting yourself out there Mr Lippy, f*ck the haters, if you want it work, it will
16 Jun 10
11:42 am
Cheers for the insightful and solid feedback Scotty! Definitely some awesome points that will need to be considered. Re discounting over a limited quantity on Brokepacker, yes…you do have that right. Once all of the allocated discounts are sold, they are no longer available. The reason for this is because A. it would not be in the interests of operators to have ‘unlimited’ discounts (so ultimately not in Brokepacker’s interests). B. The incentives we offer are substantial and are therefore only viable over a limited quantity. Or else it would cannibalise margins (which I think was your main concern?)
I reckon that the model Brokepacker uses is a little bit different, and can add a lot of value to the majority of operators in the industry. We are trying to steer clear of being just a pointless means of enticing business from those who would have paid full price anyway. I reckon the best way to explain this is to assume that you wanted to list a Scotty’s Beach House deal on Brokepacker.com for the month of Feb (hey… we can all have dreams, ok!). We would NOT even attempt to sell your ‘Nth’ last unutilised bed at a discounted rate. What we would do is come up with a predefined amount of beds that you would undoubtedly be able to commit to during low season (Mission Beach =Feb?)… It can be as little as 1-2 beds a month and discount those. Once they are all sold out the Scotty’s page still remains for the rest of Feb where users still have the opportunity to book it at full price or can be linked directly to http://www.scottysbeachhouse.com.au where they can book it – commission free. If you take the assumption that the backpackers that get those deals may not have stayed at Scotty’s anyway then, your overall cost of coming on board is (almost) limited to the number of sheets you have clean for those 2 beds during Feb. Besides the extra revenue generated, the upside benefits include increased brand exposure as we (will) utilise various online and offline channels to promote our deals, ability to on-sell after sales services, backpackers paying full rate when extending their trips or travelling with partners etc.
So will having only a limited amount of deals lead to disappointment? Only if we don’t walk the walk after we talk the talk… Which is not on the agenda at all. If a discount is committed it can be booked, and we will ensure that it would be honoured. I guess it will be a little disappointing if someone misses out on a deal, but that is the nature of the game… the early bird gets the worm, and we would rather reward those that get in early!
Hahahaa Cheers Mike… You are full of belief and inspiration this morning… Probably coz the All-Whites snatched a late draw (victory?) last night!
16 Jun 10
11:45 am
@Scotty
“As I`ve posted on this forum in detail, hostels today simply cannot afford to discount: there is no room in the overnight tariff to lower prices and remain profitable on that income alone. Hoping to make up profitability on meals/alcohol/tour sales is risky at best, a path to insolvency at worst.”
Sorry mate but I completely disagree. I’ve spoken to a hostel operator in the past, who is a very savvy businessman and now owns a number of hotels and bars, and his biggest money earner on the hostel were the meals/beer/extras. I think the word “gold mine” was used to describe just how much money you can make out of the extras.
So I’m not sure what planet you live on to make a statement like that!
16 Jun 10
12:08 pm
Thanks Mike, very constructive.
@ Ian, very much on earth, with my head out of the sand.
I am very involved in this industry and I know that no-one I`ve spoken to or heard from lately is doing back flips over how much money they`re making: from backpacker publications to sailing boats and backpacker bars, business is well down and profitability is describing a downward arc, too.
.
Lippy, thanks for your in-depth response. As with any new internet booking thingy, I`m a bit suss about it`s costs and potential, so I appreciate your efforts to clue me up.
I`ll run it past a few of my younger guests and gauge their responses and then I`ll get back to you.
16 Jun 10
12:30 pm
@scotty – no worries… i think. @ian, everyone else on this thread has managed a link back to where they come from. Often a link back provides credibility to the commenter’s opinion, would love for you to do the same considering the derisiveness of your views in reply to @scotty
16 Jun 10
12:52 pm
@Scotty
If you have after-work beers at the pub then you’re probably already a supporter of the limited discounting model, more commonly known as “happy hour”. The discount attracts punters who then continue to stick around and pay for full price drinks, thus making the bar a profit.
Let’s not mince ideas here – “limited discounting” is a bit of a misleading term to debate because it makes people think about economics when in fact it’s about marketing.
It’s easy to see that people are apprehensive about this idea from an economics point of view, but this is not about economics – this is about marketing. Yes – discounting as a pricing model will be bad for the industry. But discounting as a marketing model is a fair game and a clever one at that!
16 Jun 10
12:54 pm
@Mike Watkins – oops I thought I’d put my website in – in case it doesn’t appear I’m the founder of Travellr.com.
16 Jun 10
1:24 pm
“My argument is that it`s pointless to lower prices to entice them when they are already here and prepared to pay full whack.”
Totally agree.
Tho, as mentioned above, if all a guesthouse need do is allot a bed or three a month, then it seems like a bit of a no brainer from a marketing perspective (unless you’re running at 100% occupancy year-round).
16 Jun 10
1:29 pm
hey guys, thought I’d jump in, didn’t want everyone else to have all the fun!
I don’t think just because something hasn’t been done one way in the past doesn’t mean it shouldn’t be tried now. The way I see it, brokepacker.com is another distribution channel for hostels, full stop. The success of the site on it’s own depends on it’s marketing with a direct pay off to the property, which as Kevin mentioned, is not a new concept.
This is not dissimilar to affiliate marketing for OTA’s or even the brick and mortar agents selling travel product. The small guys cannot afford to market to everyone and therefore take a slight hit on the first discounts with the pay-off of increased reach/market penetration. As Ian mentioned, the ancillary sales will pay off as well.
Unless a property has some kind of rate parity guarantee, I can’t see the harm, really. If past trends/yield management show that the rooms would have been empty anyway, hooking in to some free marketing and exposure could save the bottom line, not harm it.
16 Jun 10
2:46 pm
PS @Scotty – love your website! scottysbeachhouse.com.au is one of the best hostel websites I’ve seen – you guys don’t need to discount for me to want to come and stay!
16 Jun 10
2:50 pm
@Ian Ditto re Scottys beach house site. I think the hot girls in Bikinis might have been a factor as well
16 Jun 10
3:54 pm
Right, I`m back.
The opinion of a random selection of backpackers (from the US,UK and Europe) is that such a site will probably generate a fair bit of interest and that they wouldn`t necessarily be put off if they missed the advertised specials, which was my main concern.
Your point, Lippy: you ARE walking the walk.
Only one of my sample group wasn`t sure that such a model would work, but most thought they`d check it out. Kudos to you.
I`m not sure how you make money out of such a site, Lippy, or whether you`re just feeling philanthropic this year, but maybe I`ll call you one day.
@ Graham and Ian. Thanks for the wrap. Recent research revealed that such lithe forms turn off 70 % of the decision makers (women), but good to see it works with the other 30%.
16 Jun 10
4:17 pm
Christ !!!! Judging by the entries today everybody is having a “slow day at the office” Scotty haven’t you got wages to make up? I’ve done mine so now it’s my turn. My experience dictates there is no such thing as a “broke backpacker” these guys have every rescource available to them to scam a “free something” and this new site is another form of freeby for them to exploit. I still maintain Australia is a bloody cheap place to visit compared to Europe and you actually get treated as a human being as well. Give Eastern Europe a go for a while and you soon feel like you are an inconvenience to their day and get charged 3-4 times the price of the same dining experience in Australia. Just take a 10% surcharge to sit and drink your coffee, then pay a further fee to go and relieve yourself in the toilet (Oh if only I could charge for that) As for the “happy hour drinks principle to lure trade, the attitude of those lured in is “I’ll take everything that is free then move onto the next discounted deal” These guy’s are professionals. It is alive and very well in Airlie Beach the “free pizza’s being delivered to the aftersail party, with a free jug of beer” as soon as they are asked to put their hand in the pocket they are out o there to move to the next discounted option. “rivers of gold” I don’t think so. The bottom line is as long as there are those that are prepared to perpetuate discounting there will be those who will exploit it to it’s max.
16 Jun 10
4:45 pm
Fair comments, Ken.
However, it is in backpackers nature to take what`s on offer and make the most of it.
” If you don`t ask, you don`t get” is their mantra: it`s a matter of how often you say “yes”, isn`t it?
Always has been, always will be.
Point taken, too: I`m off to be rude to some guests!
Cheers.
16 Jun 10
5:39 pm
Scotty, It’s only in their nature because people give it to them, try and get a discount for any activity you would like to do in Queenstown NZ, there is no such thing as discounted tours in that town. They (the tour operators and booking agents) have obviously agreed (and rightly so) that the punter is there and has the ready cash to pay for what they want to do, and they pay the going rate. The operators get their prices and there is no haggling whatsoever. Sounds good to me !!
16 Jun 10
7:22 pm
Despite my unashamed stance on discounting as a RANDOM event I have to chime in here.
Its one thing for WOTIF and HotelClub and http://www.hotels.com (an unashamed plug as one very close to me is the Brand Manager) to discount a $150 or $100 rooms. But this Brokepacker stuff is a bad, bad move for an industry such as ours. Or so I think.
Prices are already pushed downwards to the point of hairs-breadth margins by the nature of our market. Anything that grants the traveller license to force them down further leaves nothing but crumbs on the plate for the owner. Distressed inventory? Bah humbug! Its a term reserved for higher yielding markets with very sophisticated systems and highly paid revenue managers.
All our inventory is bloody distressed and looking for someone to love it. But not at just any price. Backpackers get looked after by safe and highly regulated businesses in this country and that compliance is damned expensive and takes expertise and passion. If concepts like Brokepacker grow you can be sure someone else will try it and on it goes until Brokepacker is competing with Pokepacker and Jokepacker and then whats left is Nopacker. There’s few barriers to entry in this business model except for one very big one: suppliers like us standing fast and not watching investment and years of hard work going down the discounting toilet.
16 Jun 10
9:02 pm
What Greg said….. But I do love the brand and your energy lippy and the industry needs innovation and new blood so good luck….I’ll certainly be watching so see how this goes and who has unused inventory lying around.
16 Jun 10
10:25 pm
Bloody Hell!! This is the last time I build a business model around advice I get on this forum…
“Discounting is an essential tool in this current market. Discounts are alive and well and attracting attention and giving both us and the customer a benefit. There’s nothing perceived about it. A real benefit exists when they sit down and buckle up and they’ve paid for it. Our seats have an limited shelf-life. They’re perishable fruit. Once the plane takes off or the bus leaves you can’t fill that seat. No amount of value-adding – and no matter what, value-adding costs money cos someone has to add it – will sell that seat.”
http://thumbrella.com.au/hows-.....#more-7576
For heavens sake I was going around using this as my elevator pitch for brokepacker.com!!… I feel like such a Jokepacker
17 Jun 10
10:44 am
Lippy, get over it and get on with it. We can’t see into the future. This is just an opinion site occupied by people who care and with strong opinions. If you want advice that’s meaningful then go out and buy it. just don’t expect a discount…Ha!
We’ve been going for nearly 16 years and change and adjust and twist and turn every week and just when we think we’ve got it right we hit the GFC. Get back in the elevator and push the up button.
17 Jun 10
12:54 pm
@Greg Cole Hahaha… fair play! Couldn’t agree more about the continual need for change and adjustment to get things right.
I guess we also need to be fluid in our approach to trying to demonstrate to the market that we are not out to suck the blood out of industry investment! …Just the opposite. What we are trying to do is provide a very targeted marketing solution for operators, that ultimately focuses on increasing the ROI on their marketing spend. It’s not so much about being the ‘cheapest’ solution (although it my be welcomed during the BGFC)… we care about ‘adding the most value.’ We ain’t gonna be around for very long if we can’t justify our existence to our clients. So I guess it’s going to take a bit of time to get some traction, but hopefully we will be able to prove this by walking the walk!
17 Jun 10
1:00 pm
Free beds and $5 beds!!! WTF!!!…. as an operator, we rely on other operators not to behave in a manner that jeapordises our industry… funnily enough i get emails every week with “runners” from those very same hostels… karma?
17 Jun 10
2:13 pm
@Greg: Que? Bit of a change of tune, isn`t it?
@Lippy: At least you`ll be the “Peter Pans” of the concept, with all that entails.
@Hell`s.I know, I think it`s a strange concept, but I ran it past a few guests and they liken it (rightly or wrongly) to airlines doing the same thing.
I debated with Greg Cole about this on the thread Lippy refers to above, as I think it`s a case of comparing apples to oranges, but these were pretty savvy youngsters and they reckon even giving away 2 free beds a month results in heaps of thru traffic.
I will put myself out to pasture in the near future, coz the whole concept of the running of the industry has made a paradigm shift over the last 22 years, but, luckily, the backpackers coming thru are still the lovely, enthusiastic folks they`ve always been and that`s what keeps me going .
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