Tech moves away from the all-you-can-eat model

By Steven Pearlstein
Wednesday, June 9, 2010

The night before my son's college graduation last month, we made plans to celebrate at one of his favorite restaurants, Fogo de Chão, one of those Brazilian steakhouses where they come around with more than a dozen types of grilled meat and you take as many servings as you want. There is also a fabulous salad bar, which resembles an Italian antipasto.

Eli was a bit conflicted about the choice of restaurant. For him, the all-you-can-eat pricing seemed like a great deal after he's put down his third helping of succulent rib-eye and special sirloin. But he figured (correctly, as it turned out) that his mother and sister would never eat enough meat to justify the hefty fixed price the restaurant charges for each diner.

Although he didn't put it quite this way, Eli would have preferred that Fogo de Chão had offered tiered pricing -- one price for all-you-can-eat customers such as himself, and a lower one for those with more modest appetites. That way he would have felt as if we, as a family, were getting better value.

Fogo de Chão isn't likely to change its pricing anytime soon, however. Given the economics of the restaurant business, it turns out that the difference in the total cost of serving my son and my wife isn't really all that great. But more significantly, the restaurant recognizes that part of its special attraction is offering "guilt-free dining" -- knowing that the price will be the same no matter what, or how much, you eat. The good news for Fogo de Chão is that there are enough people out there who so value that pleasure that they are willing to spend more than if they had ordered

a la carte.

Lots of other businesses use one-price strategies. Many health insurers charge the same for family plans no matter how many kids are involved, while delivery services charge the same for a package no matter how far it travels. And in recent years, it has turned into the dominant pricing strategy in much of the telecommunications business, where unlimited phone calls and texting and Internet access have become the norm.

That wasn't always the case. Some of us remember when long-distance phone calls were reserved for nights and weekends, when businesses were closed, circuits were underutilized and rates were lower. And as recently as the mid-1990s, Internet access providers charged on the basis of how much time you spent online. All that changed during the tech bubble of the 1990s, when so much money was invested to create so much excess network capacity that the incremental cost of providing a customer with another call, or another minute of Web access, came to be approximately zero. All-you-can-eat pricing made perfect sense for companies drowning in unused bandwidth, and with it, supply created its own demand.

Now, thanks to the ingenuity of the tech and telecom industries, there are so many people demanding so many new services that networks are straining to keep up -- and the costs of adding capacity are escalating rapidly. That's why Comcast and other cable operators are demanding that they be allowed the flexibility to manage their networks to give lower priority to services that hog large amounts of bandwidth -- or, at a minimum, to charge higher rates for customers who use such services. And it is why AT&T announced last week that it was moving away from its unlimited pricing for Internet and data service on its wireless networks, in favor of the kind of "tiered" pricing that Eli might appreciate.

Not surprisingly, those who have relied on cheap and plentiful network capacity to dramatically expand their businesses -- everyone from Google to iPhone application developers -- are concerned that charging people based on what they consume will slow the growth in Internet usage. It's true, of course, in the same way that charging people based on how much meat they consume runs the risk of slowing growth in Brazilian steak restaurants.

As a general rule, the most sustainable pricing strategies are ones that avoid overcharging one group of customers to make it possible to offer bargain prices to others. The danger of such cross-subsidies is that a competitor could come along and pick off the overcharged, and highly profitable, customers by offering a better value. At the same time, you don't want to push that logic too far by charging every customer a different price.

Consider the airlines. In a misguided effort to keep posted fares as low as possible in order to fill every last seat on the plane, airlines have embarked on a what is now a farcical strategy to unbundle everything they do, charging customers extra for picking up the telephone, checking a bag, or providing a pillow, a blanket or extra legroom. It is only a matter of time before one of the airlines begins charging for seats in the waiting area.

But the airlines have long since gone past the point where they are asking customers to cover the marginal cost of extra services -- these fees allow the airlines to raise fares without actually doing so. The major carriers have once again set themselves up to get their clocks cleaned, this time by the first airline with the brains and courage to offer a decent full-service package.

In every business, there's usually is a happy medium between the extremes of a la carte and all-you-can-eat pricing. While that sweet spot constantly shifts in response to changing costs, technology and competition, my guess is that it most often involves some form of tiered pricing that offers a choice from among a handful of credible value propositions. In a truly competitive market, a pricing regime that is constantly trying to force customers to consume more or less than they really want isn't likely to win.

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