FINALMENTE Y A MANERA DE REFLEXIONES

At Cornell I got to know a student, David Cobb, who encouraged me to meet his brother, Michael. A local to the area and an avid skier, Michael was determined to make a career in the ski business and had landed a job as marketing director at Greek Peak, a family-owned operation near Ithaca. At the time, the resort was in serious financial difficulties. A few winters with less than the usual amount of snow and a tough economy had created a situation where the company had to borrow heavily to get through the off-season, and this was at a time when interest rates were high, even for good credit risks, which Greek Peak was not. The resort simply had to increase revenues and decrease debt, or it would go bankrupt. Michael needed help and suggested a barter exchange. He would give me and my kids lift tickets and set the kids up with ski equipment. In return, I would try to help him get the business back in the black.

It quickly became apparent that Greek Peak would have to increase prices if they were going to turn a profit. But any increase large enough to generate a profit would put their ticket prices nearly on par with well-known ski resorts in Vermont or New Hampshire. Operational costs per skier were not much different than they were at those bigger resorts, but Greek Peak had only five chair lifts and less skiable terrain. How could we justify charging a similar price to the larger resorts, and do so without significantly reducing the number of skier visits? And how could we retain the price-sensitive local market, including students at Cornell and other nearby colleges?

In mental accounting terms, the lift ticket prices of the famous Vermont ski resorts would be a salient reference point for Greek Peak customers, and they would expect to pay significantly less since the product was distinctly inferior. What Greek Peak had going for it was proximity. It was the nicest place to ski in central New York, and getting to Vermont was a five-hour drive. Greek Peak was also the closest option for people living due south, including in Scranton, Philadelphia, and even Washington DC. Busloads of skiers would arrive from these cities every weekend.

I urged Michael to rethink Greek Peak’s revenue model, making use of principles from behavioral economics. The first problem to solve was how to raise the ticket price without losing too many customers. We adopted a plan of gradually raising the price over a period of years, thus avoiding a sudden jump that might create backlash. To partially justify the higher prices we tried to improve the skier experience, to make the purchase seem less of a rip-off.* I remember one early idea I had along these lines. There was a short racecourse on the side of one of the trails, where a skier could run through a series of slalom gates and receive an official time that was broadcast over loudspeakers. Younger skiers enjoyed the competitive aspect of this, and the gates were close enough together that speeds were safe. The price charged to use the racecourse was one dollar. A dollar was not a lot to pay, but the fee was a damn nuisance. Getting access to your money while on a ski hill is a pain. You have to take off your thick, clumsy gloves and dig down to whichever layer you are keeping your money in. Then, in this case, you had to feed a one- dollar bill into a vending machine–style slot. Given how well those machines work in the best of circumstances, you can imagine the failure rate once exposed to the elements.

I asked Michael and the owner, Al, how much money they were making from the racecourse. It was a small amount of money, perhaps a few thousand dollars a year. Why not make this free, I asked? We can improve the skier experience at a trivial cost. This was a no-brainer. And it got Michael and Al thinking about other things they could do to improve the quality and, importantly, the perceived value of their product.

Another example involved ski instructors. The instructors’ main business was teaching new skiers, especially groups of schoolkids—obviously an important way to grow the customer base. But instructors had a lot of downtime. Someone got the clever idea to set up a free ski clinic on the mountain. A skier would wait at a designated spot on the trail, and then ski though a few gates with the action captured on video. An instructor stationed at the bottom would show the skier a replay of the video and offer a few pointers. “Free lessons!”

Even if these enhancements were making higher lift ticket prices more palatable, we still had to worry about the price-sensitive local market. Here we had a nice existing model to work from. The resort offered university students a package of six weekday lift tickets at a heavily discounted price if purchased by October 15. These were popular and provided a good source of early revenue. I suspect the students also liked the fact that the deal was called a six-pack. Even subtle beer references appeal to the college crowd.

We wondered whether we could offer something like the six-pack to the local non-student market as well. The goal was to offer the locals a deal that would not be available to the out-of-town skiers who drove in once or twice a year. To these skiers, the price of the lift ticket was only a small portion of the trip’s expense, which included transportation, food, and lodging. A few dollars more for the lift ticket was unlikely to sway the decision about whether to make the trip, especially given the lack of nearby competition. We ended up with a solution called the ten-pack. It included five weekend tickets and five weekday tickets and was sold at 40% off the retail price when purchased by October 15.

Ten-packs turned out to be wildly popular with the locals. There are a few behavioral factors that explain their popularity. The first is obvious: 40% off sounds like a great deal. Lots of transaction utility. Second, the advance purchase decoupled the purchase decision from the decision to go skiing. As with wine mental accounting, the initial purchase could be viewed as an “investment” that saves money, making a spur-of-the- moment decision to go skiing on a sunny Friday after a recent snowfall costless to implement. That the customer may have gone out for a nice dinner the previous weekend would not put the recreation mental account in the red; the skiing was “free.” And from the resort’s point of view, it was better than free—it was a sunk cost.† As the season progressed, skiers would be eager to use some of their tickets to avoid wasting the money invested in the ten-pack, and they might bring along a friend who would pay full price. (The tickets were not transferrable.)

Ten-packs also were popular because skiing is one of those activities that people resolve to do more of next year. “Last year I only got out three times, which is ridiculous given that Greek Peak is so nearby. This year, I am going to take off a few days from work and go when it isn’t crowded.” As with paying for a gym membership to encourage more exercise, the skiers’ planners liked the idea of committing to ski more often this winter. Buying the ten-pack was a good way to do that and save money at the same time.

After a few years, six-packs, ten-packs, and season passes accounted for a substantial portion of the resort’s revenue, and this early money eliminated the need to borrow to stay afloat until the start of the season in December. Selling all these tickets in advance also hedged against a warm winter without much snow. While ski resorts can make snow, it has to be cold enough for the machines to work. Also—and this drives ski

resort owners crazy—even if it has been cold, if there is no snow on the ground in town, people are less likely to think about going skiing, regardless of conditions at the resort.

After three years of selling the ten-packs, Michael did some analysis and called me with the results. Recall that ten-packs were sold at just 60% of the regular season retail price. “Guess what percentage of the tickets is being redeemed?” Michael asked. “Sixty percent!” The resort was selling the tickets at 60% of the retail price but only 60% of them were being redeemed. In essence they were selling the tickets at full price and getting the money several months earlier: a huge win.

This outcome did not seem to upset the clientele, most of whom repurchased ten-packs the following year. Even those who did not use many of their tickets would blame themselves, not the resort. Of course, there were customers that would end up with nearly all their tickets unused at the end of the season. Some would ask, hopefully, whether they could use the tickets the following season. They were politely told no, the tickets were explicitly sold as being good only this year. But Al designed a special offer for these customers. They were told that if they bought a ten-pack again this year, their unused tickets from the previous year would remain valid. Of course a customer who only went skiing two or three times last year is unlikely to go more than ten times this year, but the offer sounded good. Although I don’t think many people were foolish enough to buy another ten- pack simply for this reason, they did seem to appreciate that the resort was making an effort to be “fair,” something we will soon see can be important to keeping customers happy.

A final pricing challenge for Greek Peak was to figure out what to do early in the season, when, shortly after the first snowfall, the resort would open but often with only one lift running. Avid skiers who had been waiting since the previous March would show up for the first runs of a new season. What price should they be charged? Al’s policy had been to look out his window at the mountain and the weather, and then tell the ticket sellers the price, often half off the regular price. Of course, most of the skiers who arrived had no idea what the price would be; they only knew the retail price. Only true diehards might have been able to unravel Al’s pricing strategy for the early season. I call this a “secret sale.” A customer comes up to the cash register prepared to pay retail and the seller says, “Oh, that item is on sale for 50% off.” It might generate goodwill, but it is not a brilliant pricing strategy, because the customer was ready to pay the full price. Reducing the price only makes sense if it increases current sales or perhaps future sales by building customer loyalty.

Michael and I came up with a new strategy. Early in the season, or for that matter, any time only part of the mountain was open for skiing, pricing followed a set formula. Skiers would pay full price to ski that day, but would get a coupon good for up to 50% off their next visit, depending on how many chair lifts were operating. Since customers were expecting to pay full price, this offer seemed generous, and the coupon might induce them to come back, and perhaps buy lunch and a beer as well.

Michael once told me a story that captures how popular these coupons were. A guy shows up for his first ski outing of the year and has picked up a brand new ten-pack. He is standing in line to exchange one of these coupons for a lift ticket and overhears the ticket seller explain to the customer in front of him that she will get a 50%-off coupon that she can use toward her next purchase. This sounds so good to him that he puts the ten-pack back in his pocket and shells out for a full-priced ticket. I have always wanted to know whether he used that half-off coupon before he finished his ten-pack. We will never know.

We do know that building a solid revenue base before the season started accomplished the goal of getting the resort out of debt and reducing its dependence on the amount of snowfall during the season. Both Michael‡ and I moved on, but I can report that Greek Peak is still in business.

My day at GM

For years, American automobile manufacturers had a seasonal sales problem. New car models would be introduced in the fall of each year, and in anticipation of the new models, consumers became reluctant to buy “last year’s” model. Manufacturers did not seem to anticipate this pattern and would reliably have a substantial inventory of unsold cars on dealers’ lots in August, taking up the space needed to show off new models. Inevitably, car companies offered sales promotions to move the excess inventory.

One innovation was the rebate, introduced by Chrysler in 1975, and quickly followed by Ford and GM. The car companies would announce a temporary sale whereby each buyer of a car would receive some cash back, usually a few hundred dollars. A rebate seems to be just another name for a temporary sale, but they seemed to be more popular than an equivalent reduction in price, as one might expect based on mental accounting. Suppose the list price of the car was $14,800. Reducing the price to $14,500 did not seem like a big deal, not a just-noticeable difference. But by calling the price reduction a rebate, the consumer was encouraged to think about the $300 separately, which would intensify its importance. This bit of mental accounting was costly, at least in New York State where I was living, because the consumer had to pay sales tax on the rebate. Using the numbers in the example above, the consumer would pay sales tax on the full purchase price of $14,800 and would then get a check back from the manufacturer for $300, not $300 plus the 8% sales tax. But more to the point, rebates were starting to lose some of their luster, and cars were again piling up in dealers’ lots.

Then someone at GM headquarters got an idea. Ford and Chrysler had been trying discounted auto loans as an alternative or supplement to rebates. What if GM tried offering a highly discounted rate as a sales inducement? At a time when the going interest rate for a car loan was 10% or more, General Motors offered a loan at just 2.9%. Consumers could choose either a rebate or the discounted loan. The loan offer had an unprecedented effect on sales. There were news reports of consumers sprawled on the hoods of cars at a dealership claiming a particular car before anyone else could buy it.

Around this time, I noticed a small story in the Wall Street Journal. A reporter had crunched the numbers and discovered that the economic value of the low-interest-rate loan was less than the value of the rebate. In other words, if consumers used the rebate to increase the down payment they made on the car, thus reducing the amount they had to borrow (though at a higher rate), they would save money. Taking the loan deal was dumb! But it was selling a lot of cars. Interesting.

At this time, one of my Cornell colleagues, Jay Russo, was consulting for GM, so I went to talk to him. I told Jay about this puzzle and said that I might have a simple psychological explanation. The rebate was a small percentage of the price of the car, but the car loan being offered was less than a third of the usual rate. That sounds like a much better deal. And few people besides accountants and Wall Street Journal reporters would bother to do the math, especially since this was in an era that predated spreadsheets and home computers.

Jay asked me to write up a brief note about my observation that he could share with people at GM. I did, and to my surprise about a week later I got a call from General Motors headquarters. My note had found its way to someone in the marketing department, and he wanted to talk to me about it in person. I said sure, come on by.

This gentleman flew from Detroit to Syracuse and drove the hour and a quarter down to Ithaca. We chatted about my idea for about an hour, at most. He left, spent a few hours strolling the campus, and went back to Detroit. I went to Jay to find out what this was about and he put it bluntly. “He was here to count your heads.” What? “Yeah, he wanted to see if you had two heads, didn’t bathe, or were in some other way unsafe to bring to see his bosses. He will report back to HQ.”

Apparently I passed the test. A few days later I got a call asking whether I would be willing to come to Detroit. This had the potential to be my first paid consulting gig, I could use the money, so I quickly agreed. Besides, I was damn curious.

If you have seen Michael Moore’s documentary film Roger and Me, you have seen my destination: the GM headquarters building. I found it very strange. It was huge, and new cars were on display everywhere inside, in the hallways and lobbies. In my first meeting, a vice president of marketing gave me my schedule for the day. I had a series of half-hour meetings with different people in the marketing department. Many of them also seemed to be vice presidents. In that first meeting I asked who was in charge of evaluating the low-interest-rate promotion, which reduced the

also seemed to be vice presidents. In that first meeting I asked who was in charge of evaluating the low-interest-rate promotion, which reduced the price of the cars sold by hundreds of millions of dollars. My host was not certain, but assured me it had to be one of the people I would be meeting. By the end of the day I would know.

During the day several people described how the interest rate of 2.9% had been determined. Apparently Roger Smith, the CEO, had called a meeting to determine how they were going to deal with surplus inventory that year and someone had suggested a promotion based on lower interest rates. Everyone agreed this was a great idea. But what rate should they use? One manager suggested 4.9%. Another said 3.9%. After