What is Opaque Pricing?
Opaque pricing or a non-transparent price refers to the pricing method for goods and services whose brand and/or detailed quality information is hidden during the sale process. It is targeted to consumers who make purchases primarily based on price and not on brand reputation or detailed product/service quality information.
- Opaque pricing is the pricing of goods and services whose brand and/or detailed quality information is hidden during the sale process.
- Opaque pricing allows the supplier to (1) protect their stated pricing position, (2) generate guaranteed revenue, and (3) target price-conscious consumers.
- Goods/services in an opaque pricing structure are generally heavily discounted to compensate for the lack of information asymmetry between the buyer and seller.
How Opaque Pricing Works
Opaque pricing is most commonly seen in the hotel/travel industry, where travel inventory (hotel rooms, airline tickets, etc.) is sold at discounted prices while hiding the supplier’s identity until the completion of the purchase. Opaque pricing is a useful pricing technique for travel companies looking to dispose of unsold inventory without resorting to clearance sales or cannibalizing their existing pricing position.
Prominent travel websites that use opaque pricing include hotwire.com and priceline.com. On the websites, consumers choose a general location, date, and hotel star rating. The websites would then return numerous results. Of the results, generally, the most heavily discounted options keep their hotel name hidden until the consumer books it.
According to a paper published in March 2013, the average opaque room costs 40% less than equivalent regular offers. When consumers make a purchase through an opaque pricing structure, refunds, changes, or cancellations are not offered.
Benefits for the Supplier
Opaque pricing benefits the supplier by:
- Protecting their stated pricing position (i.e., not publicly disclosing that their hotel rooms are discounted, which can damage the brand reputation or cannibalize existing full-price sales);
- Guaranteeing revenue (i.e., the consumer cannot refund the product/service); and
- Allowing the supplier to reach price-conscious consumers that are outside of their direct target markets.
Benefits for the Purchaser
Goods and services that are purchased through an opaque pricing structure are generally heavily discounted. It is done to compensate for the lack of information symmetry (i.e., the buyer does not know the brand or detailed quality information) between the buyer and seller. Price-conscious consumers benefit the most from opaque pricing, as they are most concerned about the price rather than the quality/brand.
For example, consider an individual looking to book a hotel stay in Vancouver for three days. The individual is not concerned with the exact hotel name or its prestige but wants a good deal. An opaque pricing structure would allow the individual to benefit from a discounted hotel stay purchase rather than purchasing a stay at a hotel whose name and amenities are outlined, which would generally sell at a higher price point.
Information: Hotel A is positioned as a luxury-style hotel and is currently selling daily hotel stays for $200/night. Due to the coronavirus pandemic, demand for hotel rooms is significantly lower.
Question: How can Hotel A retain its current stated pricing position of $200 (to maintain its brand image and appeal to non-price-conscious consumers) while also opening up to price-conscious consumers?
Answer: Hotel A can work with an external travel company to offer an opaque pricing structure at a 40% discount to its stated pricing position of $200/night. In such an arrangement, Hotel A is able to publicly protect its stated pricing position while also targeting price-conscious consumers through the external travel company.
CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: