The airline industry has been charging customers different prices for different seats on the same flight for years. Mindbody (NASDAQ:MB), a cloud-based technology company that helps wellness service providers, has implemented this "dynamic pricing" ability to help its customers fill slots and increase profits. And millennials are the target.

Dynamic pricing means charging different prices for the same service based on demand, time of purchase, or other factors. Airlines do this to achieve a delicate balance of filling as many seats as possible and maximizing profits. According to Mindbody, there are four key factors that make dynamic pricing a good strategy for airlines...and for its wellness customers.

  • Fixed capacity: There's only a certain number of seats on the plane or spots in a yoga class.
  • Perishable inventory: Once the flight takes off -- or the class starts -- you can't sell that empty seat or spot.
  • Low marginal cost: Running the flight -- or fitness class -- at 100% full is only slightly more costly than running it at 50% or 25% full.
  • Demand fluctuations: Some days and times are more popular than others.

Based on Mindbody's data, its customers -- such as fitness studios and spas -- see less than 50% of their class/appointment capacity sold every day. In addition, clients utilizing wellness services have a high rate of last-minute bookings and more than half cancel their memberships within in a year. All of these factors add up to dynamic pricing being a great way for Mindbody to help its wellness facility customers be more profitable.

Seven people sitting on a bench, all using a different electronic device.

Tech-savvy millennials are the target audience for dynamic pricing at Mindbody. Image source: Getty Images.

How does it work?

Mindbody's dynamic pricing program opens up unsold appointment and class spots to non-members via the Mindbody app. Business owners can set up rules like having its members able to reserve 75% of the class capacity, or members reserving a certain number of days in advance, or even more specific by class or day. Once the rules are set up, the Mindbody customer can turn on the functionality to make its classes available for the public.

People looking for a fitness class or spa appointment at the last minute can use the Mindbody app to see available "inventory" in their local area. The fitness-class seeker can compare classes and clubs, then book and pay for the class they want on the app.

Four screenshots of the Mindbody app on four different iPhones showing the dynamic pricing app that can discover, book, pay, and review a last minute class.

Mindbody's app makes it easy for people to find and book classes at the last minute. Image source: Mindbody.

Pricing is set dynamically by an algorithm that looks at a number of data points, including historical transactions, class and instructor popularity, traffic, and weather. Data from these transactions are stored for analysis to enable Mindbody and its subscribers to continue to improve the process.

Mindbody is confident this strategy will work for its customers just like the airlines based on macro trends and survey data from health club customers.

Keys to success

Mindbody sees millennials as a target consumers for this strategy. There are 83 million millennials in the U.S. They are generally considered tech-savvy and with them ranging in age from about 17 to 35, some of them are starting to reach their peak earning years. Doug Hecht, senior vice president of consumer products at Mindbody, explained during the analyst day why the company is focused on this customer.

This generation has created a personalized on-demand economy. And they're more comfortable with pay-as-you-go than pay for the right to go. So they also are more aware of their health and wellness than any previous generation. They eat better, they workout more and they track their fitness more than any generation. They also seek value rather than price, spending more on experiences.

Mindbody encourages its customers to offer their unsold classes at a discount to bring in new clients. Based on survey data, Mindbody finds that when people are selecting a fitness business to join, price is the No. 1 consideration. After a client has visited a location multiple times, price drops to third in the list of reasons why they come back.

Dynamic pricing benefits Mindbody and its customers. When a customer gets more revenue for each class it runs, it becomes more profitable. Mindbody collects fees from these incremental transactions and subscription revenue for the dynamic pricing service. This functionality has only been available since September, so it will be awhile before Mindbody will see an impact in its earnings, but it's certainly an exciting development for investors to watch.

Brian Withers owns shares of Mindbody. The Motley Fool recommends Mindbody. The Motley Fool has a disclosure policy.