What is Perishability?
Perishability is a characteristic of products and services that do not allow for the product or service to be stored for sale at a future date.
To understand perishability, think of foods which are perishable. Foods that have a short shelf life are said to be “perishable” since they will decay within a short amount of time.
Any products or services which cannot be stored are said to be “perishable.”
Perishability is important for businesses because it determines sale prices, inventory levels, and marketing strategies for a given product.
Businesses use custom tactics, such as dynamic pricing, to mitigate adverse impacts to their business from perishability of their services.
What is Perishability?
Perishability is most commonly in reference to a product, but can also be in reference to services.
Fruits and vegetables are considered perishable because they have a short shelf life and cannot be sold after a certain period.
The time frame after they become ripe and before they rot is considered the optimal window to market and sell a fruit.
The entire product supply chain is designed to take advantage of this period.
For example, wholesalers determine inventory levels and sale prices based on the time to perish for fruits and vegetables.
The same principles can be applied to perishability in services.
While hotel rooms and airline bookings do not rot with time, their utility can “perish” or become worthless, if it is not used in a certain timeframe.
If rooms remain unoccupied for long stretches of time, then the hotel may run out of money to maintain them.
Similarly, empty seats can spell doom for carriers in the airline industry.
As was the case with products, perishability influences prices, inventory levels, and marketing strategies for products in services.
For example, hotels and airlines offer deep discounts when demand for their product is running low.
Sites like TripAdvisor and Expedia offer cheap rates for last-minute booking of rooms and airline tickets to make sure that goods from their inventory are sold, instead of being marked up as losses.
Conversely, during times of high demand and low supply, prices will run high and service providers may form alliances between themselves to increase supply.
Operations at small businesses are also influenced by their perishability.
Plumbers schedule their appointments several weeks in advance and charge cancellation fees to recoup some of their losses.
How Does Perishability Influence Services?
The main difference between perishability of products and services is that the latter cannot be manufactured at will to meet demand. In other words, companies cannot plan for additional services to meet demand.
Product manufacturing plants use detailed forecasts to plan for inventory of tangible products.
But perishability within the services industry is intangible, meaning it is not a physical product that can be measured and quantified. Hence, it is not possible to make accurate forecasts.
Consider the case of a hotel in a seaside town.
Physical constraints limit the number of its rooms.
If there is excess demand for its product i.e., room service and accommodation, the hotel cannot manufacture additional rooms as supply.
Instead the hotel must plan to optimize its existing room capacity to meet varying periods of demand.
A hotel is at capacity during summer, when demand is at peak and tourists throng to the beach.
Crowds thin out in winter, however, and room occupancy is low.
Even with the certainty of seasonal travel, it is impossible for a hotel to make accurate demand forecasts due to a variety of reasons.
For example, some tourists may cancel their reservations at the last minute. Others may shift reservation dates or choose to stay at a competitor.
This uncertainty in balancing of supply and demand affects quality of service and overall costs.
During times of peak demand, the quality of service may suffer if the hotel management does not plan for adequate staff to meet demand.
At the same time, having excess staff on hand during lean winter months will inflate costs of operation at the establishment.
To minimize the effect of perishability on their inventory, firms often apply a pricing approach known as dynamic pricing or demand pricing.
In this approach, services pricing varies based on certain factors, such as product demand or time to expiration.
For example, an airline may slash prices for seats on its routes close to the flight date. The seats are perishable. They are worth nothing, if they are empty, after the flight takes off.
Hotels may offer heavy discounts on their “perishable” rooms to ensure occupancy and revenue even during periods of low demand.
The perishable nature of products, airline seats, and hotel rooms makes it necessary for firms to sell at a loss.
Seasonal hiring is another strategy used by firms to contend with varying demand.
During summer, the hotel may hire additional temporary workers to meet demand. Come winter, it might work with a skeletal staff to cut down on operational costs.
Perishability and Services Marketing
Perishability is one of the four characteristics of services marketing. The others are:
- Intangibility: The characteristic to evaluate a service using tangible evidence, such as providing excellent experience inside their premises.
- Inseparability: The characteristic of providing the same level of quality to each customer.
- Heterogeneity/Variability: The characteristic of providing unique service for a mass-produced product.
Together these characteristics are used to design strategies for products in services.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.