july 2008 strategic pricing for hotels: revenue management through pricing (c) stowe shoemaker,...
TRANSCRIPT
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
1
Section E:
Customer Loyalty and Value
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
2
Objectives of This Section
• Provide overview of customer loyalty and value
• Provide a view of pricing that incorporates knowledge of consumer behavior
• Provide an understanding of the different components of “value”
• Provide an understanding of how consumers make purchase decisions
July 20083
When customers give you a greater share of their transactions than they might have without the program, usually in exchange for accumulating miles, points, or other surrogate discounts.
You ask: Aren’t we quibbling here, isn’t that loyalty?
Frequency . . . Focusing on Behavior
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
4
Loyalty . . . Focusing on Emotion When the customer feels so strongly that you can best meet his or her relevant needs, your competition is virtually excluded from the considered set, and the customer buys almost exclusively from you — referring to you as “their restaurant” or “their hotel.”Winning maximum share of heart, mind and wallet.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
5
The Benefits of Real Loyalty
• The customer focuses on your brand, offers and messages to the exclusion of the competition.
• Price is no longer the dominant consideration, but one component in the larger value proposition.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
6
The Benefits of Real Loyalty
• Loyalty provides critical inoculation.– Competitive offers face a higher hurdle.– The customer becomes more forgiving —
goodwill equity.
• Loyalty begets loyalty.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
7
Why Hotels Should Be Concerned about Customer Loyalty
• Customer loyalty leads to increased profit
• Customer loyalty leads to increased partnership
• Lower marketing and sales costs
• Lower transaction costs
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
8
Lessons Learned From Research in Hotels
• Loyal customers are less likely to ask about price when making a reservation
• Loyal customers are willing to serve on advisory panels
• Loyal customers claim they will use purchase other offered services
• Loyal customers more likely to report service failures
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
9
Annual Profits Throughout Guest Life
Source: Adapted from Bain
0 1 2 3 4 5
Price Premium 4
Referrals 3
Cost savings 2
Revenue growth 1
Year of customer life
Base profit1
2
3
1
2
3
1 1 1
22
23
3
3
4
4
4
4
July 200810
Benefits
Trust
Relationship
Commitment
VoluntaryPartnership
Certainty
* Significant at .01
** Significant at .05
Product Usage
.24*.17*
.47*
.41*
.83*
.51*
.97*.63*
.63*
-.13**
Value
.55*
.66*
.43*
.17**Switching Costs
Opportunistic
Behavior
What ImpactsLoyalty
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
11
Impact of Yield Management
Assume that you go to make a reservation at thebusiness class hotel you are loyal to and you findthat they are charging you $50 per night more thanthey usually do because they have only a few roomsleft. Please answer each of the following questionsbased on this knowledge.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
12
Impact of Yield Management - continued• 1 = strongly disagree to 10 = strongly agree– 50.2% (Top Box) The next time I made a reservation at this hotel, I would be more likely to ask about the rate
– 31.7% (Top Box) The next time I came to this city I would check the hotel rates at other properties
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
13
Impact of Yield Management - continued• 1 = strongly disagree to 10 = strongly agree
– 15.3% (Top Box) My business travel policy would not allow me to stay at this higher rate
– 10.1% (Top Box) This would never happen as my company as a negotiated rate
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
14
Impact of Yield Management - continued• 1 = strongly disagree to 10 = strongly agree
– 4.9% (Top Box) My feelings toward the hotel would not change as a result of the above action
– 4.0% (Top Box) What I told others about the hotel would still continue to be positive
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
15
Impact of Yield Management - continued• 1 = strongly disagree to 10 = strongly agree
– 1.5% (Top Box) It is alright for the hotel to increase their rates in this situation
July 200816
RM Strategies and Loyalty
• Traditional RM– Room rate and length of stay to balance supply
and demand
• Lifetime Value-Based Pricing– Rate quoted is based on customer worth
• Availability of Guarantees– Room always available for certain customers
• Short and ad hoc promotions
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 200817Types of Loyalty
Butterflies True Friends
Strangers Barnacles
• Good fit between company’s offerings and customers’ needs;•High profit potentialActions:•Aim to achieve transactional satisfaction,not attitudinal loyaltyMilk the accounts as long as they are activeKey challenge is to cease investing soon enough
• Good fit between company’s offerings and customers’ needs;•Highest profit potentialActions:•Communicate consistently, but not too often•Build both attitudinal and behavioral loyalty•Delight to nurture, defend, and retain them
• Little fit between company’s offerings and customers’ needs;•Lowest profit potentialActions:•Make no investments in these relationships•Make profit on every transaction
• Limited fit between company’s offerings and customers’ needs;•Low profit potentialActions:•Measure the size and share of wallet; if low focus on up and cross-sellingIf size of wallet small, impose strict cost controls
From Reinartz and Kumar 2002 Harvard Business Review
HP
LP
ST LT
HP = high profit; LP= low profit; ST =short term; LT= long termStrategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
18
Types of RM Strategies
• Which strategy is important for each cell and why?
July 200819Types of RM Strategies
Butterflies True Friends
Strangers Barnacles
From Reinartz and Kumar 2002 Harvard Business ReviewStrategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Case Study
• Customer Profitability and Customer Relationship Management at RBC Financial Group (Abridged)
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
20
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
21
Section F:
Pricing and Decision Making
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
22
Question: Where Would You Buy Gas?
Station A: Sells gasoline for $ 2.30 per gallon, and gives a $ 0.10 discount if the buyer pays with cash.
Station B: Sells gasoline for $ 2.20 per gallon, and charges a $ 0.10 surcharge if the buyer pays with a credit card.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
23
Examples• Which do you choose? A____ or B____
– A. Receive $50– B. 55% chance of receiving $100; 45% chance
of earning nothing
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
24
Examples• Which do you choose? C____ or D____
– C. Loose $20– D. 20% chance of loosing $100; 80% chance
of loosing nothing
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
25
Answer to Previous Question Pertains to Prospect Theory
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
26
Daniel Kahneman Toasting Noble Prize
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
27
Prospect Theory: Basic Idea
• Value is associated not with actual levels of consumption, but with anticipated changes in well being
• Buyer assesses prospective decision outcomes (prospects) by mentally categorizing them as either gains or losses relative to reference point
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
28
ExplanationStation A sets reference point at $2.30 and then rewards buyers who pay cash; that is; a gain relative to the reference point;
Station B first establishes a reference point at $2.20 and then penalizes buyers who use credit cards; a loss relative to the reference point
This is in contrast to economic theory that predicts that gains and losses of equal size are valued the same
July 200829
Losses Gains
Positive Value
Negative Value
Reference Point(state of well being)
Station A ($2.30 – 0.10)
Station B:($2.20 +.10)
Value Function
1.6
1.0
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
30
Examples• Which do you choose? A____ or B____
– A. Receive $50– B. 55% chance of receiving $100; 45% chance
of earning nothing • Which do you choose? C____ or D____
– C. Loose $20– D. 20% chance of loosing $100; 80% chance
of loosing nothing
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
31
Answer
• If you chose A in Question 1, then you should choose C in Question 2
• If you chose B in Question 1, then you should choose D in Question 2
• How many had a reversal?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
32
Rationale for Answers
• Prospect theory states that people are risk adverse (e.g., conservative) when considering gains; in contrast, more naturally inclined to risk a loss than to pay even the expected value of avoiding it.
July 200833
Losses Gains
Positive Value
Negative Value
Reference Point(state of well being)
Value Function
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
34
Economic Theory versus Prospect Theory
• Economic Theory– Gains and losses of
equal size treated the same (e.g., £100 gain = to £100 loss)
• Prospect Theory– loss judged more
painful than a gain of equal value (e.g., loss of £100 more painful than a gain of £100)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
35
Economic Theory versus Prospect Theory
• Economic Theory– People are consistent
in their decision making
• Prospect Theory• If people perceive they are
in the gain domain, they will act conservatively
• If people are in the loss domain, they will tend to take more risks
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
36
Economic Theory versus Prospect Theory
• Economic– Expected utility of
uncertain outcome is weighted by its probability
• Prospect– Expected utility of
uncertain outcome is multiplied by a decision weight (p) where :
– 1. Impossible events are discarded (0)=0
– 2. Low probabilities are over weighted while moderate and high probabilities are under weighted (e.g., odds of being involved in an airline crash versus car accident)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
37
Prospect Theory – Implications
• Increasingly larger gains are incrementally less pleasurable (10 to 20 great; 110 to 120 not as great)
• Increasingly larger losses are incrementally less painful (and smaller losses are almost as painful as slightly larger losses)
• The displeasure associated with losing a certain amount (e.g., of money) is generally greater than the pleasure associated with winning the same amount (e.g., of money)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
38
Implications
• Once consumers have agreed to spend a certain amount of money, getting to pay more is easier than one would think
• Goal for is to move the reference point beyond “price” to something that can gain a competitive advantage – e.g., brand, type of ingredients, service, etc.
July 200839
Losses Gains
Positive Value
Negative Value
Reference Point(state of well being)
Value Function
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
40
Prospect Theory Leads to Framing
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
41
Framing
Buyers frequently form frames of referencewhen making buying decisions, and theseframes of reference in turn influence howbuyers respond to price and productinformation.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
42
Goal of Understanding Frames of Reference
1. Change the relationship between whatcustomers perceive they pay and what they perceive they get in return.And manage this relationship
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
43
Example -1 Change the relationship between what customers perceive they
pay and what they perceive they get in return.
• Option 1: Oliva Cameroon Cigar for $15 • Option 2: Oliva Cameroon (Figurado, 6 ½ inch x
60 ring); made by Oliva Cigar Co. – Nicaragua
The Authentic Cameroon Wrapper gives this boxed pressed figurado a pronounced aroma of nuts, with hints of cocoa and coffee.
It is medium-bodied, but not exceedingly strong. $15
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
44
Example-2 Change the relationship between what customers perceive they
pay and what they perceive they get in return.
• Option 1: Selection of teas from wooden box $1.95
• Option 2: Fresh pot of Lapsang Souchong black-smoked tea:
From the Fujian province of China, this black tea is full ancient history and flavor! Smoky smooth character is achieved through the smoking process over pine and oak fires. $3.95
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
45
Example-3 Change the relationship between what customers perceive they
pay and what they perceive they get in return.
• Option 1: Our standard room for $240
• Option 2: Or, an upgrade to superior from for only $15 more.
How is a better way to write this?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
46
Example-4 Change the relationship between what customers perceive they
pay and what they perceive they get in return.
• Research shows that a significant number of consumers DO place a value on the X brand; e.g., for a £10 premium 56% of business travelers and 38% leisure travelers are very likely to choose Brand A
• Goal is to concentrate not on the price, but the components of the brand that consumers desire
• Give customer choice
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
47
Example-5 Change the relationship between what customers perceive
they pay and what they perceive they get in return.
• Focus on the features of the menu item that are different from what consumer can buy at home; e.g., Kobe beef
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
48
Ways To Frame Purchase Decisions
1. Structure transactions to reflect gains and avoid losses
– Present price last after descriptions– endow potential buyers
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
49
# 2 Change Way Frame Decisions
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
50
Example 1
Let customer know the cost of not booking and paying now; that is, give the difference between current booking class and the next level up
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
51
Examine How We Quote Rates
• We always quote low to high, which sets reference point low and the other prices a “loss”
• If we quote high price first, then other prices are a “gain”
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
52
Example 2
Make it simple for customer to see options – and trade-offs
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
53
This slide shows how prices changedepending upon day of flight; keyhere is that customer sees the optionsand can make choices
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
54
Figure 3
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
55
Figure 4
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
56
Figure 5
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
57
Note: departure and returnare bundled
Customers knows price buthas to buy prepackagedschedule
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
58
Customer chooses by schedulebut does not know price
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
59
Customer can easily get bothprice and schedule and therefore itis easy to make choice
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
60
Example 3
Frame decision outcomes in terms of gains or losses
– do not discuss benefits of buying the product, but discuss the consequences of not buying the product
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
61
Example 4
Frame by Bundling Gains and Losses– un-bundle gains
– bundle losses
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
62
Frame by Un-bundle Gains
• Packages such as “London for Free” – use of free bundles gain; list all the components separately
• Ability to purchase upgrades by segment (e.g., seat on UK to USA different utility than seat on USA to UK)
• Check-in time; use of lounge
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
63
Frame by bundle losses
• Should we quote rates that include all taxes and airport fees?
• What losses that can be bundled?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
64
Hotel Examples?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
65
Example of Research Study Undertaking
• Test Condition: Bundling Added:1. Utilize proper opening dialogue
2. Listen to caller’s requests
3. Ask repeat guest question and determine reason for stay
4. Provide normal sales strategy
5. At time of purchase, ask the following:
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
66
Example of Research Study Undertaking
• For an extra $15 we can offer an amenities package that includes:
• no phone access charge,
• 10 free local phone calls,
• free received faxes,
• free sent faxes,
• free internet access,
• one 3-minute call to call home (may call anywhere in the world).
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
67
Examples of current research• Test Condition: Willingness to Pay for
Guaranteed Bed Type:• At time of purchase, read the following:
As you are probably aware, hotels only guarantee a room, they never guarantee what the bed type in the room will be. The reason for this pertains to the fact that the bed inventory is limited and fixed. Since guests arrive at different intervals, room assignments are made on a first come first serve basis. This means that the bed type you would like to have may not be available. For an extra $20 we can guarantee that no matter what time you arrive, the bed type you requested will be available.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
68
Examples of current research
• Test Condition: Willingness to Pay for Guaranteed Bed Type:
• Other test conditions:
• At what price would this guarantee service be so expensive that you would not consider purchasing this service?
• At what price would this guarantee service be expensive, but you still would consider purchasing this service?
• What price would you expect this hotel to charge for the guarantee of a bed type?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
69
Framing and Reference Price Formation
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
70
Hotel Example: Would You Choose?
• Staying at the Venetian Hotel in Las Vegas for a vacation; Staying two nights; 3036 rooms
• Which Would You Choose?– A: Luxury suite room at $159 and then for an
additional $30 you get guaranteed room on a high floor with a strip view
– B: Luxury suite room with guaranteed room on a high floor for $189, or room for $30 less anywhere in the hotel
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
71
Hotel Example
• Venetian Hotel in Las Vegas• Manipulation
– Quote $159 first (option A previous slide)– Quote $189 first (option B previous slide)
• Two Teams– Team 1: conversion 21.9%; calls 1813– Team 2: conversion 21.2%; calls 1654
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
72
Hotel Example
• Upgrades:– $159 quoted first: 13.59% upgraded (option A)– $189 quoted first: 20.55% upgraded (option B)
– Translates $31,878 extra revenue for the month to the bottom line
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
73
Restaurant Study
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
74
Study Design
• Eight different menus– Type of description
• Modest/Detailed
– Number of items• Three per category/Two per category
– Prices• High prices/Low prices
23
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
75
Spinach and Feta Dip
• Modest Description:• Spinach and Feta Cheese with Tomatoes
and Pinenuts• Detailed Description:• Organic Spinach Sautéed in Garlic and
Combined with Authentic Athenian Feta Cheese, Sun Ripened Yellow Tomatoes and Toasted Pinenuts
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
76
Menu One: Detailed Menu Descriptions, High Price, 3 ChoicesMenu Two: Detailed Menu Descriptions, Low Price, 3 ChoicesMenu Three: Detailed Menu Descriptions, High Price, 2 ChoicesMenu Four: Detailed Menu Descriptions, Low Price, 2 ChoicesMenu Five: Modest Menu Description, High Price, 3 ChoicesMenu Six: Modest Menu Description, Low Price, 3 ChoicesMenu Seven: Modest Menu Description, High Price, 2 ChoicesMenu Eight: Modest Menu Description, Low Price, 2 Choices
MENU DESIGN
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
77
Hypothesis Two Items Each Menu
Category
Ho1 X value (high price with detailed description) = X value (high price with modest description)
Mean 4.74 4.26
p=.083
Ho2: X value (low price with detailed description) = X value (low price with modest description)
Mean 4.99 4.74
P=.369
Ho3: X value (high price with detailed description) = X value (low price with detailed description)
Mean 4.74 4.99
P=.315
Ho4: X value (high price with modest description) = X value (low price with modest description)
Mean 4.26 4.74
p=.113
Ho5: X value (high price with detailed description) ≥ X value (low price with modest description)
Mean 4.74 4.74
p=1.00
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
78
What Influence Buyers’ Reference Prices
1. Current Price Influences
2. Past Price Influences
3. Purchase Context Influences
4. Prices of similar items
5. Price considering cost of making item yourself
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
79
1. Current Price Influences
• Product-Line Pricing– Adding a premium product to the product line
may not necessarily result in overwhelming sales of the premium product itself. It does, however, enhance buyer’s perceptions of lower-priced products in the product line and influences low-end buyers to trade up to higher-priced items
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
80
Product Line Pricing Example: Wine
• $38
• $48
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
81
• $38
• $48
• $58
Product Line Pricing Example: Wine
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
82
Anchoring
• The idea is that when a person must make a judgment, he or she starts with an initial, approximate judgment - an “anchor.” This judgment gets the person ‘in the ball-park.” Then, in view of other considerations, the person arrives at a final judgment by adjusting away from that initial assessment
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
83
Our top room is a Park Avenue Suite decorated with an elegant European accent. This suite is 900 Sq. Ft. The suite is designed with the business traveler in mind. Suites feature a separate parlor with a wet bar and refreshment center, an oversized working desk,2 multi-line speaker phones with call waiting, voicemail, data-port, fax machines, Lodgenet Entertainment System with movies andCD Library. These rooms overlook 56th street or the city view of57th street. The bedroom can be closed off from the living room.The king size bed includes five down pillows with satin-bandedEgyptian cotton Pillowcases. Suites sell for $995.00. Position following second: Our 2nd room type is the Metropolitan Suite. This suite is 700 Sq. Ft. Position following third: Our 3rd room type is the Executive Suite. This suite is 600 Sq. Ft.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
84
Current Price Influences - continued
• Suggested Reference Prices– State a price charged previously– State a price charged by a competitor– State suggested retail price
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
85
Example of item being tested
• If consumers are always told the normal rate, and then provided with a discount from that rate, they will remember the normal rate, not the discount rate. In addition, when the invoice is provided to the client at check-out, the normal price will be printed. At the end the discount will be subtracted. We should see a rise in "overall price value" compared to when customer only sees the price paid.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
86
Current Price Influences - continued• Consider the following airline prices seen on Internet for round-tripLondon to Paris £ 310
Paris to Prague £ 288
Nice to Prague £ 289
London to Nice £ 310
Given above prices, answer following questions:1. What price would you expect to pay to fly from London to Prague
_____2. What is the most you would pay _____3. What is a fair price _____
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
87
2. Past Price Influences
• Past price paid has a particularly strong influence on the reference price because it is more likely to be recalled as a frame of reference than past prices that were observed in advertising
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
88
2. Past Price Influences - continued
• Implications of Previous Slide– Numerous small price increases for frequently
purchased items more likely to be accepted than are infrequent large increases
– Need to always state actual price and discount from that; otherwise, low promotional prices can establish low reference prices for judging the value of later purchases
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
89
3. Purchase Context Influences
• You are lying on the beach on a hot day. All you have to drink is warm water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite imported beer. A companion gets up to make a phone call and offers to bring back a beer. The only near by place where beer is sold is a small, run-down grocery store. He asks what the maximum price you are willing to pay. If the price is higher, he will not buy it.
What price do you tell him? _____
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
90
3. Purchase Context Influences
• You are lying on the beach on a hot day. All you have to drink is warm water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite imported beer. A companion gets up to make a phone call and offers to bring back a beer. The only near by place where beer is sold is a resort hotel. He asks what the maximum price you are willing to pay. If the price is higher, he will not buy it.
What price do you tell him? _____
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
91
3. Purchase Context Influences continued
• Use context as a frame of reference that makes the price seem fair or reasonable
e.g., 8 hours tossing and turning trying to get comfortable, versus good night sleep
e.g., a day at the office
e.g., What is your time worth to drive versus
to fly to airport that is not convenient?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
92
4. Prices of similar items (e.g., if consumers think there is no difference, then there is a problem)
5. Price considering cost of making it yourself
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
93
Restaurant Positioning Example
See Article in Handout
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
94
AB
C
DE
F
GH
I
J
K
LMN
O P
Q
R
S
T UV
W
X
Y
Z
1
2
3
4
5
6
78
9
1. Value for the $2. Price, thinking about type of ingredients3. Price compared to other entrees at Brand_4. Price compared to entrees other places5. Price considered at Brand _6. Price Expected to pay7. Price considered amount of food8. Overall price/value9. Overall quality of food
-5
-9
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
95
• Scenario A: You are a purchasing agent for a large organization. You have ordered for your own use a new electric typewriter with special
features, which will cost £1,000. A friend discovers that the identical
typewriter is available from another vendor for £ 600. Would you cancel the current order and switch to the other vendor? (Assume that canceling the current order and initiating a new one will take one of the purchasing clerks who works for you about one-half day. Assume that there are no other costs such as a loss of good will or delay in delivery.)
Would you cancel the current order and switch to the other vendor?
Yes _______ No _________
6. Price Differentials
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
96
• Scenario B: You are a purchasing agent for a large organization. You have ordered a new word processor with special features, which will cost £ 20,000. Your purchasing department discovers that the identical word processor is available from another vendor for £ 19,600. Would you cancel the current order and switch to the other vendor? (Assume that canceling the current order and initiating a new one will take one of the purchasing clerks who works for you about one-half day. Assume that there are no other costs such as a loss of good will or delay in delivery.)
Would you cancel the current order and switch to the other vendor?
Yes _______ No _________
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
97
• Scenario A the difference is 40%, whereas in Scenario B the difference is 2%, even though the absolute difference in both is £400
• Implications– the perception of a price change depends on the
percentage, not on the absolute difference
– there is a threshold above and below a product’s price at which price changes are ignored
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
98
• When quoting rates, quote price differences instead of whole rate; e.g., $320 versus $290. For $30 less get….
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
99
7. Framing Price Differences• Look at the two pairs of prices below and quickly
answer the question: For which pair of prices is the lower price more of a bargain?
Higher Price Lower Price
First Pair $0.89 $0.75Second Pair $0.93 $0.79
Your answer _____
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
100
• Perceptions of Odd Price Endings– Buyers use left most digits in a price and round up to form
a quick reference point to evaluate the actual price against.
– Previous example: second pair seems to have better discount.(first pair: 8-7 = 1; second pair 9-7 = 2; if figure same in first column, then look at second column)
In reality, difference is a greater percentage of the price in the first pair (18.6% vs. 17.7%)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
101
Exercise
• Make a list of things to do when you return to work that incorporate some of the above ideas. Be prepared to give concrete examples and discuss with classmates.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
102
Phone calls to reservation centers to illustrate the concepts discussed
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
103
Summary Slide
• Importance of Understanding Customer Loyalty• Consumers and decision making• Frames of reference
– Goal to change the frame• Prospect theory
– Purchase decisions made in relation to beliefs about gains and loses
• What to do with this knowledge– Un-bundle gains– Bundle loses
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
104
Summary Slide
• Value Creation– Financial, temporal, functional, experiential,
emotional, social, trust, Identification with organization
• Anchoring
• What Influences Buyers Reference Prices
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
105
Section G:
Competitor Analysis and Positioning
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
106
Objectives for this section
• Understand different ways a hotel may position itself
• Why this positioning knowledge is important for those in pricing
• How do create easy positioning maps using excel
• Understand competitive value analysis• How to write a positioning statement
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
107
Product Positioning
The way the product is defined by consumers on important attributes - the place the product occupies in consumers’ minds usually relative to something.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
108
Research Will Help Determine the Following:
1. Who the customers are, 2. What makes the property different, 3. Why property is appealing to the customer4. Market position differences by market
segment or season (e.g., business travel versus leisure travel)
5. Defines what strategic advantages the property has, or conversely, what challenges the property may face
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
109
Ways to Position
# 1. Positioning by attribute– Associating a product with an attribute, a
product feature, or a customer feature– e.g., Hyundai low price, Volvo safety, BMW
handling
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
110
Vintage Building
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
111
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
112
Ways to Position
# 2. Positioning by how customer uses your product or service– Arm & Hammer baking soda as odor-
destroying agent in refrigerators– Long distance phone line “Reach out and touch
someone”– Campbell’s Soup for use at lunch, Gatorade as
sports drink
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
113
Ways to Position
# 2. Positioning by how customer uses your product or service – continued– Positioning to business travelers versus leisure
travelers– e.g, baby shampoo, Miller Lite beer
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
114
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
115
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
116
Ways to Position
# 3. Positioning by price/value– Higher price used to signal higher quality to the
consumer– Does not have to been high price; especially if
one considers definition of quality- “design to work as it is supposed to work”
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
117
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
118
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
119
Ways to Position
# 4. Positioning with respect to product class– e.g, 7-Up as the “un-cola;” Caress as a bath oil
rather than a hand soap
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
120
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
121
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
122
Ways to Position
# 5. Positioning with respect to competitor– Used to exploit the dominant position of a
competitor (e.g., Avis, we are number two)– Sometimes it is not important how good
customers think you are, it is just important that they believe you are better than the competitor
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
123
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
124
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
125
The competitive advantages and disadvantages which are shown in the matrix of competitive advantages can be condensed into one single index, the index of competitive strength. All relative performances of the product on the individual factors are weighted with their importance and summed up.
Index of Competitive Strength
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
126
Example: Importance Question
• Next, please think for a moment about the reason for visiting a specific hotel in Las Vegas for gambling. Please tell me how important each reason is for you in your decision to visit one specific property over another. Please use a 1 to 10 scale, where a “1” means the reason is not at all important and a “10” means the reason is very important in your decision to choose one establishment over another for gambling. You may use any number on this 1 to 10 scale.
[Ask questions in random order]
• How important is…_______________…in your decision to choose one place to visit over another?
– It is a place my friends like to go
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
127
Example: Attitude Question• Now I am going to read you a list of features that may or may not
describe some of the hotels in the Las Vegas area. We’ll use a 1 to 10 scale, where a 1 means it “does not describe the hotel at all” and a 10 means “describes the hotel perfectly”. If you have not been to the hotel personally, please base your answers on what you have heard, or what you believe to be true.
[Ask questions in random order]
• How well does this feature describe…(brand to be rated)?– It is a place my friends like to go
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
128
Calculation of Competitive Index
1. Sum the importance ratings for all features and multiply by the number of scale points. (The numbers are in column A in Table on next page)
2. For each attribute, multiple average importance x average performance. Answers in Column C
3. Sum all numbers in column C 4. Calculate the CSI as -- Total C/Total in A5. Repeat steps for competitor's: see columns D
and E
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
129Calculation of Competitive Index
Importance A
Company Rating B
Company Score C
Competitor Rating D
Competitor Score E
Feature Scale: 1-10 Scale: 1-10
A*B Scale: 1-10 A*D
It is a place friends like to go
7.3 7.6 55.48 6.4 46.72
Atmosphere is very pleasant
8.8 7.7 67.76 7.6 66.88
One place seems to have better odds
7.4 6.8 50.32 6.0 44.40
Slot machines filled in a timely manner
7.5 6.8 51 6.8 51.00
Type of promotions offered
7.4 7.7 56.98 6.8 50.32
TOTAL INDEX
38.4 *10=384 281.54 73.3
259.32 67.5
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
130
Relative Performance
Example: Casino
Leve
l of
Impo
rtan
ce
high
low
Brand FeelSafe
Good Entertainment
Value ofPromotions
Slot Club
NonSmoking
FriendlyStaff
Service Package
Price
Matrix of Competitive Advantages
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
131
Steps to Developing a Positioning Strategy
1. Identify the competitors
– From customer’s point of view
– Different competitors in different segments
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
132
Best Way to Define True Competitors
• Ask 50 – 100 customers at check-in, “If you did not stay here tonight, where would you stay?”
• Those hotels who, if they took a pricing action, would force you to take a pricing action
• Where do you currently “walk” guests?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
133
Best Way to Define True Competitors
• Based upon a definition of the core customer; different competitors for different segments
• Avoid emotional opinions
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
134
Steps to Developing a Positioning Strategy
2. Determine how the competitors are perceived and evaluated
3. Determine the competitors’ positions• Critical to also have reference points for data
analysis
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
135
1. Identify competitive set • Upper tier: member of competitive market
with a rate premium above our hotel• Direct tier: member of our competitive
market, with a rate price point approximately “equal” to our hotel
• Lower tier: member of our competitive market, with a rate price point below our hotel
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
136
• Calculate for your three core customers in all three competitive tiers: a total of nine analysis
• Three core customers• Business transient
• Pleasure transient
• Group customer
• Thee competitive tiers • Upper tier
• Direct tier
• Lower tier
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
137
2. Conduct competitive pricing analysisShops for
– Local hotel reservations office– Hotel 800 number– GDS system– Internet
• Shop for leisure peak, leisure non-peak, business peak, business non-peak, group peak, and group non-peak
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
138
3. Use chart to plot each competitors’ overall value
– Horizontal axis: plot each competitors’ overall value assessment
– Vertical axis: plot each competitors lowest available retail rate obtained via blind shop
– Center axis: your hotel with rate equal to lowest available retail price point
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
139
Example
• See handout on Las Vegas data
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
140
Feel Safe
There
Friendly Employe
es
Place My Friends
Like to Go
Always Have Good
Entertaiment
Drink Orders
Taken in Timely Manner
Cashier Lines Are
Short
Restaurants Offer Great
Value
Can get change quickly
Slot Machines Filled in Timely Manner
Like the Promotions Offered
You Can Get Complimentari
esoverall
averageImportance 8.20 8.20 6.27 4.80 6.12 6.37 7.49 6.33 5.67 4.80 6.15 6.40Rio 7.26 6.60 6.49 6.47 5.93 5.91 5.70 5.54 5.35 5.05 4.96 5.93Bally 6.55 5.28 3.96 4.59 5.11 5.05 4.05 4.70 4.60 3.75 4.20 4.71Boulder 7.40 6.88 6.40 5.74 6.50 5.90 6.54 6.11 5.89 6.16 6.05 6.32Caesar 7.19 5.85 6.15 5.81 5.37 5.43 4.32 4.82 5.07 3.62 3.97 5.24Circues 4.70 4.60 4.07 4.24 4.59 4.63 4.55 4.15 4.21 3.80 3.81 4.30Excalibur 6.61 5.64 5.01 4.89 5.03 5.42 5.01 5.19 5.04 4.06 4.47 5.12Fiesta 6.19 6.00 4.75 4.64 5.48 5.43 5.61 5.60 5.34 4.66 5.25 5.36
Rate CSI
Rio $179.00 59.97Bally $185.00 47.91Boulder $160.00 63.92Caesar $189.00 53.16Circues $159.00 43.41Excalibur $140.00 52.07Fiesta $155.00 54.3
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
141
$179
$185
$189
$180
$159
$155
$140
59.97 Rio
47.91 Bally
63.92 Boulder
53.16 Caesar
43.41 Circus Circus
52.07Excalibur
54.3 Fiesta
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
142
Exercise
• Develop positioning map for coffee shop data on the next slide
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
143It is a Norma Café
Importance Grind Starbucks Jeans Java Einstein's
You feel safe there 8.20 7.26 6.55 7.40 7.19 4.70The employees are friendly and courteous 8.20 6.60 5.28 6.88 5.85 4.60It is a place my friends like to go 6.27 6.49 3.96 6.40 6.15 4.07Always have good entertainment 4.80 6.47 4.59 5.74 5.81 4.24Drink orders are taken and delivered in a timely manner 6.12 5.93 5.11 6.50 5.37 4.59I can sit and read the paper 6.37 5.91 5.05 5.90 5.43 4.63Offer great price value 7.49 5.70 4.05 6.54 4.32 4.55Food items taste great 6.33 5.54 4.70 6.11 4.82 4.15Music is to my liking 5.67 5.35 4.60 5.89 5.07 4.21The type of promotions offered 4.80 5.05 3.75 6.16 3.62 3.80Price of cup of coffee 3.25 3.50 3.25 3.75 2.75
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
144
Tweeter, Inc.• Questions:
– Objectively and subjectively, is Tweeter price competitive? Why or why not?
– Who are Tweeter’s core customers and who are Tweeter’s competitors for these customers? Are these the right customers to be going after?
– How does current buyer behavior fit with Tweeter’s new marketing strategy? How is APP designed to alter that buying behavior? Is APP a customer acquisition or a customer retention strategy?
– Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective? Is this effectiveness sustainable?
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
145
Section H:
Price Bundling
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
146
Objective of this section
• Explain the benefits of price bundling
• Show how bundling might work in the hotel industry
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
147
Bundling
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
148
Bundling• Examples of bundling
– Retailers bundle free parking with a purchase from their stores,
– Fast-food outlets bundle chances in games with purchase of their products; also bundle drinks
– Restaurants bundle foods into fixed-priced meals– Symphony orchestras bundle diverse concerts into season
subscription tickets,– Restaurants that bundle super-sized drinks with their meals– Microsoft bundling application software with platform
software
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
149
Goal of Bundling
• The objective of price bundling is to stimulate demand for the firm’s product line in a way that achieves cost economies for the operations as a whole while increasing net contributions to profits – Kent Monroe
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
150
Forms of Price Bundling
• Tie-in Sales– Buyer of main product (tying good) agrees to
buy one or several complementary goods (tied goods)
– Tying good is a durable (e.g., copier)– Tied goods are non durables (e.g., toner)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
151
Forms of Price Bundling• Sales Rebates
– Companies offer customers a year-end rebate on total annual sales across all the company’s products
• Cross couponing/selling– Often used to introduce new products and/or increase
the sales of weak products by linking them with established products in a firms product line
• Pay less with coupon than if bought each product separately
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
152
Mixed Bundling
• Essentially Four Groups:– Non buyers– Buy only A– Buy only B– Buy both
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
153
Principles of Price Bundling
• Underlying concept is that different customers have different perceived values for various products and services offered
• Thus, have different amount they are willing to pay for various products and services
• Consider the following table:
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
154
Reservation Prices, $
Customer Product A Product B A+B
1 $9 $1.5 $10.5
2 $8 $5 $13.0
3 $4.5 $8.5 $13
4 $2.5 $9 $11.5
July 2008155
0 2 4 6 8 10
10
8
6
4
4
0
Group 1.
.Group 2
.Group 3.Group 4
Price for B = $8.50
Price for A= $8.0
Price for A
Price for BFigure 1Separate Pricing
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008156
Forms of Price Bundling
Optimal Prices
A
Optimal Prices
B
Optimal Prices
Bundle
Sales Volume
A
Sales Volume
B
Sales Volume
Bundle
Profit (Index)
No Bundling
$8.0 $8.50 --------- 2 (groups 1&2)
2 (groups 3&4)
--------- $33 (100)
$16+$17
Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
157
Forms of Price Bundling
• Pure Price Bundling– Can only buy items as a bundle
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
158
Reservation Prices, $
Customer Product A Product B A+B
1 $9 $1.5 $10.5
2 $8 $5 $13.0
3 $4.5 $8.5 $13
4 $2.5 $9 $11.5
July 2008159
0 2 4 6 8 10
10
8
6
4
2
0
Group 1.
.Group 2
.Group 3.Group 4
Price for A
Price for B
($9.0, $1.50)
($2.5, $9) ($4.5, $8.5)
($8.0, $5.0)
Figure 2Pure Bundling
Price of $10.50
Reservation price
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008160
Forms of Price Bundling
Optimal Prices
A
Optimal Prices
B
Optimal Prices
Bundle
Sales Volume
A
Sales Volume
B
Sales Volume
Bundle
Profit (Index)
No Bundling
$8.0 $8.50 --------- 2 (groups 1&2)
2 (groups 3&4)
--------- $33 (100)
$16+$17
Pure Bundling
(2 services together)
------- ------- $10.5 ------- ------- 4 $42 (127)
4*$10.50
Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
161
Forms of Price Bundling
• Mixed Price Bundling – Items sold either as a bundle or by themselves
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
162
Reservation Prices, $
Customer Product A Product B A+B
1 $9 $1.5 $10.5
2 $8 $5 $13.0
3 $4.5 $8.5 $13
4 $2.5 $9 $11.5
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
163
0 2 4 6 8 10
10
8
6
4
2
0
Group 1 .
.Group 2
.Group 3.Group 4
Price for A
Price for B
Price A = $9
Price B = 9
Price A + B = $13
X
Y
Figure 3Mixed Bundling
People in Y buy only B
People in X buy only A
People in this areaBuy the bundle for $13
July 2008
Case Study
• Atlantic Computer: A Bundle of Pricing Options
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
164
July 2008
Section I
Overbooking
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
165
July 2008
Overbooking main concept
• The expected marginal gain of the overbooked room is at least equal to the potential loss for the same room.
166Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Overbooking issues
• When to overbook?
• For what reason?
• With what kind of risk?
167
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Internal factors
• Historical data per segment:
– No-shows
– Cancellations
– Early departures
– Late departures
• Human error
168
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
External factors
• Seasonality (yearly, monthly, weekly, daily,…)
• Special events
• Weather
169
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Handling Overbooking
• Internal elements:
– No-shows forecast
– Overbooking policy
• External elements:
– Prepayment / deposit
– Cancellation policy
– Penalties
170
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Overbooking cost - components
• Cost of walking guests:• Need to re-accommodate guests• Compensation• Loss of good will
• Probability of refused guest will never return.
• Cost of empty room:• The profit opportunity of having sold an
empty room; contribution to fixed costs171Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Overbooking techniques
• (OB ratio): marginal cost analysis
• Where overbooking Ratio = Walk/(Walk+Empty)
• Necessary data:
– Probability distribution of no-shows
– Cost of empty room
– Cost of walk
172
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Steps to Calculating Overbooking
• Find probability distribution of no-shows
• Cost of empty room
• Cost to walk
• Calculate OB ratio
• The expected marginal gain of the overbooked room is at least equal to the potential loss for the same room.
173
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
OB Ratio Mathematically
Where:
W = cost of walk
E = cost of empty room
174Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Probability distribution of no-shows
175
No Shows
NumberAt 180
Probability Cumulative Marginal(1-
cumulative)
Gains Loss Net Result
0 2
1 4
2 4
3 2
4 1
5 0
6 0
7 0
8 0
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Example176
Rates € 180.00 € 220.00 € 350.00
Variable costs € 32.00 € 32.00 € 32.00
Goodwill € 360.00 € 440.00 € 700.00
Re-accomodation € 198.00 € 242.00 € 385.00
Cost of walk (W) € 558.00 € 682.00 € 1,085.00
Empty room (E) € 148.00 € 188.00 € 318.00
OB ratio (Critical Fractile) 0.79 0.78 0.77
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Complete Table On Previous Page
177
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Group Forecasting and Pricing
What to do when group calls
178
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Mathematically Expressing This Decision
179Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
This example comes from:Group Revenue ManagementCornell Hotel and Administration QuarterlyVol 47 #3 2006
180
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008181
Principal Concept of Model
• Examines the amount of financial contribution lost from the transient customers turned away by the hotel’s decision to accept the group
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
182
How to calculate transient displaced rooms
Example:
DT: total transient displaced rooms for day I
FT: total transient rooms forecasted to be sold day I
C: hotel’s capacity on day I
FG: group room forecasted to be sold on day i
Calculate ?
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Calculate displacement with one segment
183Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
How to calculate transient displaced rooms multiple price segments
DT: total transient displaced rooms for day I and segment 1
FT: total transient rooms forecasted to be sold day I and segment 2
C: hotel’s capacity on day I and segment 3
FG: group room forecasted to be sold on day i
184Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008185
How to calculate transient displaced rooms multiple price segments
Example 2
forecast 250 rooms by price
Displacement (rooms available - group show)
same as above difference rooms displaced
segment 1 $200 100
segment 2 $180 120
segment 3 $150 30
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Fill in the blanks on previous slide
186Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008187
Should the hotel accept the group? Why or Why NotAssumptionsNumber of rooms 300request day 1 150request day 2 100group rate $80.00Additional non revenue $0.00Percent of room block used 90.00%transient forecast day 1 250transient forecast day 2 300overbook day 1 (rooms) 5overbook day 2 (rooms) 6segments day 1 day 2
$200 120 130$180 80 110$150 50 60
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Group Brings Only Room Revenue
• Accept a group request only if the revenue brought in by the group is at least as much as the revenue lost from transient segments by accepting the group
Where n is the number of days the group stays at the hotel and m is number ofTransient segments
FG = forecasted group roomsRG= requested group room rateDT= total transient displacedRT=transient average displaced room rate
188Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008189A B C D
39 Assumptions
40 Number of rooms 300
41 request day 1 150
42 request day 2 100
43 group rate $80.00
44 Additional non revenue $0.00
45 Percent of room block used 90.00%
46 transient forecast day 1 250
47 transient forecast day 2 300
48 overbook day 1 (rooms) 5
49 overbook day 2 (rooms) 6
50 segments day 1 day 2
51 $200 120 130
52 $180 80 110
53 $150 50 60
Revenue Brought in by the
Group
Actual rooms day 1 135
Actual rooms day 2 90
room revenue day 1 group $10,800.00
room revenue day 2 group $8,000.00
TOTAL GROUP REVENUE $18,800.00
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008190A B C D E
63 Demand groups
64 segments day 1 day 2
65 transient forecast $200 120 130
66 transient forecast $180 80 110
67 transient forecast $150 50 60
68 total transient 250 300
70 rooms available 305 306
71
72 group actual $80 135 90
73
74
75 where rooms come from
76
77 segment 1 $200 $200 0 0
78 segment 2 $180 $180 30 24
segment 3 $150 $150 50 60
total displacement 80 84
lost revenue $26,220
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
If You Accept the Group, what should the minimum rate be?
Where numerator is the lost revenue denominator is sum of the group room forecasted for each day
Where n is the number of days the group stays at the hotel and m is number ofTransient segments
191Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008192
Calculate Minimum Group Revenue Previous Slide
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008193
If Group Brings in Additional Revenue
• Groups financial contribution from additional non-room revenue sources is considered
• Consider contribution because of differences in variable cost structure among different revenue sources
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Accept Group If:
VR=variable cost selling a room ERG= total group revenue from source type kVT= total variable cost for revenue source type kFG= group rooms forecastedDT=transient displaced roomsRT= transient displaced room rate; p is number non room revenue sources
194Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008195Assumptions
A B C
Example:
99 meeting room fee $3,000.00
100 Food and beverage $5,500.00
101variable cost meeting room
rental 20.00%
102Variable cost food and
beverage 60.00%
103variable cost of renting room
regardless of price charged $50.00
104 Group rate $80.00
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Assumptions
107Contribution generated
from room $6,750.00
108Contribution generated
from non-room $4,600.00
109
110 Total Contribution $11,350.00
196Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008197
Formula for Contribution Generated by Group Room Rental
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008198
Displaced Contribution
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008199
Minimum Group Rate If Non-room revenue Included
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008200Displaced Contribution and minimum
price to be charged group
A B C
Displaced Contribution
115 Day 1 $8,900.00
116 Day 2 $9,120.00
117 Total of two days $18,020.00
non room contribution which is lost because no
group $4,600.00
119 # of group rooms 225
120 Minimum price $109.64Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
201
The Pricing Process: A Blue Print for Class
1. Understand the steps to better pricing.
2. Understand “what is price” and consider the two mail ways to price
3. Investigate different pricing strategies
4. Understand why we should have multiple prices
5. Understand customer psychology and how to use this information to increase revenue;
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
202
The Pricing Process: A Blue Print for Class - continued
6. Understand competitor analysis – especially segmentation and positioning; (competitive value analysis;)
7. Understand methods to determine price thresholds (e.g., willingness to pay)
8. Examine decision making and how it impacts the prices we offer the customer.
9. Understand how to use pricing tools to maximize revenue (e.g., bundling; group forecasting; statistics to predict proper bookings)
July 2008
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
203
The Pricing Process: A Blue Print for Class - continued
10. Review basic math for pricing