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Revenue Management and Price discrimination: consumers’ reactions Patrick Legohérel, University of Angers.

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Presentation on theme: "Revenue Management and Price discrimination: consumers’ reactions Patrick Legohérel, University of Angers."— Presentation transcript:

1 Revenue Management and Price discrimination: consumers’ reactions Patrick Legohérel, University of Angers

2 Revenue Management and Price discrimination: consumers’ reactions Distinguished delegates… you are travellers. …and you have to pay for your room, your ticket (airline, TGV…). The cost of your trip is of importance for you… and for your boss!

3 Revenue Management and Price discrimination: consumers’ reactions His/her (i.e. your boss!) question: how much have you paid? Did you get a good price? Have you anticipated your booking, and tried to get an early booking rate?

4 Revenue Management and Price discrimination: consumers’ reactions When boarding (on plane, on TGV…), did you know if your ticket was the most expensive one, or if you have paid far less than other passengers? You can bet that the other customers seated by your side have probably paid a different rate.

5 Revenue Management and Price discrimination: consumers’ reactions My room (Ibis): 85.5€ each night on average, for a multiple-night stay. Is it a good deal regarding the « product » (2* hotel, location…)? The theoretical limits (written at the back of the door of my room) are: – Minimum rate: 65€ – Maximum rate: 110€ Is it a good deal on a given date (12th of April)?

6 Revenue Management and Price discrimination: consumers’ reactions The customer has no idea! The developpement of Yield/Revenue Management has lead to more price discrimination and to more variations of prices.

7 Revenue Management and Price discrimination: consumers’ reactions Yield/Revenue Management is a sophisticated form of supply and demand management with simultaneous action based on prices and available capacity. This strategy consists of allocating the best service to the best customer, at the best price and at the best moment in time (Smith, Leimkhuler and Darrow, 1992)

8 Revenue Management and Price discrimination: consumers’ reactions The main objective consists of not serving all the customers equally but prioritizing and reacting more quickly to the customer who make the largest contribution and accept the highest price (Legohérel and Poutier, 2011). End of the rule: first come, first served. Think about it when booking: are you a profitable customer for the hotel, the airline…

9 Revenue Management and Price discrimination: consumers’ reactions The « visible » consequence of Revenue Management for customer is characterized by an impression of continuous and unexplained variation of the prices. Kimes (2002) shows that certain practices (regarding prices) in the hotel business are considered unfair, unjustified and/or excessive by the respondents (customers staying in hotels during the survey).

10 Revenue Management and Price discrimination: consumers’ reactions The price-customer interface management becomes a problem, and the repercussions are: – Loss of references (what is the real price of the room, why is a 3* room less expensive than a 2* room…) – Reduction in trust toward the service provider (relation between price and quality, is the decision regarding the price a serious one…) – and a certain level of dissatisfaction (I didn’t get the price I was looking for…)

11 Revenue Management and Price discrimination: consumers’ reactions The critical/most important part of the relation between guests and the hotel (or other service providers) are: – The first contact (the customer enter the hotel, feel the atmosphere…) – The last contact… Nowadays, the first contact is often the interface between the customer searching for prices on the website, and trying to book his/her room. During this critical moment, the customer can sometime get lost, confused… facing unstable and unexplained prices

12 Revenue Management and Price discrimination: consumers’ reactions Theoretical background: – perception of honesty, fairness and equality is considered as a psychological factor exercising an influence on purchasing decisions (Bolton, Warlop et Alba 2003; Bolton, Lemon et Verhoef 2004, Campbelle 1999; Xia, Monroe et Cox 2004). – The variation of a price must be understandable and exposed to the consumers (Lynn 1990). A consumer who pays more for an identical service but who does not perceive the difference between the two services, will consider the situation unfair and dissatisfactory.

13 Revenue Management and Price discrimination: consumers’ reactions Theoretical background : – Fair behavior (perceived justice and equality) = correlated to profits in the long term – Concept of reference transaction, correlated with fairness and justice (Kahneman, Knetsch and Thaler, 1986):The price and the condition of the transaction must be seen by the customer to be a reasonable price that he must pay with a reasonnable profit for the company. – Then, if the price is too high with no justification, or being modified too often and/or too quickly…the transaction (and to a certain extend, the company/brand) are considered as unfair, unequal, not honest…

14 Revenue Management and Price discrimination: consumers’ reactions Prices… too high… often modified…= Revenue Management Then should we consider that RM results in situations perceived as unfair and dissatisfactory? Other tools associated with the RM techniques face similar limitations: barriers.

15 Revenue Management and Price discrimination: consumers’ reactions Barriers reduce the possibility for the consumer to escape his/her price segment and have access too easily to price reductions which are not made for him (Wirtz and Kimes, 2007). A fair price must be associated with fair pricing rules and barriers (Dickson and Kalapurukal, 1994). But those access rules and pricing barriers are sometimes seen to be unfair and dishonest.

16 Theories and research hypothesis have been propose in the literature in order to understand the consequences of pricing barriers on consumers’reactions Wirtz and Kimes (2007): – The regular confrontation of the customer towards discriminatory pricing practices creates a moderating role of the pricing rules and barriers. – The pricing rules and barriers have a more significant effect on the perception of equality and honesty when the customer is not familiar with the pricing practices.

17 Revenue Management and Price discrimination: consumers’ reactions A key issue is: has the developement of Revenue Management modified the relation between the service provider and the guests? Should service providers develop new/innovative relationship with their customers? An attempt to look « less unfair » and more acceptable (honest) is the BAR technique.

18 Revenue Management and Price discrimination: consumers’ reactions What is BAR? – A place where you can order a beer or a coffee? → Yes, but it is not the issue for the moment (Wine testing is forthcoming) – A Best Available Rate offered by a hotel on its website? → Yes

19 Revenue Management and Price discrimination: consumers’ reactions The BAR is the best price the hotel can offer to a customer for each night, and the information is presented to the customer when he/she is booking his/her room. The BAR must contain a signal for the customer, and must play a major role in informing customers they will obtain « the best advertised price »

20 Revenue Management and Price discrimination: consumers’ reactions Rohlfs et Kimes (2007) define the BAR as an attempt to reduce confusion and to guarantee the customer the most competitive price possible for each night of its stay.

21 Revenue Management and Price discrimination: consumers’ reactions Academic and managerial perspectives: – Up until what point can we apply the revenue management practices in response to the objectives of revenue maximization, while at the same time, preserving the customers feeling of justice, fairness and equality? – Can the experience effect alone help to lower the feeling of injustice and the consumers’ perception of an unbalanced transaction?

22 Revenue Management and Price discrimination: consumers’ reactions Academic and managerial perspectives: The question of the perception of the fair and honest character of dynamic pricing practices, and revenue management are yet to be adressed.

23 Revenue Management and Price discrimination: consumers’ reactions Thank you for your attention.


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