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Customer Loyalty and Value
Section E: Customer Loyalty and Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Frequency . . . Focusing on Behavior
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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 2

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 2

Annual Profits Throughout Guest Life
Price Premium 4 4 4 Referrals 3 3 4 3 Cost savings 2 4 3 2 3 2 2 3 2 Revenue growth 1 2 1 1 1 1 1 Base profit Year of customer life Source: Adapted from Bain Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 6

What Impacts Loyalty Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Impact of Yield Management
Assume that you go to make a reservation at the business class hotel you are loyal to and you find that they are charging you $50 per night more than they usually do because they have only a few rooms left. Please answer each of the following questions based on this knowledge. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

1 = strongly disagree to 10 = strongly agree 1.5% (Top Box) It is alright for the hotel to increase their rates in this situation Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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.

HP = high profit; LP= low profit; ST =short term; LT= long term
Types of Loyalty LT ST Butterflies True Friends Good fit between company’s offerings and customers’ needs; High profit potential Actions: Aim to achieve transactional satisfaction, not attitudinal loyalty Milk the accounts as long as they are active Key challenge is to cease investing soon enough Good fit between company’s offerings and customers’ needs; Highest profit potential Actions: Communicate consistently, but not too often Build both attitudinal and behavioral loyalty Delight to nurture, defend, and retain them HP Strangers Barnacles Limited fit between company’s offerings and customers’ needs; Low profit potential Actions: Measure the size and share of wallet; if low focus on up and cross-selling If size of wallet small, impose strict cost controls Little fit between company’s offerings and customers’ needs; Lowest profit potential Actions: Make no investments in these relationships Make profit on every transaction LP From Reinartz and Kumar 2002 Harvard Business Review Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. HP = high profit; LP= low profit; ST =short term; LT= long term

Types of RM Strategies Which strategy is important for each cell and why? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Types of RM Strategies Butterflies True Friends Strangers Barnacles
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. From Reinartz and Kumar 2002 Harvard Business Review

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.

Pricing and Decision Making
Section F: Pricing and Decision Making Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Examples Which do you choose? A____ or B____ A. Receive $50
B. 55% chance of receiving $100; 45% chance of earning nothing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Examples Which do you choose? C____ or D____ C. Loose $20
D. 20% chance of loosing $100; 80% chance of loosing nothing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Answer to Previous Question Pertains to Prospect Theory
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Daniel Kahneman Toasting Noble Prize

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Explanation Station 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Positive Value Value Function Station A ($2.30 – 0.10) Gains Losses
1.0 Losses Gains 1.6 Reference Point (state of well being) Station B: ($ ) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. Negative Value

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Positive Value Value Function Gains Losses Reference Point
(state of well being) Negative Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Economic Theory versus Prospect 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) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Economic Theory People are consistent in their decision making Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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) Economic Expected utility of uncertain outcome is weighted by its probability Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Positive Value Value Function Gains Losses Reference Point
(state of well being) Negative Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Prospect Theory Leads to Framing

Framing Buyers frequently form frames of reference
when making buying decisions, and these frames of reference in turn influence how buyers respond to price and product information. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Goal of Understanding Frames of Reference
1. Change the relationship between what customers perceive they pay and what they perceive they get in return. And manage this relationship Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Ways To Frame Purchase Decisions
Structure transactions to reflect gains and avoid losses Present price last after descriptions endow potential buyers Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

# 2 Change Way Frame Decisions

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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” Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Example 2 Make it simple for customer to see options – and trade-offs

This slide shows how prices change depending upon day of flight; key
here is that customer sees the options and can make choices Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Figure 3 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Note: departure and return are bundled Customers knows price but
has to buy prepackaged schedule Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Customer chooses by schedule but does not know price

Customer can easily get both price and schedule and therefore it
is easy to make choice Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Example 4 Frame by Bundling Gains and Losses un-bundle gains
bundle losses Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Frame by bundle losses Should we quote rates that include all taxes and airport fees? What losses that can be bundled? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Hotel Examples? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Example of Research Study Undertaking
Test Condition: Bundling Added: Utilize proper opening dialogue Listen to caller’s requests Ask repeat guest question and determine reason for stay Provide normal sales strategy At time of purchase, ask the following: Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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). Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Framing and Reference Price Formation

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Hotel Example Venetian Hotel in Las Vegas Manipulation Two Teams
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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Hotel Example Upgrades: $159 quoted first: 13.59% upgraded (option A)
$189 quoted first: % upgraded (option B) Translates $31,878 extra revenue for the month to the bottom line Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Restaurant Study Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Study Design Eight different menus Type of description Number of items
Modest/Detailed Number of items Three per category/Two per category Prices High prices/Low prices 23 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

MENU DESIGN Menu One: Detailed Menu Descriptions, High Price, 3 Choices Menu Two: Detailed Menu Descriptions, Low Price, 3 Choices Menu Three: Detailed Menu Descriptions, High Price, 2 Choices Menu Four: Detailed Menu Descriptions, Low Price, 2 Choices Menu Five: Modest Menu Description, High Price, 3 Choices Menu Six: Modest Menu Description, Low Price, 3 Choices Menu Seven: Modest Menu Description, High Price, 2 Choices Menu Eight: Modest Menu Description, Low Price, 2 Choices Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Two Items Each Menu Category
Hypothesis Two Items Each Menu Category Ho1 X value (high price with detailed description) = X value (high price with modest description) Mean p=.083 Ho2: X value (low price with detailed description) = X value (low price with modest description) Mean P=.369 Ho3: X value (high price with detailed description) = X value (low price with detailed description) Mean P=.315 Ho4: X value (high price with modest description) = X value (low price with modest description) Mean p=.113 Ho5: X value (high price with detailed description) ≥ X value (low price with modest description) Mean p=1.00 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

What Influence Buyers’ Reference Prices
Current Price Influences Past Price Influences Purchase Context Influences Prices of similar items Price considering cost of making item yourself Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Product Line Pricing Example: Wine
$38 $48 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Product Line Pricing Example: Wine
$38 $48 $58 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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, voic , data-port, fax machines, Lodgenet Entertainment System with movies and CD Library. These rooms overlook 56th street or the city view of 57th street. The bedroom can be closed off from the living room. The king size bed includes five down pillows with satin-banded Egyptian cotton Pillowcases. Suites sell for $ 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Current Price Influences - continued
Suggested Reference Prices State a price charged previously State a price charged by a competitor State suggested retail price Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Current Price Influences - continued
Consider the following airline prices seen on Internet for round-trip London 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 _____ This is example of order effect: the third current price influence. Results should be as follows: subjects who saw the prices in descending order form higher reference prices than those who saw them in ascending order, even though both groups saw the same sets of prices before making judgments Implications: 1. Show products above price range, even if customers will ultimately look at cheaper products as well. Known as top-down selling 2. Direct mail packages: display packages from most expensive to least expensive 3. Put high priced items on shelf eye-level and more lower price/higher margin items underneath Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? _____ A rationale consumer should be willing to pay same price, regardless as to where it was purchased as the person would be consuming the beer on the beach. Many people in survey would rather go thirsty than be “ripped off” by the grocery store. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? _____ A rationale consumer should be willing to pay same price, regardless as to where it was purchased as the person would be consuming the beer on the beach. Many people in survey would rather go thirsty than be “ripped off” by the grocery store. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? A rationale consumer should be willing to pay same price, regardless as to where it was purchased as the person would be consuming the beer on the beach. Many people in survey would rather go thirsty than be “ripped off” by the grocery store. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

4. Prices of similar items (e. g. , if. consumers think there is no
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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Restaurant Positioning Example
See Article in Handout Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Price, thinking about type of ingredients
Value for the $ Price, thinking about type of ingredients Price compared to other entrees at Brand_ Price compared to entrees other places Price considered at Brand _ Price Expected to pay Price considered amount of food Overall price/value Overall quality of food -9 6 2 4 Z Q S X B U 5 P T O V K A I -5 L M H D E N G W J C 1 F Y R 8 3 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 7 9

6. Price Differentials 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 £ 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 _________ Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Would you cancel the current order and switch to the other vendor?
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 _________ Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Weber’s Law: A series of smaller price increases above the threshold is more successful than than one large increase. Similarly, one large discount is more noticeable than a series of smaller, successive discounts Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

When quoting rates, quote price differences instead of whole rate; e.g., $320 versus $290. For $30 less get…. Weber’s Law: A series of smaller price increases above the threshold is more successful than than one large increase. Similarly, one large discount is more noticeable than a series of smaller, successive discounts Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 $ $0.75 Second Pair $ $0.79 Your answer _____ Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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%) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Phone calls to reservation centers to illustrate the concepts discussed

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Summary Slide Value Creation Anchoring
Financial, temporal, functional, experiential, emotional, social, trust, Identification with organization Anchoring What Influences Buyers Reference Prices Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Competitor Analysis and Positioning
Section G: Competitor Analysis and Positioning Write on Board: Price = quantity of money or goods and services received by the seller quantity of goods and services received by the buyer Problems: Cannot look just at the numerator, must also look at denominator; firms that take a value orientation to pricing consider both sides of the ratio. Ways to change price: change quantity of money or goods to be paid by buyer change quantity of goods and services provided by buyer (e.g., give less) change quality of goods and services change premiums or discounts to be applied for quantity variations change the time and transfer of ownership change place and time of payment change acceptable form of payment Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Research Will Help Determine the Following:
Who the customers are, What makes the property different, Why property is appealing to the customer Market position differences by market segment or season (e.g., business travel versus leisure travel) Defines what strategic advantages the property has, or conversely, what challenges the property may face Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Vintage Building Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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” Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Index of Competitive Strength
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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Calculation of Competitive Index
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) For each attribute, multiple average importance x average performance. Answers in Column C Sum all numbers in column C Calculate the CSI as -- Total C/Total in A Repeat steps for competitor's: see columns D and E Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Calculation of Competitive Index

Matrix of Competitive Advantages
Example: Casino high Slot Club Friendly Staff Value of Promotions Brand Feel Safe Service Package Level of Importance Price Good Entertainment Non Smoking low Relative Performance Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Steps to Developing a Positioning Strategy
Identify the competitors From customer’s point of view Different competitors in different segments Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Best Way to Define True Competitors
Based upon a definition of the core customer; different competitors for different segments Avoid emotional opinions Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Steps to Developing a Positioning Strategy
Determine how the competitors are perceived and evaluated Determine the competitors’ positions Critical to also have reference points for data analysis Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Thee competitive tiers
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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Conduct competitive pricing analysis Shops 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Example See handout on Las Vegas data

53.16 Caesar $189 47.91 Bally $185 $180 $179 59.97 Rio 63.92 Boulder 43.41 Circus Circus $159 54.3 Fiesta $155 52.07 Excalibur $140 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Exercise Develop positioning map for coffee shop data on the next slide Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Section H: Price Bundling

Objective of this section
Explain the benefits of price bundling Show how bundling might work in the hotel industry Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Bundling Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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) Pure price bundling: only one bundle offered; products cannot be bought individually; example is block booking Mixed price bundling: both the bundle and the individual products are offered for sale; Mixed-joint – prices set individually and for the bundle Mixed leader – discount given for second product if full price paid for the first Tie-in Sales: buyer of main product (tying good) agrees to buy one or several complementary goods (tied goods), which are necessary to use the tying good, exclusively from the same supplier; Tying good = durable (phone) Non tying good = non durable (air time) Sales Rebates: does not matter where sales come from within firms product line; Cross couponing: often used to introduce new products and/or increase the sales of weak products by linking them with established products in the firms product line Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Pure price bundling: only one bundle offered; products cannot be bought individually; example is block booking Mixed price bundling: both the bundle and the individual products are offered for sale; Mixed-joint – prices set individually and for the bundle Mixed leader – discount given for second product if full price paid for the first Tie-in Sales: buyer of main product (tying good) agrees to buy one or several complementary goods (tied goods), which are necessary to use the tying good, exclusively from the same supplier; Tying good = durable (phone) Non tying good = non durable (air time) Sales Rebates: does not matter where sales come from within firms product line; Cross couponing: often used to introduce new products and/or increase the sales of weak products by linking them with established products in the firms product line Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Mixed Bundling Essentially Four Groups: Non buyers Buy only A
Buy only B Buy both Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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: Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Reservation Prices, $ 1 $9 $1.5 $10.5 2 $8 $5 $13.0 3 $4.5 $8.5 $13
Customer Product A Product B A+B $9 $ $10.5 $8 $ $13.0 $ $ $13 $ $ $11.5 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

. . . . Figure 1 Separate Pricing Price for B Price for A
10 8 6 4 Group 4 Group 3 Price for B = $8.50 . Group 2 . Group 1 Price for A Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Forms of Price Bundling Optimal Prices A B Bundle Sales Volume Profit (Index) No Bundling $8.0 $8.50 2 (groups 1&2) 2 (groups 3&4) $33 (100) $16+$17 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Pure Price Bundling Can only buy items as a bundle Pure price bundling: only one bundle offered; products cannot be bought individually; example is block booking Mixed price bundling: both the bundle and the individual products are offered for sale; Mixed-joint – prices set individually and for the bundle Mixed leader – discount given for second product if full price paid for the first Tie-in Sales: buyer of main product (tying good) agrees to buy one or several complementary goods (tied goods), which are necessary to use the tying good, exclusively from the same supplier; Tying good = durable (phone) Non tying good = non durable (air time) Sales Rebates: does not matter where sales come from within firms product line; Cross couponing: often used to introduce new products and/or increase the sales of weak products by linking them with established products in the firms product line Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

. . . . Price for B Price for A Figure 2 Pure Bundling 10 8 6 4 2
($2.5, $9) ($4.5, $8.5) Group 4 Group 3 Price of $10.50 Reservation price . ($8.0, $5.0) Group 2 . ($9.0, $1.50) Group 1 Price for A Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Forms of Price Bundling Optimal Prices A B Bundle Sales Volume 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Mixed Price Bundling Items sold either as a bundle or by themselves Pure price bundling: only one bundle offered; products cannot be bought individually; example is block booking Mixed price bundling: both the bundle and the individual products are offered for sale; Mixed-joint – prices set individually and for the bundle Mixed leader – discount given for second product if full price paid for the first Tie-in Sales: buyer of main product (tying good) agrees to buy one or several complementary goods (tied goods), which are necessary to use the tying good, exclusively from the same supplier; Tying good = durable (phone) Non tying good = non durable (air time) Sales Rebates: does not matter where sales come from within firms product line; Cross couponing: often used to introduce new products and/or increase the sales of weak products by linking them with established products in the firms product line Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

. . . . Y X Figure 3 Price for B Mixed Bundling Price for A
People in Y buy only B Y . . 10 8 6 4 2 Price A = $9 Group 3 Price B = 9 Group 4 Price A + B = $13 . People in this area Buy the bundle for $13 Group 2 People in X buy only A . X Group 1 Price for A Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Case Study Atlantic Computer: A Bundle of Pricing Options

Section I Overbooking Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Overbooking main concept
The expected marginal gain of the overbooked room is at least equal to the potential loss for the same room. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Overbooking issues When to overbook? For what reason?
With what kind of risk? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Internal factors Historical data per segment: No-shows Cancellations
Early departures Late departures Human error Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

External factors Seasonality (yearly, monthly, weekly, daily,…)
Special events Weather Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Handling Overbooking Internal elements: No-shows forecast
Overbooking policy External elements: Prepayment / deposit Cancellation policy Penalties Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 costs Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

OB Ratio Mathematically
Where: W = cost of walk E = cost of empty room Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Probability distribution of no-shows
Number At 180 Probability Cumulative Marginal (1-cumulative) Gains Loss Net Result 2 1 4 3 5 6 7 8 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Example Rates € 180.00 € 220.00 € 350.00 Variable costs € 32.00
Goodwill € € € Re-accomodation € € € Cost of walk (W) € € € 1,085.00 Empty room (E) € € € OB ratio (Critical Fractile) 0.79 0.78 0.77 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Complete Table On Previous Page

Group Forecasting and Pricing
What to do when group calls Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Mathematically Expressing This Decision

This example comes from: Group Revenue Management
Cornell Hotel and Administration Quarterly Vol 47 #3 2006 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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.

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.

Calculate displacement with one segment

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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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.

Fill in the blanks on previous slide

Should the hotel accept the group? Why or Why Not

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 FG = forecasted group rooms RG= requested group room rate DT= total transient displaced RT=transient average displaced room rate Where n is the number of days the group stays at the hotel and m is number of Transient segments Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

A 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 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 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.

A B C D E 63 Demand groups 64 segments day 1 day 2 65 transient forecast $200 120 130 66 $180 80 110 67 $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 78 segment 2 $180 30 24 segment 3 $150 total displacement 84 lost revenue $26,220 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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 of Transient segments Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Calculate Minimum Group Revenue Previous Slide

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.

Accept Group If: VR=variable cost selling a room
ERG= total group revenue from source type k VT= total variable cost for revenue source type k FG= group rooms forecasted DT=transient displaced rooms RT= transient displaced room rate; p is number non room revenue sources Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Assumptions A B C Example: 99 meeting room fee $3,000.00 100
Example: 99 meeting room fee $3,000.00 100 Food and beverage $5,500.00 101 variable cost meeting room rental 20.00% 102 Variable cost food and beverage 60.00% 103 variable 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.

Assumptions 107 Contribution generated from room $6,750.00 108
Contribution generated from non-room $4,600.00 109 110 Total Contribution $11,350.00 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

Formula for Contribution Generated by Group Room Rental

Displaced Contribution

Minimum Group Rate If Non-room revenue Included

Displaced Contribution and minimum price to be charged group
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 $109.64 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

The Pricing Process: A Blue Print for Class
Understand the steps to better pricing. Understand “what is price” and consider the two mail ways to price Investigate different pricing strategies Understand why we should have multiple prices Understand customer psychology and how to use this information to increase revenue; Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

The Pricing Process: A Blue Print for Class - continued
Understand competitor analysis – especially segmentation and positioning; (competitive value analysis;) Understand methods to determine price thresholds (e.g., willingness to pay) Examine decision making and how it impacts the prices we offer the customer. Understand how to use pricing tools to maximize revenue (e.g., bundling; group forecasting; statistics to predict proper bookings) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

The Pricing Process: A Blue Print for Class - continued
Review basic math for pricing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

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