July 2008 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 200 Section E: Customer Loyalty and Value

July 2008

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

1

Section E:

Customer Loyalty and Value

July 2008


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


July 2008


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


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


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


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


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


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


July 2008


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


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


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


14


– 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


15


– 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


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


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)


20

July 2008


21

Section F:

Pricing and Decision Making

July 2008


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


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


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


25

Answer to Previous Question Pertains to Prospect Theory

July 2008


26

Daniel Kahneman Toasting Noble Prize

July 2008


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


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


July 2008


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


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


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


Value Function


July 2008


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


35


• 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


36


• 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


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


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


Value Function


July 2008


40

Prospect Theory Leads to Framing

July 2008


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


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


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


44

Example-2 Change the relationship between what customers perceive they


• 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


45



• 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


46



• 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


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


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


49

# 2 Change Way Frame Decisions

July 2008


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


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


52

Example 2

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

July 2008


53

This slide shows how prices changedepending upon day of flight; keyhere is that customer sees the optionsand can make choices

July 2008


54

Figure 3

July 2008


55

Figure 4

July 2008


56

Figure 5

July 2008


57

Note: departure and returnare bundled

Customers knows price buthas to buy prepackagedschedule

July 2008


58

Customer chooses by schedulebut does not know price

July 2008


59

Customer can easily get bothprice and schedule and therefore itis easy to make choice

July 2008


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


61

Example 4

Frame by Bundling Gains and Losses– un-bundle gains

– bundle losses

July 2008


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


63

Frame by bundle losses

• Should we quote rates that include all taxes and airport fees?

• What losses that can be bundled?

July 2008


64

Hotel Examples?

July 2008


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


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


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


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


69

Framing and Reference Price Formation

July 2008


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


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


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


73

Restaurant Study

July 2008


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


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


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


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


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


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


80

Product Line Pricing Example: Wine

• $38

• $48

July 2008


81

• $38

• $48

• $58

Product Line Pricing Example: Wine

July 2008


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


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


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


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


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


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


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


89


• 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


90


• 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


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


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


93

Restaurant Positioning Example

See Article in Handout

July 2008


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


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


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


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


98

• When quoting rates, quote price differences instead of whole rate; e.g., $320 versus $290. For $30 less get….

July 2008


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


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


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


102

Phone calls to reservation centers to illustrate the concepts discussed

July 2008


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


104

Summary Slide

• Value Creation– Financial, temporal, functional, experiential,

emotional, social, trust, Identification with organization

• Anchoring

• What Influences Buyers Reference Prices

July 2008


105

Section G:

Competitor Analysis and Positioning

July 2008


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


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


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


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


110

Vintage Building

July 2008


111

July 2008


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


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


114

July 2008


115

July 2008


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


117

July 2008


118

July 2008


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


120

July 2008


121

July 2008


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


123

July 2008


124

July 2008


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


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


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


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


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


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


131

Steps to Developing a Positioning Strategy

1. Identify the competitors

– From customer’s point of view

– Different competitors in different segments

July 2008


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


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


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


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


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


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


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


139

Example

• See handout on Las Vegas data

July 2008


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


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


142

Exercise

• Develop positioning map for coffee shop data on the next slide

July 2008


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


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


145

Section H:

Price Bundling

July 2008


146

Objective of this section

• Explain the benefits of price bundling

• Show how bundling might work in the hotel industry

July 2008


147

Bundling

July 2008


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


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


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


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


152

Mixed Bundling

• Essentially Four Groups:– Non buyers– Buy only A– Buy only B– Buy both

July 2008


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


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


July 2008156


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


July 2008


157


• Pure Price Bundling– Can only buy items as a bundle

July 2008


158



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


July 2008160


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


July 2008


161


• Mixed Price Bundling – Items sold either as a bundle or by themselves

July 2008


162



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


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


164

July 2008

Section I

Overbooking


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


July 2008

Internal factors

• Historical data per segment:

– No-shows

– Cancellations

– Early departures

– Late departures

• Human error

168


July 2008

External factors

• Seasonality (yearly, monthly, weekly, daily,…)

• Special events

• Weather

169


July 2008

Handling Overbooking

• Internal elements:

– No-shows forecast

– Overbooking policy

• External elements:

– Prepayment / deposit

– Cancellation policy

– Penalties

170


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


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


July 2008

OB Ratio Mathematically

Where:

W = cost of walk

E = cost of empty room


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


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


July 2008

Complete Table On Previous Page

177


July 2008

Group Forecasting and Pricing

What to do when group calls

178


July 2008

Mathematically Expressing This Decision


July 2008

This example comes from:Group Revenue ManagementCornell Hotel and Administration QuarterlyVol 47 #3 2006

180


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


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 ?


July 2008

Calculate displacement with one segment


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


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


July 2008

Fill in the blanks on previous slide


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


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


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


July 2008190A B C D E

63 Demand groups

64 segments day 1 day 2

65 transient forecast $200 120 130



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


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


July 2008192

Calculate Minimum Group Revenue Previous Slide


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


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


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


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


July 2008197

Formula for Contribution Generated by Group Room Rental


July 2008198

Displaced Contribution


July 2008199

Minimum Group Rate If Non-room revenue Included


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


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


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


203

The Pricing Process: A Blue Print for Class - continued

10. Review basic math for pricing

Documents

July 2008 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. 200 Section E: Customer Loyalty and Value