What Is A Fair Price? - And Who Gets to Decide?
What Customer-centric Revenue Managers Know About
Guest Perceptions of Price
By Dr. David Hayes and Allisha Miller
November 15, 2010 - In the lodging industry Revenue
Managers set and manage prices. Customer-centric revenue
managers make sure their prices are fair.
The difficulty for them; and for you if you influence pricing,
comes in deciding exactly what constitutes a fair price. The
question is important for a variety of reasons including:

Buyers must be convinced the prices they are
paying are fair if they are to become repeat
customers.

Employees of a hotel must be convinced the prices
charged by their employers are fair if they are to be
effective salespersons for the business.

Regulatory agencies must be convinced prices
charged are fair or they will be motivated to
increase their oversight and control
Actually, while the issue of what constitutes a fair price is
interesting, even more interesting is the question of who
decides when a price is fair.
Sellers initially set what they believe to be fair prices for what
they sell, but in the long run it is always the buyer, not the
seller, who determines the fairness of a price. That is so
because buyers will not repeatedly and willingly pay more for
a product than they believe it is truly worth.
Interestingly, in most cases, it is not the actual price charged
for an item that makes buyers question its fairness. Rather, it
is the perception of the potential profit made by sellers that
lead to accusations of price gouging or unconscionable selling
prices (and that can result in bad press for an industry or invite
government regulation).
Are My Prices Perceived As Fair By My Customers?
The question; “Are my prices perceived as fair by customers?”
calls for thoughtful consideration. Because all customers
naturally seek to pay low prices, they sometimes have a
tendency to project an attitude that nearly any price is “too
high”. That is, their preference, much like your own, is always
to pay a lower price for all of the things they want to buy.
Experienced Revenue Managers understand this natural
tendency but they also know that the fact that a potential
customer feels a price is too high is not a legitimate reason for
granting that customer a price reduction.
They, like you, also know that the issue of a too high a price is
vastly different from that of an unfair price. Prices can easily
be too high for a potential buyer, but still be perceived as fair
(just ask your local Mercedes Benz dealer!).
Revenue Managers have little control over the inherent
tendency of buyers to seek low prices. They have a great deal
of control, however, over buyer perceptions of price fairness.
It is extremely important to recognize that most buyers believe
it is unfair for sellers to charge excessively high prices, even if
the majority of buyers are willing to pay those prices. This is
so because, overwhelmingly, consumers feel they have a right
to a reasonable price, just as sellers have a right to a
reasonable profit. Prices that appear to customers as having
been established to increase profits beyond reasonable levels
will always be viewed as being unfair, even when those
customers must pay the prices charged.
Ignoring this customer viewpoint can be the cause of pricing
fiascos brought about by those who honestly (but erroneously)
believe a fair price is ultimately defined by “what the market
will bear”.
To see why, consider the upstate New York hardware store
normally selling snow shovels for $ 25.99. The morning after
a major snowstorm, the store knows it will sell all the snow
shovels it has in stock so it raises the price on its five
remaining snow shovels to $ 39.99.
Is such an action on the part of the store owner and the
resulting new snow shovel price “fair”?
When posed with this question, an overwhelming majority of
buyers (over 82% of respondents in one study) found such an
action to be inherently unfair. You probably do as well.
Interestingly, in an identical study, 76% of the economics
students in one of the nation’s leading business schools found
raising the prices of the shovels (because demand increased
while supply was constant) to be “fair”; a pretty good
indicator that unless buyers’ views are more fully considered,
pricing debacles and the strong consumer reactions they
generate will not disappear in the foreseeable future.
Interestingly, the same business students were not asked if
they thought the store’s pricing decision would serve to build
repeat customers (maybe because the answer to that question
was too self-evident?)
The fact is that most buyers will sympathize with a seller’s
cost increases much more than with the seller’s supply
shortages. Thus a seller who finds they have only a few of an
extremely popular item in stock (for example, this Christmas
season’s most popular new video game release or hotel
rooms) must be careful. While the price of the item could, of
course, be raised significantly, or even auctioned to the
highest bidder, doing so would certainly be perceived as
unfair by the majority of consumers. The result might be short
term revenue maximization, but it would not be long term
revenue optimization. This is so because buyers use a variety
of information to establish their reference price; or the price
perceived by them to be the normal (and fair) price for a
product or a service. They will then evaluate all other prices
for that same item in comparison to that reference price.
It is for this reason that discounts from “normal” prices; even
those normal prices that are set very high, are popular with
buyers.
Experienced sellers know it pays to keep reference prices
(rack rates in the hotel industry) high, and when it is
advantageous to them, offer discounts from those regular
prices. Reducing rack rates across the board and then
advertising the reduced prices widely makes little long-term
pricing sense because it simply drives down the guest’s
reference price.
What Does It All Mean?
Customer-centric Revenue Management is about much more
than the manipulation of forecast data to set prices. It is about
using pricing to capture and retain market share. While data is
important in helping to determine prices, understanding
buyers’ perceptions of price fairness is more important if price
is to be the effective and powerful tool it can be for expanding
a hotel’s customer base. The best Revenue Managers always
remember that it is their customers’ perceptions of pricing
fairness, not their own, which matters most.
About this Article:
This article is based on information in Revenue Management
for the Hospitality Industry by David K. Hayes and Allisha A.
Miller. © 2011 John Wiley & Sons, Inc. All rights reserved.
To purchase this book, visit www.wiley.com.
About the Authors: Dr. David K. Hayes and Allisha A.
Miller operate Panda Professionals (www.pandapros.com)
where they create and deliver innovative and practical
educational materials and programming exclusively for those
in the hospitality industry.
Contact:
Allisha Miller
Panda Professionals
1715 Jolly Road
Okemos, MI 48864
amiller@pandapros.com
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