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Section E:
Customer Loyalty and Value
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July 2008
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
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July 2008
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?
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July 2008
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.
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July 2008
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.
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July 2008
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.
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July 2008
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
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July 2008
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
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Annual Profits Throughout Guest Life
4
4
4
4
3
Price Premium 4
Referrals 3
3
Cost savings 2
3
3
2
2
2
3
2
2
1
1
Revenue growth 1
1
1
1
Base profit
Year of customer life
0
1
2
3
4
5
Source: Adapted from Bain
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.63*
.66*
Certainty
Value
.97*
.63*
.51*
.17**
What Impacts
Loyalty
.55*
Switching Costs
.17*
Trust
.24*
.41*
-.13**
Benefits
Opportunistic
Behavior
.43*
Relationship
Commitment
.47*
Product Usage
.83*
Voluntary
Partnership
* Significant at .01
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
** Significant at .05
July 2008
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.
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July 2008
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
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July 2008
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
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July 2008
Impact of Yield Management continued
• 1 = strongly disagree to 10 = strongly agree
– 4.9% (Top Box) My feelings toward the hotel
would not change as a result of the above action
– 4.0% (Top Box) What I told others about the
hotel would still continue to be positive
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July 2008
Impact of Yield Management continued
• 1 = strongly disagree to 10 = strongly agree
– 1.5% (Top Box) It is alright for the hotel to
increase their rates in this situation
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July 2008
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
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July 2008
ST
Butterflies
Types of Loyalty
• Good fit between company’s offerings and
HP
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
Strangers
• Little fit between company’s offerings and
LP
customers’ needs;
•Lowest profit potential
Actions:
•Make no investments in these relationships
•Make profit on every transaction
LT
True Friends
• 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
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
From Reinartz and Kumar 2002 Harvard Business Review
Strategic
Hotels:
Revenue
Management
Through
Pricing
(c) Stowe
HPPricing
= highfor
profit;
LP=
low profit;
ST =short
term;
LT= long
termShoemaker, Ph.D.
216
July 2008
Types of RM Strategies
• Which strategy is important for each cell
and why?
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July 2008
Types of RM Strategies
Butterflies
Strangers
True Friends
Barnacles
Strategic
Pricing for
Revenue
Management
Through
Pricing Review
(c) Stowe Shoemaker, Ph.D.
From
Reinartz
andHotels:
Kumar
2002
Harvard
Business
218
July 2008
219
Case Study
• Customer Profitability and Customer
Relationship Management at RBC Financial
Group (Abridged)
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Section F:
Pricing and Decision Making
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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.
July 2008
Examples
• Which do you choose? A____ or B____
– A. Receive $50
– B. 55% chance of receiving $100; 45% chance
of earning nothing
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July 2008
Examples
• Which do you choose? C____ or D____
– C. Loose $20
– D. 20% chance of loosing $100; 80% chance
of loosing nothing
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July 2008
Answer to Previous Question
Pertains to Prospect Theory
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July 2008
Daniel Kahneman Toasting Noble Prize
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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
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July 2008
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
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July 2008
Positive Value
228
Value Function
Station A ($2.30 – 0.10)
1.0
Losses
Gains
1.6
Reference Point
(state of well being)
Station B:
($2.20 +.10)
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Negative Value
July 2008
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
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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?
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July 2008
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.
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July 2008
Positive Value
232
Value Function
Gains
Losses
Reference Point
(state of well being)
Negative Value
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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)
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Economic Theory versus
Prospect Theory
• Economic Theory
– People are consistent in
their decision making
• Prospect Theory
• If people perceive they are
in the gain domain, they
will act conservatively
• If people are in the loss
domain, they will tend to
take more risks
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Economic Theory versus
Prospect Theory
• Economic
– Expected utility of
uncertain outcome is
weighted by its
probability
• Prospect
– Expected utility of
uncertain outcome is
multiplied by a decision
weight (p) where :
– 1. Impossible events are
discarded (0)=0
– 2. Low probabilities are
over weighted while
moderate and high
probabilities are under
weighted (e.g., odds of
being involved in an airline
crash versus car accident)
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
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)
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July 2008
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.
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July 2008
Positive Value
238
Value Function
Gains
Losses
Reference Point
(state of well being)
Negative Value
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July 2008
Prospect Theory Leads to
Framing
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240
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.
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July 2008
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
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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
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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 blacksmoked 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
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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?
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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
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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
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July 2008
Ways To Frame Purchase Decisions
1. Structure transactions to reflect gains
and avoid losses
–
–
Present price last after descriptions
endow potential buyers
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July 2008
# 2 Change Way Frame
Decisions
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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
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July 2008
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”
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Example 2
Make it simple for customer to see options –
and trade-offs
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This slide shows how prices ch
depending upon day of flight; k
here is that customer sees the
and can make choices
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Figure 3
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Figure 4
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Figure 5
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Note: departure and return
are bundled
Customers knows price but
has to buy prepackaged
schedule
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Customer chooses by schedu
but does not know price
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Customer can easily get both
price and schedule and there
is easy to make choice
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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
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Example 4
Frame by Bundling Gains and Losses
– un-bundle gains
– bundle losses
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July 2008
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
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July 2008
Frame by bundle losses
• Should we quote rates that include all taxes
and airport fees?
• What losses that can be bundled?
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July 2008
Hotel Examples?
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July 2008
Example of Research Study
Undertaking
• Test Condition: Bundling Added:
1.
2.
3.
4.
5.
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:
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July 2008
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).
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July 2008
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.
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July 2008
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?
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July 2008
Framing and Reference Price
Formation
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July 2008
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
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July 2008
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
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July 2008
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
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July 2008
Restaurant Study
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Study Design
• Eight different menus
23
– Type of description
• Modest/Detailed
– Number of items
• Three per category/Two per category
– Prices
• High prices/Low prices
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July 2008
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
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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
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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
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
What Influence Buyers’
Reference Prices
1.
2.
3.
4.
5.
Current Price Influences
Past Price Influences
Purchase Context Influences
Prices of similar items
Price considering cost of making item yourself
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July 2008
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 lowerpriced products in the product line and
influences low-end buyers to trade up to
higher-priced items
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Product Line Pricing Example: Wine
• $38
• $48
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July 2008
Product Line Pricing Example: Wine
• $38
• $48
• $58
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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
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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 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 $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.
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Current Price Influences - continued
• Suggested Reference Prices
– State a price charged previously
– State a price charged by a competitor
– State suggested retail price
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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.
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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 _____
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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
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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
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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, rundown 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? _____
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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? _____
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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?
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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
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Restaurant Positioning Example
See Article in Handout
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-9
Z
X
O
-5
H
E
Q
P
G
Y
R
1.
2.
3.
4.
5.
6.
7.
8.
9.
293
Value for the $
6 2
Price, thinking about type of ingredients
Price compared to other entrees at Brand_
Price compared to entrees other places
4
Price considered at Brand _
Price Expected to pay
Price considered amount of food
Overall price/value
S
Overall quality of food
U
5 B
T
V K
AI
L
M
D
N
W
J
C
1
F
8 3
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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 £ 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 _________
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• 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 _________
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• 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
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• When quoting rates, quote price differences
instead of whole rate; e.g., $320 versus
$290. For $30 less get….
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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?
First Pair
Second Pair
Higher Price
$0.89
$0.93
Your answer
Lower Price
$0.75
$0.79
_____
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• 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%)
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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.
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Phone calls to reservation centers to
illustrate the concepts discussed
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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
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Summary Slide
• Value Creation
– Financial, temporal, functional, experiential,
emotional, social, trust, Identification with
organization
• Anchoring
• What Influences Buyers Reference Prices
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Section G:
Competitor Analysis and
Positioning
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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
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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.
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Research Will Help Determine the Following:
1.
2.
3.
4.
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)
5. Defines what strategic advantages the
property has, or conversely, what challenges
the property may face
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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
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Vintage
Building
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Ways to Position
# 2. Positioning by how customer uses
your product or service
– Arm & Hammer baking soda as odordestroying agent in refrigerators
– Long distance phone line “Reach out and touch
someone”
– Campbell’s Soup for use at lunch, Gatorade as
sports drink
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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
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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”
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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
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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
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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.
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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
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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
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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 A
5. Repeat steps for competitor's: see columns D
and E
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Calculation of Competitive Index
A
Scale: 1-10
Company
Rating
B
Scale: 110
Company
Score
C
A*B
Competitor
Rating
D
Scale: 1-10
Competitor
Score
E
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
Slot machines
filled in a timely
manner
Type of
promotions
offered
TOTAL
INDEX
7.4
6.8
50.32
6.0
44.40
7.5
6.8
51
6.8
51.00
7.4
7.7
56.98
6.8
50.32
Importance
Feature
38.4 *10=384
281.54
73.3
259.32
67.5
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Matrix of Competitive Advantages
Example: Casino
Level of Importance
high
Slot Club
Value of
Promotions
Friendly
Staff
Brand
Service
Package
Feel
Safe
Price
Non
Smoking
Good
Entertainment
low
Relative Performance
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Steps to Developing a Positioning Strategy
1. Identify the competitors
– From customer’s point of view
– Different competitors in different
segments
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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?
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Best Way to Define True Competitors
• Based upon a definition of the core
customer; different competitors for
different segments
• Avoid emotional opinions
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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
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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
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• 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
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2. 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
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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
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Example
• See handout on Las Vegas data
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Feel
Safe
There
Importance
Rio
Bally
Boulder
Caesar
Circues
Excalibur
Fiesta
8.20
7.26
6.55
7.40
7.19
4.70
6.61
6.19
Drink
Slot
Orders
Machines
Friendly Place My
Always Taken in Cashier Restaurants Can get Filled in Like the You Can Get
Employe Friends Have Good Timely Lines Are Offer Great change
Timely Promotion Complimentari
es
Like to Go Entertaiment Manner Short
Value
quickly Manner s Offered
es
8.20
6.60
5.28
6.88
5.85
4.60
5.64
6.00
Rio
Bally
Boulder
Caesar
Circues
Excalibur
Fiesta
6.27
6.49
3.96
6.40
6.15
4.07
5.01
4.75
4.80
6.47
4.59
5.74
5.81
4.24
4.89
4.64
Rate
CSI
$179.00
$185.00
$160.00
$189.00
$159.00
$140.00
$155.00
59.97
47.91
63.92
53.16
43.41
52.07
54.3
6.12
5.93
5.11
6.50
5.37
4.59
5.03
5.48
6.37
5.91
5.05
5.90
5.43
4.63
5.42
5.43
7.49
5.70
4.05
6.54
4.32
4.55
5.01
5.61
6.33
5.54
4.70
6.11
4.82
4.15
5.19
5.60
5.67
5.35
4.60
5.89
5.07
4.21
5.04
5.34
4.80
5.05
3.75
6.16
3.62
3.80
4.06
4.66
6.15
4.96
4.20
6.05
3.97
3.81
4.47
5.25
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overall
average
6.40
5.93
4.71
6.32
5.24
4.30
5.12
5.36
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53.16
Caesar
$189
$185
340
47.91
Bally
$180
$179
$159
59.97
Rio
43.41
Circus Circus
54.3
Fiesta
$155
$140
63.92
Boulder
52.07
Excalibur
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Exercise
• Develop positioning map for coffee shop
data on the next slide
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Importance
It is a
Grind
Starbucks
Norma
Jeans
Café
Java
Einstein's
You feel safe there
8.20 7.26 6.55 7.40 7.19 4.70
The employees are
friendly and courteous
8.20 6.60 5.28 6.88 5.85 4.60
It is a place my friends
like to go
6.27 6.49 3.96 6.40 6.15 4.07
Always have good
entertainment
4.80 6.47 4.59 5.74 5.81 4.24
Drink orders are taken
and delivered in a timely
manner
6.12 5.93 5.11 6.50 5.37 4.59
I can sit and read the
paper
6.37 5.91 5.05 5.90 5.43 4.63
Offer great price value
7.49 5.70 4.05 6.54 4.32 4.55
Food items taste great
6.33 5.54 4.70 6.11 4.82 4.15
Music is to my liking
5.67 5.35 4.60 5.89 5.07 4.21
The type of promotions
offered Strategic Pricing for Hotels:
4.80Revenue
5.05
3.75 Through
6.16Pricing3.62
3.80
Management
(c) Stowe
Shoemaker, Ph.D.
Price of cup of coffee
3.25 3.50 3.25 3.75 2.75
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July 2008
• Questions:
Tweeter, Inc.
– 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?
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July 2008
Section H:
Price Bundling
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Objective of this section
• Explain the benefits of price bundling
• Show how bundling might work in the hotel
industry
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Bundling
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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.
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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
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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)
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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
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Mixed Bundling
• Essentially Four Groups:
–
–
–
–
Non buyers
Buy only A
Buy only B
Buy both
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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:
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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
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Price for A= $8.0
Price for B
. .
Figure 1
Separate Pricing
354
Group 4
10
Group 3
8
Price for B = $8.50
.
6
Group 2
4
.
4
Group 1
0
0
Price for A
2
4
6
8
10
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Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Forms of
Price
Bundling
No
Bundling
Optimal
Prices
Optimal
Prices
A
B
$8.0
$8.50
Optimal
Prices
Bundle
---------
Sales
Volume
Sales
Volume
A
B
2
(groups
1&2)
2
(groups
3&4)
Sales
Volume
Profit
(Index)
Bundle
---------
$33 (100)
$16+$17
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Forms of Price Bundling
• Pure Price Bundling
– Can only buy items as a bundle
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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
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Figure 2
Pure Bundling
Price for B
. .
10
($2.5, $9)
Group 4
8
($4.5, $8.5)
Group 3
Price of $10.50
Reservation price
.
6
($8.0, $5.0)
Group 2
4
.
($9.0, $1.50)
Group 1
2
0
0
Price for A
2
4
6
8
10
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Optimal Prices, Sales Volumes, and Revenues for Different Forms of Pricing
Forms of
Price
Bundling
Optimal
Prices
Optimal
Prices
A
B
Optimal
Prices
Bundle
Sales
Volume
Sales
Volume
A
B
Sales
Volume
Profit
(Index)
Bundle
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
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Forms of Price Bundling
• Mixed Price Bundling
– Items sold either as a bundle or by themselves
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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
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July 2008
Price for B
Y
10
Figure 3
Mixed Bundling
People in Y buy only B
. .
362
Price A = $9
Group 3
Price B = 9
Group 4
8
Price A + B = $13
People in this area
Buy the bundle for $13
6
.
Group 2
People in X buy only A
4
2
Group 1
0
.
X
Price for A
0
2
4
6
8
10
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Case Study
• Atlantic Computer: A Bundle of Pricing
Options
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Section I
Overbooking
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Overbooking main concept
• The expected marginal gain of the
overbooked room is at least equal to
the potential loss for the same room.
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Overbooking issues
• When to overbook?
• For what reason?
• With what kind of risk?
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Internal factors
• Historical data per segment:
– No-shows
– Cancellations
– Early departures
– Late departures
• Human error
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External factors
• Seasonality (yearly, monthly, weekly,
daily,…)
• Special events
• Weather
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Handling Overbooking
• Internal elements:
– No-shows forecast
– Overbooking policy
• External elements:
– Prepayment / deposit
– Cancellation policy
– Penalties
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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
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empty room; contribution to fixed costs
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
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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.
July 2008
OB Ratio Mathematically
Where:
W = cost of walk
E = cost of empty room
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Probability distribution of noNo shows
Numbe Probability Cumulative Marginal Gains
Shows
r
At 180
0
2
1
4
2
4
3
2
4
1
5
0
6
0
7
0
8
0
(1cumulative)
Loss
Net
Result
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Example
€ 180.00
€ 220.00
€ 350.00
€ 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
0.79
0.78
0.77
Rates
Variable costs
OB ratio (Critical Fractile)
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Complete Table On Previous
Page
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Group Forecasting and Pricing
What to do when group calls
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Mathematically Expressing This
Decision
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This example comes from:
Group Revenue Management
Cornell Hotel and Administration Quarterl
Vol 47 #3 2006
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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
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July 2008
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
Calculate ?
C: hotel’s capacity on day I
FG: group room forecasted to be sold on day i
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Calculate displacement with one segment
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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
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How to calculate transient displaced
rooms multiple price segments
Example
2
forecast 250
rooms by
price
same as
above
Displacement (rooms available - group
show)
difference
segment
1
$200
100
segment
2
$180
120
segment
3
$150
30
Strategic Pricing for Hotels: Revenue Management Through Pricing
rooms displaced
(c) Stowe Shoemaker, Ph.D.
July 2008
Fill in the blanks on previous
slide
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Should the hotel accept the group? Why or Why Not
Assumptions
Number of
rooms
request day 1
request day 2
group rate
Additional non
revenue
Percent of
room block
used
transient
forecast day 1
transient
forecast day 2
overbook day
1 (rooms)
overbook day
2 (rooms)
segments
day 1
$200
$180
$150
300
150
100
$80.00
$0.00
90.00%
250
300
5
6
day 2
120
80
50
130
110
60
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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
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
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A
B
C
D
39
Assumptions
40
Number of rooms
300
41
request day 1
150
42
request day 2
100
43
group rate
44
Additional non revenue
45
Percent of room block used
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
388
$80.00
$0.00
90.00%
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
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July 2008
A
B
63
C
D
E
segments
day 1
day 2
389
Demand groups
64
65
transient forecast
$200
120
130
66
transient forecast
$180
80
110
67
transient forecast
$150
50
60
68
total transient
250
300
70
rooms available
305
306
$80
135
90
71
72
group actual
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
80
84
total displacement
lost revenue
$26,220
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
If You Accept the Group, what should the minimum
rate be?
Where numerator is the lost revenue
denominator is sum of the group room forecasted for each day
Where n is the number of days the group stays at the hotel and m is number of
Transient segments
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Calculate Minimum Group Revenue Previous
Slide
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If Group Brings in Additional Revenue
• Groups financial contribution from
additional non-room revenue sources is
considered
• Consider contribution because of
differences in variable cost structure
among different revenue sources
Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.
July 2008
Accept Group If:
VR=variable cost selling a room
ERG= total group revenue from source type 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
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Assumptions
A
B
394
C
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
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Assumptions
107
Contribution generated
from room
$6,750.00
108
Contribution generated
from non-room
$4,600.00
Total Contribution
$11,350.00
109
110
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Formula for Contribution Generated by Group
Room Rental
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Displaced Contribution
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Minimum Group Rate If Non-room revenue Included
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Displaced Contribution and minimum
price to be charged group
A
115
116
117
119
120
B
Displaced
Contribution
Day 1
Day 2
Total of two days
non room
contribution which
is lost because no
group
# of group rooms
Minimum price
399
C
$8,900.00
$9,120.00
$18,020.00
$4,600.00
225
$109.64
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July 2008
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;
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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)
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The Pricing Process: A Blue Print
for Class - continued
10. Review basic math for pricing
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