Pricing - Cornell

8/6/2019 Pricing - Cornell

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Our VisionLeadership Through Differentiation

Our Mission

We will operate a collection of luxury boutique hotels andrestaurants, establishing global standards of product quality

and service excellence.

We will enhance customer experience and make it the purposeof every action we take and every job we do.

We believe our strength is our people and we will encouragetheir development. We respect them as individuals and believethat teamwork, commitment, integrity are values that will lead

us to success.

We will ensure the profitability and growth of the company forthe long-term benefit of our shareholders, our customers and

our employees.

We believe that it is essential to be a good corporate citizen andserve the community that sustains us.


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Strategic Pricing for Hotels:Revenue Enhancement

through Pricing


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Price and the Customer

Price is the economic sacrifice a customermakes to acquire a product or service.

In essence, a customer buys a product orservice only if its perceived value isgreater than the price.


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The Evolution of Pricing Strategies inHotels

Bundling

and other

techniques

to change

perception

of value

Ratesvary byseason

YieldManagementSystems,much

DemandForecasting

RevenueManagement,look at thetotal value ofthe customer

Pricing basedupon valuereceived, notcost to produce;consider loyalty

Pricing basedon customerknowledge

StrategicTactic

Profitability


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Lessons from Research

Coming together of RM and CRM

Revenue management practices at thisstage of the game do not take a great dealof relationship management into account,except for special corporate rates forvolume accounts. Tim Genovese ofIntercontinental Hotel Group


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Pricing is currently a commodity type of

pricing, where a customer that has stayed100 nights is quoted the same rate as onethat stays only one night over a peaktime, argues Tim Genovese


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Importance of pricing for revenuemaximization in addition to maximizinginventory allocation. RM should be calledprice optimization

You cant change rooms very fast but you can

sure change the price. It gives you final

control. John Riddel


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Understanding consumers buyingbehavior and price elasticity to be able tocharge the right price to each customer

Yield management opens and closes each

rate. The key question is what the rate should

be, highlights John Higbie with Revenue

Analytics.


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The finer we can segment our market, the

better we can target and get the right productin front of the right customer in the right

channel at the right price.

Tim Coleman


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Dynamic packaging and pricing is a majorfuture trend

Chris Bishop with Harrahs Entertainmentexplains: In the near future, customers willbe able to use drop down menus to choose if

they want a bottle of wine in their room, usethe spa or attend a show.


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One of the areas where group revenuemanagement is likely to grow in the futureis in the area of forecasting.

Group revenue management should get downto the same level of detail as transient yieldmanagement and group acceptance

decisions should be made based on alternativegroup displacement instead of only transientdisplacement, argues John Riddel


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What is Price?

Generic Pricing Strategies


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What is Price?

Quality / Quantity of goods and services

received by the buyer

Versus

Quality / Quantity of goods and servicesgiven by the seller


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What is Price? - continued

Way to change prices Change the quantity of money or goods and

services to be paid by the buyer

Change the quantity of goods and services to beprovided by seller

Change the quality of goods and servicesprovided

Change the premiums or discounts to be appliedfor quantity variations


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What is Price? - continued

Way to change prices

Change the time and place of transfer ofownership

Change the place and time of payment

Change the acceptable form of payment


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Ways to Price Products and

Services

Two common approaches to pricing

products and services:

Cost based pricing

Value based pricing


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Cost Based Pricing

Involves adding a target margin to the cost

of producing a product or service.

Satisfies no goal other than achieving the

target margin ( to the extent the targetmargin is chosen arbitrarily).


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Value Based Pricing

Involves choosing a price after developingestimates of market demand based onhow potential customers perceive thevalue of the product or service.

Can satisfy diverse product strategies,including, for example, market penetrationor profit maximization.


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Value Based Pricing: Key

Benefits

It forces managers to review the objectives

they have when marketing their product orservice.

It requires managers to keep in touch withthe needs and preferences of customers


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Differences between Up sell andRevenue Opportunity

Up sell

Replace product with

a better product

Force the need forbetter

Revenue Opportunity

Find the need that

the customers haveand then charge forthat need.

Eg. Selling the aisle

row at a premiumcharge in the airlinesector


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Value Additions

Financial

Temporal

Functional Emotional / Psychological

Experiential

Trust


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Factors that impact Financial Value

Perceived substitute effect If the customer believes that a product is easily substitutable ,

he will be more price sensitive

Unique value effect

Buyers are less sensitive to a products price the more theyvalue any unique attributes that differentiate the offering fromcompeting products. Eg. Lake - side view, underwater Spatreatment

Switching cost effect

The greater the product specific investment that a buyer mustmake to switch suppliers, the less price sensitive that buyer isCustomerLoyalty programme

Retaining a customer is cheaper than making a new one


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Difficult comparison effect Buyers are less price sensitive to the price of a

known or reputable supplier when they have difficultycomparing alternatives

Spa Fish for removing dead skin

Price quality effect Buyers are less sensitive to a products price to the

extent that a higher price signals better quality

Expenditure effect Buyers are more price sensitive if they spend

relatively more that what their income is


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Shared - cost effect

Impact of partial or complete reimbursementon price sensitivity

Fairness effect

Based on previously paid, prices of similarproducts (includes location or situation)


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Temporal Value

How much is one hour of your customers timeworth?

Time is money

Consider the amount the customer would beearning per hour

Hence, the customer is willing to pay a little bitextra if it saves time.

Airlines enable you to check in on the cellphone, get your Boarding Card through theinternet


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Functional Value

Does the product or service do what it issupposed to do?

Do we convey the functional value to the

consumer? Through the RATER system

Reliability

Assurance

Tangible

Empathy

Responsiveness

Apply to every are of guest interaction - through everyinteraction that we have with the consumer, we need to showthat he is getting value


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Emotional / Psychological Value

Need for recognition

Staff have your best interest in mind Feeling of safety


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Experiential Value

Guests are active participants in the

experience versus passive observers

Eg. Chefs Table concept


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Trust Value

Integrity Customer should feel that the employee or the

management is being truthful and transparent

through all transactions

Security Customer should feel secure in the Hotel and

should not be worried about his security or that ofhis valuables


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Types of Pricing Strategies

Skim

Penetration Neutral

Match


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Skim Pricing

Strategy

Designed to capture high margins at theexpense of high sales volume

Skim prices are high in relation to what mostbuyers are willing to pay

Eg. I Phone is relatively higher priced thanmost other phones

Eg. Four Season, Imperial


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Skim Pricing - continued

Customers

Price insensitive

Place high value on a products differentiatingattributes

Importance attached to end benefits

Value prestige and exclusivity


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Costs

incremental unit costs represent a small share ofproducts price; even a small price premium willgenerate a large percentage increase in thecontribution margin

High fixed costs


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Competition

Must have some source of competitive protection(eg. Patents, brand name, access to scarceresource, distribution channel, image)

Must have a competitive advantage


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Penetration Pricing

Strategy

Setting price far enough below economic value to

attract and hold a large base of customers Strategy designed to generate sales volume even

at the expense of high margins

Penetration prices not necessarily cheap, but are

low relative to others


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Penetration Pricing

CustomersA large share of the market must be willing to

change suppliers in response to a price differential

Price sensitive customer Not every market will respond

Will not attract buyers to products for which theprice is a trivial expenditure

Will not attract buyers who look at other featuresbeside price


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Penetration Pricing

Costs More favourable when variable costs represent a

small share of the price so that each additional

sale provides a large contribution margin The lower the contribution per sale, the larger the

sales gain required before penetration pricing isprofitable

If firm can create variable cost economies

Eg. Ginger Hotels, Nano car


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Penetration Pricing

Competition

Competitors lack the ability or incentive to matchprices; this will only happen:

Firm has significant cost advantage and / or resourceadvantage so competitors believe they will lose if they

begin a price warWhen firm is small so that it will not effect sales of

competitors


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Neutral Pricing

Strategic decision not to use price to gainmarket share

Firm favours other marketing tools may be

based on Hotel features, value offered etc.

Generally adopted by default, as unable topractice a skim or penetration strategy

Maintain coherent pricing strategy


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Neutral Pricing

Customers Maintain coherent pricing strategy

Competition May or may not be concerned with competition

Costs May or may not understand costs


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Match Pricing

Strategy Decision to directly match competitors price

Customers

Believe customer is concerned about price

Costs No understanding of costs

Competition Totally concerned with competition

Eg. MICE Business


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Seven Concepts of StrategicPricing

Focus on price rather than supply whenbalancing supply and demand

Replace cost based pricing with value pricing Sell to segmented micro markets, not mass

markets Save your products for your most valuable

customers Make decisions based on knowledge, not

supposition Exploit each products value cycle Continually re evaluate your revenue opportunity


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CustomerL

oyalty and Value


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The Benefits of Real Loyalty

The customer focuses on your brand,offers and messages to the exclusion ofthe competition.

Price is no longer the dominantconsideration, but one component in thelarger value proposition.

Loyalty provides critical inoculation Competitive offers face a higher hurdle The customer becomes more forgiving Goodwill

equity


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Why Hotels Should be Concernedabout CustomerLoyalty

Customer loyalty leads to increased profit

Customer loyalty leads to increasedpartnership

Lower marketing and sales cost


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What impacts Loyalty

Value

Certainty Trust

Benefits

Switching Costs


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Pricing and Decision Making

Where would you buy gas?

Station A: Sells gasoline for $2.30 pergallon, and gives a $0.10 discount if thebuyer pays with cash

Station B: Sells gasoline for $2.20 pergallon, and charges a $0.10 surcharge ifthe buyer pays with a credit card


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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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Example

Which do you choose? C or D

C. Loose $20

D. 20% chance of loosing $100; 80% chance ofloosing nothing


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Answer to Previous Question

Pertains to Prospect Theory


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Prospect Theory: Basic Idea

Value is associated not with actual levels ofconsumption, but with the anticipated changes inwell being

Buyer assesses prospective decision outcomes(prospects) by mentally categorizing them aseither gains or losses relative to reference point

Value is not about what one is getting. It is arelative gain or loss against the reference point


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Explanation

Station A sets reference point at $2.30 and thenrewards buyers who pay cash; that is; a gainrelative to the reference point

Station B first establishes a reference point at$2.20 and then penalizes buyers who use creditcards; a loss relative to the reference point

This is in contrast to the economic theory thatpredicts that gains and losses of equal size arevalued the same


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Prospect Theory

Prospect Theory states that people are riskadverse / conservative when considering gains;in contrast, more naturally inclined to risk a lossthan to pay even the expected value of avoiding

it.

When people are losing, they take more risks.

When people are winning, they makeconservative bets and start putting money intheir pockets.


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Economic Theory versus ProspectTheory

Economic Theory

Gains & losses of equalsize are treated the same

People are consistent intheir decision making

Prospect Theory

Loss is judged morepainful than a gain ofequal value

If people perceive thatthey are in the gaindomain, they will actconservatively

If people are in the lossdomain they will tend totake more risks


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Prospect Theory - Implications

Increasingly larger gains are incrementally lesspleasurable

Increasingly larger losses are incrementally less

painful (and smaller losses are almost as painfulas slightly larger losses)

The displeasure associated with losing a certainamount (eg. of money) is generally greater thanthe pleasure associated with winning the sameamount


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Implications

Once consumers have agreed to spend a certain amount of money,getting to pay more is easier than one would think

Eg. If a person spends $200 for a room, he wouldnt mind taking aroom at $220 with internet.

Buyers frequently form frames of reference when making buyingdecisions, and these frames of reference in turn influence howbuyers respond to price and product information.

Each consumer has a different frame of reference. The goal is to

manipulate this frame of reference.

The goal for us is to move the reference point beyond price tosomething that can gain a competitive advantage eg. Brand,location, service etc.


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Goal of UnderstandingFrames of Reference

Change the relationship between whatcustomers perceive they pay and whatthey perceive they get in return.

And manage this relationship.


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Example 1

Change the relationship between whatcustomers perceive they pay and what they

perceive they get in return

Option 1: Oliva Cameron Cigar for $15

Option 2: Oliva Cameroon (Figurado, 6 inch X 60ring); made by Oliva Cigar Co. Nicaragua

The Authentic Cameroon Wrapper gives this boxed

pressed figurado a pronounced aroma of nuts, with hintsof cocoa and coffee.

It is medium bodied, but not exceedingly strong.$15


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Example 2

Change the relationship between what customersperceive they pay and what they perceive they get in

return

Option 1: Selection of teas from wooden box $1.95 Option 2: Fresh pot ofLapsang Souchong black

smoked tea:

From the Fujian province of China, this black tea is full of

ancient history and flavour! Smoky smooth character isachieved through the smoking process over pine andoak 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 roomfor only $15


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Goal

Goal is to concentrate not on the price, buton the components of the brand thatconsumers desire

Give customer choices


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Ways to Frame PurchaseDecisions

Structure transactions to reflect gains andavoid losses

Present price last after descriptions

Endow potential buyers Eg At check in, before allotting a room to the guest,

show him the higher category as well, if possible. Hemight take it.


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Example 1

Let the customer know the cost of notbooking and paying now; that is, give the

difference between current booking classand the next level up


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Examine How We Quote Rates

We usually quote rates low to high, whichsets the reference point low and the otherprices appear as a loss

If we quote high price first, then the otherprices appear like a gain


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Example 2

Make it simple for customers to seeoptions and trade offs

You tell me what you want to pay and Iwill tell you when to come.

You tell me when you want to come and Iwill tell you what to pay


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Example 3

Frame decision outcomes in terms ofgains or losses

Do not discuss the benefits of buying the product,but discuss the consequences of not buying theproduct


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Example 4

Frame by Bundling Gains and Losses

Un Bundle Gains List all components separately Upgrade facility,

Early Check in, Late check out, Complimentarytransfers, Usage ofLounge etc.

Bundle LossesWe can look at quoting rates which include all taxes


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What Influences BuyersReference Prices

Current price influences

Past price influences

Purchase context influences Price of similar items

Price considering cost of making item

yourself


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Current Price Influences

Product Line PricingAdding a premium product to the product line may

not necessarily result in overwhelming sales of thepremium product itself. It does, however, enhance

buyers perceptions of lower priced products inthe product line and influence low end buyers totrade up to higher priced items

Suggested Reference Prices

State a price charged previously On the website we can state the price charged by

the competitor


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Past Price Influences

Past price paid has a particularly stronginfluence on the reference price because itis more likely to be recalled as a frame ofreference


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Implications

Numerous small price increases for frequentlypurchased items is more likely to be acceptedthan infrequent large increases.

Need to always state actual price and discountfrom that; otherwise, low promotional prices canestablish low reference prices for judging the

value of later purchases


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Purchase Context Influences

You are lying on the beach on a hot day. All youhave to drink is warm water. For the last houryou have been thinking about how much youwould enjoy a nice cold bottle of your favourite

drink. (Lets assume Coke). A companion gets upto make a phone call and offers to bring back aCoke. The only near by place where Coke issold is a small, run down grocery store. Heasks what the maximum price you are willing to

buy. If the price is higher, he will not buy it.

What price do you tell him? _________


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You are lying on the beach on a hot day. All youhave to drink is warm water. For the last houryou have been thinking about how much youwould enjoy a nice cold bottle of your favourite

drink. (Lets assume Coke). A companion gets upto make a phone call and offers to bring back aCoke. The only near by place where Coke issold is a five star deluxe hotel. He asks what themaximum price you are willing to buy. If the price

is higher, he will not buy it.

What price do you tell him? _________


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Use context as a frame of reference that makesthe price seem fair or reasonable.

While making reservations or quoting rates, find

out the context of the purchase. A Business traveller will be willing to pay extra

for convenience.

For the Leisure traveller money seems differentwhile on a holiday. One ends up purchasing stuffthat he would normally not buy while at home.


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Price Differentials

Scenario A: You are a purchasing agent for a largeorganization. You have ordered for your own use a newleather bound folder which will cost Rs 1000. A frienddiscovers that the identical folder is available fromanother vendor for Rs 400.Would you cancel the order

and switch to another vendor? (Assume that cancellingthe current order and initiating a new one will take one ofthe purchasing clerk who works for you about one halfday. Assume that there are no other costs such as a lossof goodwill or delay in delivery).

Would you cancel the current order and switch to theother vendor?

Yes_______ No_______


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Price Differentials

Scenario B: You are a purchasing agent for a largeorganization. You have ordered a cabinet which will costRs 20000. Your purchasing department discovers thatthe identical cabinet is available from another vendor forRs 19400. Would you cancel the current order and

switch to another vendor? (Assume that cancelling thecurrent order and initiating a new one will take one of thepurchasing clerks who works for you about one halfday. Assume that there are no other costs such as lossof goodwill or delay in delivery).

Would you cancel the current order and switch to theother vendor?

Yes__________ No_________


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Price Differentials

Scenario A: The difference is 60%

Scenario B: The difference is 3%

Even though the absolute difference inboth is Rs 600

Implications:

T

he perception of a price changedepends on the percentage, not onthe absolute difference


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When quoting rates, quote pricedifferences instead of whole rates

Eg: Instead of stating $320 versus $290,quote as For just $30 less get.


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Framing Price Differences

Look at the two pairs of prices below andquickly answer the question: For whichpair of prices is the lower price more of a

bargain?

Higher Price Lower Price

First Pair 10900 10000

Second Pair 10100 9200


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Perceptions of Odd Price Endings

Buyers use left most digits in a price andround up to form a quick reference point toevaluate the actual price against theoriginal price

In reality, the difference in both the caseswas Rs 900


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Price Bundling

The objective of price bundling is tostimulate demand for the firms productline in a way that achieves cost economies

for the operations as a whole whileincreasing net contributions to profitsKent Monroe


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Principles of Price Bundling

Underlying concept is that differentcustomers have different perceived valuesfor various products and services offered

Thus, have different amount they arewilling to pay for various products and

services


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Price Bundling

Tie in Sales Buyer of main product (tying good) agrees to buy one or

several complementary goods (tied goods)

Eg. Printer and cartridge, Razor and blades

Tying good is a durable (eg. Copier)

Tied goods are non durables (eg, toner)

Cross Selling Often used to introduce new products and / or increase the

sales of weak products by liking them with establishedproducts in a firms product line

Pay less with the Bundle than if bought each productseparately


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Examples

We can bundle room with: Breakfast

Internet

Airport transfers

Dinner

Spa treatment

Sightseeing Tours

On New Years Eve when the rooms division isnot doing well, the rooms package can bebundled with the F& B Package


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Summary Slide

Importance of CustomerLoyalty Consumers and Decision Making Value Creation

Financial, Temporal, Functional, Experiential, Emotional,

Trust Frames of Reference

Goal to change the frame

What influences Buyers Reference Prices

ProspectT

heory Purchase decisions made in relation to beliefs about gainsand losses

Price Bundling

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