1. Examination of the concept of price from the perspective of a seller and a buyer.
2. Detailed assessment of why RMs who consider only supply and demand or costs when determining their prices will inevitably make poor pricing choices.
3. Discussion of the concept of strategic pricing and the role of the RM in it.
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CH A P T E R 2 ST R AT E G I C P R I C I N G
W H AT I S A P R I C E ?
The ability to price products and services effectively is one of an RM’s most important skills.
In the previous chapter, you learned that an RM is the individual or team responsible for ensuring that a company’s prices match its informed customers’ willingness to pay. When this is done, customers perceive value and fairness in the prices they pay. As a result, the business’s revenue and profi tability are maximized. To achieve this goal, however, RMs must fully understand the meaning of price. Doing so is a bit more complex than it fi rst appears.
First, you should know that in the hospitality industry, there are some very specialized terms that are used when referring to prices. The various terms commonly used to indicate selling price are based primarily on what is being sold. Common examples illustrating this variance in pricing terminology are shown in Figure 2.1.
In this book we will use the generic term price when referring to the amount a buyer pays for a hospitality industry seller’s product or service because this term is universally understood even by those who work outside a specifi c hospitality industry segment. When pricing within a specifi c industry segment is addressed, however, the term most commonly used in that segment will be utilized. Thus, for example, the term room rate will be used when referring to guest room pricing in the lodging industry and menu price will be used when referring to pricing in the foodservice industry.
Unfortunately, RMs who wish to better understand what the term price means based on a dictionary defi nition will face a dilemma. This is so because the meaning of the word price varies based on one’s perspective. An economist views price as “the cost at which something
Figure 2.1 Common Pricing Terms Used in Hospitality and Hospitality-Related Industries
Industry Segment Product Sold Price Referred To As
Lodging Guest rooms Rate or room rate
Lodging Meeting rooms Room rental
Lodging Telephone services Toll charge
Foodservice Food and beverages Menu price
Foodservice Special guest services Service charge
Special events/theaters Admission Ticket price
Golf resorts/courses Rounds of golf Greens fee
Amusement parks Park admission Pass price or admission fee
Ski resort Ski area access Lift ticket price
Parking areas/lots Parking space Hourly rate or overnight charge
Taxi Transportation Fare
Airlines Transportation Airfare
Car rental Use of vehicle Daily or weekly rental rate
Casino Games of chance Minimum bet
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W H AT I S A P R I C E ? 37 is obtained.”1 The accountant prefers to defi ne price as “the amount of money something would bring if or when it is sold.2
Hospitality professionals with a marketing background will no doubt have encountered a defi nition of price similar to one of the following:
Price: The value placed by a fi rm on its products and services.3 Price: The amount of money charged for a good or a service.4
Each defi nition has merit. But for RMs, each also has shortcomings. When faced with seeming contradictions about business, or any other ideas, it is always good to remember the quote from Buddha: “Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.”5
RMs should understand the meaning of price at a much deeper level. In fact, because effective pricing is the foundation of successful revenue management, it can be reasonably said that RMs should understand price and pricing theory better than any other individuals in the hos-pitality organization—better than the controller; better than the DOSM; better than the general manager; better than the owner.
Surprised? You shouldn’t be. The hotel chef should understand the art and science required to make a crème brulé better than the hotel’s front offi ce manager. In a similar manner, a hotel’s chief engineer should be able to diagnose the cause of an electrical malfunction in the boiler system better than the food and beverage director.
Just as understanding the purpose of business fi rst required an appreciation of the buyer and seller in a business trans-action, mastery of the term price requires specialized knowledge and understanding of a seller’s perspective and a buyer’s perspective. Effective RMs must possess that knowledge and understanding.
To begin, it is important to understand that, for an RM, the term price is both a noun and a verb.
A very careful examination of price as defi ned in this text will reveal two important details:
1. Both the seller and buyer are part of the defi nition.
2. The concept of value “given up” is present whether price is used as a noun or a verb.
Notably missing from this defi nition of price is any mention of cost recovery, profi t, return on investment (ROI), or supply and demand. This is by design. Too many RMs believe that a price, whether noun or verb, is synonymous with a numerical calculation.
It is not.
To illustrate the importance of proper price determination in a hospitality setting, con-sider the hotel RM who is asked to establish a room rate to be quoted for 100 group hotel rooms to be sold on a specifi c Friday night. If that RM believes that arriving at a suitable Essential RM Term
DOSM: Short for director of sales and marketing.
This is the individual responsible for managing the organization’s entire sales and marketing effort.
Essential RM Term
Price: Noun: A measure of the value given up (exchanged) by a buyer and a seller in a business transaction. For example: “The price of the room is
$245.00 per night.”
Verb: To establish the value to be given up (exchanged) by a buyer and a seller in a business transaction. For example: “We need to meet with the revenue management team to price the New Year’s Eve dinner package.”
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CH A P T E R 2 ST R AT E G I C P R I C I N G
price is a matter of applying the appropriate mathematical formula or calculation, they likely have missed the basic fact that an effective and strategic price is a concept, not merely a number. Consider the following questions that would be fair to ask such an RM after he or she had determined the rate (price) to be charged to this group:
How will the price we offer to this group buyer today affect his or her decision to buy from us in the future?
If this price is accepted by the group, what impact will that have on the number of room reservation requests for that same night that we will likely be required to refuse to individual buyers because all of our rooms have been sold?
Does the price take into account the specifi c type of room desired by the group?
Does the price consider the probability that this group will:
Cancel at the last minute?
Stay more than one night?
How has this price been infl uenced by the prices our competitors are likely to quote to the same group?
What are the likely secondary sources of revenue (i.e., food and beverage sales, meeting room rentals, and the like) that this group could provide if they accept our price?
What, if any, is the hotel’s historical relationship with:
Other groups of this same type?
Has the quoted price been infl uenced by the payment form to be utilized by the guest? By the estimated timeliness of the group’s payment?
How has the recommended price been infl uenced by the source or channel from which this business originated?
Note that most of the questions cannot be adequately addressed by mathematics alone.
Despite that, the RM in this example must be able to answer all of these type questions, and more, if they are to establish an appropriate price. To do so, they must completely under-stand the concept of price.
Seventeenth-century writer Jonathan Swift is best known for penning Gulliver’s Travels.
RMs seeking to fully understand pricing should consider his perceptive statement: “The art of vision is to see what others do not.”6 What too many pricing managers do not see is that price can be truly understood only by exploring the two very different, but complementary, price-related perspectives of the seller and the buyer.
Interestingly, some pricing managers believe they have already mastered pricing from their own (the seller’s) perspective, despite the fact that many have not. One of the major themes throughout this text is that RMs must equally consider their customer’s pricing decisions if they are to ensure that the buyer benefi ts as much as the seller. Thus, while
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W H AT I S A P R I C E ? 39 the buyer’s perspective will be presented second in the following examination, that is not a refl ection on its relative signifi cance. Rather, it recognizes that it is imperative for RMs to understand themselves before they seek to understand their customers.