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RM IN ACTION 3.3: COKE OR PEPSI?

In document Revenue Management (Page 98-102)

In the United States, soft drinks are overwhelmingly the most popular category of beverages sold. Coca-Cola Classic is the number-one selling soft drink, followed by Pepsi-Cola. Both Coke and Pepsi are excellent products. Both companies would argue that their product tastes the best. It does not follow, however, that RMs should base their soft drink pricing decisions on the fact that their operation sells one or the other of these products. It makes little sense to sell Coke for a higher price than Pepsi. While that fact may seem obvious, it is important to recognize that the same principle holds true with respect to many other hospitality products that they sell.

Only when a product’s quality is truly unique and it clearly exists at either end of the product

quality range should the product’s quality level be allowed to dictate a strategic pricing decision. Extremely high-quality products most often should carry higher price tags, and lower-quality products may be most salable only at discounted prices.

For the majority of RMs, however, it will be service quality, not product quality, that most heavily infl uences strategic pricing. The good news for RMs is that service quality is a signifi cant factor that they themselves, not a distant product manufacturer, can directly infl uence!

Coke vs. Pepsi market share information accessed on 1/25/2008 from www.energyfi end.com/2007/03/top-10-soft-drinks.

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Holiday Inn Express hotels Red Roof Inns

America’s Best Value Inns

In both the foodservice and lodging examples cited, an organization’s actual product offerings, the franchise requirements it must meet, and even the construction standards of its facilities are among those items that act to signifi cantly restrict RMs’ abilities to substantially move the level of product quality offered to guests up or down the product quality scale. This is not to imply that talented managers of franchised or highly structured operations cannot signifi cantly impact revenue generation. They can and they do. The means by which these managers can most impact revenue, however, is via an emphasis on changing and improving service levels; not by introducing variation in product quality.

Experienced managers working in foodservice know that the number one complaint in restaurants is not bad food; it is lousy service. Similarly, in the lodging industry, guests do not typically complain most about the size of their room or its age. They complain most about lack of expected services such as cleanliness, timing of room cleaning services, or security.

In the hospitality industry, most buyers’ assessments of value are determined by their individual perceptions of benefi ts derived from product quality and service quality, less (minus) the price they must pay. This relationship was presented mathematically in the previous chapter as follows:

Perceived benefi t ⫺ Price ⫽ Value

Because you now know that hospitality service provides intangible benefits, a variation on this original buyer’s view of value formula can easily be created, as shown in Figure 3.4

Readers with a background in basic algebra will recognize that the revised buyer’s view of value formula can also be expressed as:

(A ⫹ B) ⫺ C ⫽ D Where:

A ⫽ Perceived tangible product benefi t B ⫽ Perceived intangible service benefi t C ⫽ Price

D ⫽ Value (profi t)

Figure 3.4 Alternative Buyer’s View of Value Formulas Original buyer’s view

of value formula:

Perceived benefi t ⫺ Price ⫽ Value (profi t)

Revised buyer’s view of value formula:

(Perceived tangible product benefi t 1 Perceived intangible service benefi t) 2 Price 5 Value (profi t)

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CH A P T E R 3 VA L U E

Utilizing the formula and again applying basic algebra it can be stated that:

As A increases: Value (D) increases As B increases: Value (D) increases As A and B increase : Value (D) increases As C decreases: Value (D) increases

Given the consistent and signifi cant impact on value of variations in product (A) and service (B), it is unfortunate that so many RMs and other managers focus only on utilizing the power of reduced price (C) to affect changes in buyer’s perceptions of value (D).

It is important to recognize that changes in product quality and service may only be noticed by guests over a period of time. Price, however, has the incredible power to immediately infl uence consumer perceptions of value. Unfortunately, the extraor-dinary power of price is too often misunderstood and thus misused; frequently with damaging effects.

Price is easily the most dynamic of the 4 Ps of Marketing. RMs know that in most consumer transactions price behaves exactly like a super action hero (think Spiderman). It is truly all-powerful and produces extraordinary results in an incredibly short time period.

Strategic pricing can optimize a business’s revenues regardless of the business’s product or its place. Best of all, strategic pricing is a tool that is available to RMs instantaneously and at all times.

As illustrated by the buyer’s view of value formula, reductions in price should lead most buyers to believe the value they received has increased. Problems occur, however, when RMs erroneously conclude that lower prices automatically result in higher value perceptions. In a tidy algebraic formula it does. In the real world of buyer’s perceptions of value, it frequently does not, and, in fact, may even have the opposite effect.

In large part, the confusion about the relationship between quality, service, and price is a direct result of the awesome power of pricing. Excessively high prices will not result in equally high levels of consumer value perception. Most RMs understand that. Similarly, low prices are not always synonymous with higher buyer perceptions of value, or with a seller’s profi tability. This fact was stated well by A. G. Lafl ey, CEO of Procter & Gamble who, when asked how he would respond to the notion, popularized by Wal-Mart and others, that price rules the world replied:

It’s value that rules the world. There’s an awful lot of evidence across an awful lot of categories that consumers will pay more for better design, better performance, better quality, better value, and better experiences. Price is part of it, but in many cases not the deciding factor.7

Do customers unswervingly prefer to pay low prices? Of course they do. So do you.

A low price is a powerful buyer stimulant. When McDonald’s entered the specialty coffee fi eld and elected to price its offerings at 40 cents to 80 cents less than the similar Starbucks product but include fewer choices, the decision was certainly an instance of strategic pricing.8

You have learned that strategic pricing requires RMs to match the prices they charge to their customers’ perceptions of value. Stated differently, RMs match their

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prices with the amounts their customers are willing to pay. This can be challenging when RMs recognize that all rational customers will consistently seek lower prices.

This is a market reality that, unless well understood, can very much complicate strategic pricing. In fact, one criticism of pricing based on perceived consumer value is that it is sometimes extremely diffi cult to know precisely what customers are, in fact, willing to pay for a product or service. This can be especially true when lower-cost alternatives are available.

The fact that learning to price strategically is a real challenge, however, is certainly not reason enough to avoid learning how it is done. In fact, as Bertrand Russell, the British author, mathematician, and philosopher pointed out: “The greatest challenge to any thinker is stating the problem in a way that will allow a solution.”9

RM AT WORK 3.2

“How many rooms do we have left for next weekend?” asked Ben Humphrey, GM of the Lennox Suites.

“165,” replied Hillary, the Lennox Suites’ Front Offi ce manager.

“We got too aggressive,” said Ben.

It was Thursday afternoon, and Ben and Hillary were discussing room pricing for the Friday, Saturday, and Sunday that were now only eight days away. The three weekend days they were discussing coincided with the International Cattle Breeders Association meeting, which was to be held at the

convention center in the city where the Lennox was located.

Together, Ben and Hillary fi lled the role of revenue manager for their property, and they were discussing room rates.

“The organizers claimed their attendance would be higher,” said Ben. “That’s why I felt we should keep the rates at full rack, plus 20 percent, for so long. If we had known their attendance was going to be this soft, we could have backed our rates off earlier. But since we have only 200 rooms

reserved as of today, we need to move quickly if we are going to sell our remaining 165 rooms.”

“What do you think we should do?” asked Hillary.

“Let’s take the rates from $299.00 per night to $199.00. Put that on our Web site. If we aren’t fully booked by next Thursday, drop the rates another $50.00 per night. That should allow us to sell out any remaining rooms.”

1. Consider the buyer’s value formula. Do you think Ben’s pricing strategy will signifi cant-ly increase value offered and thus help the hotel sell out?

2. What impact will Ben’s pricing strategy likely have on the value perceptions of those guests who have already booked at the Lennox?

3. Is it likely that those guests who have already booked rooms at the Lennox will fi nd out about the new room rates? How would they?

If you were Hillary, how would you respond to a telephone inquiry from an “early buyer”

regarding the hotel’s willingness to change the rate the guest had agreed to pay previ-ously to the newer and lower room rates?

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CH A P T E R 3 VA L U E

In the fi nal analysis, and despite the challenges faced, RMs are responsible for assessing value and for strategically pricing their products and services. In Chapter 2, you learned that strategic pricing involves the application of data and insight to effectively match prices charged with your buyers’ perceptions of value. Some RMs consider strategic pricing to be a precise science and thus these RMs emphasize the data collection and analysis aspects of it.

Perhaps this is one reason why mathematical formula-driven pricing programs are popular with some RMs. Other RMs consider strategic pricing to be an art. These RMs emphasize the importance of applying their experience, intuition, and insight to revenue optimization decision making. As you will learn, these two perspectives do not necessarily confl ict and each viewpoint merits thoughtful consideration.

In document Revenue Management (Page 98-102)