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  1. Section E: Customer Loyalty and Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  2. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  3. 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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  4. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  5. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  6. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  7. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  8. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  9. Annual Profits Throughout Guest Life Price Premium 4 4 4 Referrals 3 3 4 3 Cost savings 2 4 3 2 3 2 2 3 2 Revenue growth 1 2 1 1 1 1 1 Base profit Year of customer life 0 1 2 3 4 5 Source: Adapted from Bain Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  10. What Impacts Loyalty Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  11. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  12. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  13. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  14. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  15. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  16. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  17. Types of Loyalty LT ST True Friends Butterflies • 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 • Good fit between company’s offerings and • 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 HP Strangers 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 • Little fit between company’s offerings and • customers’ needs; • Lowest profit potential • Actions: • Make no investments in these relationships • Make profit on every transaction LP From Reinartz and Kumar 2002 Harvard Business Review Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. HP = high profit; LP= low profit; ST =short term; LT= long term

  18. Types of RM Strategies • Which strategy is important for each cell and why? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  19. Types of RM Strategies True Friends Butterflies Strangers Barnacles Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. From Reinartz and Kumar 2002 Harvard Business Review

  20. Case Study • Customer Profitability and Customer Relationship Management at RBC Financial Group (Abridged) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  21. Section F: Pricing and Decision Making Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  22. 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.

  23. Examples • Which do you choose? A____ or B____ • A. Receive $50 • B. 55% chance of receiving $100; 45% chance of earning nothing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  24. Examples • Which do you choose? C____ or D____ • C. Loose $20 • D. 20% chance of loosing $100; 80% chance of loosing nothing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  25. Answer to Previous Question Pertains to Prospect Theory Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  26. Daniel Kahneman Toasting Noble Prize Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  27. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  28. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  29. Positive Value Value Function Station A ($2.30 – 0.10) 1.0 Gains Losses 1.6 Reference Point (state of well being) Station B: ($2.20 +.10) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D. Negative Value

  30. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  31. 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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  32. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  33. Positive Value Value Function Gains Losses Reference Point (state of well being) Negative Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  34. 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) Economic Theory versus Prospect Theory Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  35. 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 Economic Theory versus Prospect Theory Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  36. 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) Economic Theory versus Prospect Theory Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  37. 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) Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  38. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  39. Positive Value Value Function Gains Losses Reference Point (state of well being) Negative Value Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  40. Prospect Theory Leads to Framing Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  41. 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. Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  42. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  43. Example -1Change 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  44. Example-2Change 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 black-smoked 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  45. Example-3Change 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? Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  46. Example-4Change 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  47. Example-5Change 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  48. Ways To Frame Purchase Decisions • Structure transactions to reflect gains and avoid losses • Present price last after descriptions • endow potential buyers Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  49. # 2 Change Way Frame Decisions Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.

  50. 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 Strategic Pricing for Hotels: Revenue Management Through Pricing (c) Stowe Shoemaker, Ph.D.