Section E

1
Section E

• Customer Loyalty and Value

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

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 Arent we quibbling here, isnt that
loyalty?
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.
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.

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.

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

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

9
Annual Profits Throughout Guest Life
Price Premium 4
4
Referrals 3
4
3
3
4
Cost savings 2
4
2
3
3
2
2
3
Revenue growth 1
2
2
1
1
1
1
1
Base profit
Year of customer life
0 1 2 3 4 5
Source Adapted from Bain
10
What Impacts Loyalty
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.
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

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

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

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

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

17
Types of Loyalty
LT
ST
True Friends
Butterflies

• Good fit between companys 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 companys 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 companys 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 companys 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
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?

19
Types of RM Strategies
True Friends
Butterflies
Strangers
Barnacles
From Reinartz and Kumar 2002 Harvard Business
Review
20
Case Study

• Customer Profitability and Customer Relationship
  Management at RBC Financial Group (Abridged)

21
Section F

• Pricing and Decision Making

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.
23
Examples

• Which do you choose? A____ or B____
• A. Receive 50
• B. 55 chance of receiving 100 45 chance of
  earning nothing

24
Examples

• Which do you choose? C____ or D____
• C. Loose 20
• D. 20 chance of loosing 100 80 chance of
  loosing nothing

25
Answer to Previous Question Pertains to Prospect
Theory
26
Daniel Kahneman Toasting Noble Prize
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

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

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)
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

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?

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.

33
Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
34
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)

35
Economic Theory versus Prospect Theory

• 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
• People are consistent in their decision making

36
Economic Theory versus Prospect Theory

• 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
• Expected utility of uncertain outcome is weighted
  by its probability

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)

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.

39
Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
40
Prospect Theory Leads to Framing
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.
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
43
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

44
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
  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

45
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?
46
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

47
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

48
Ways To Frame Purchase Decisions

• Structure transactions to reflect gains and
  avoid losses
• Present price last after descriptions
• endow potential buyers

49
2 Change Way Frame Decisions
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

51
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

52
Example 2

• Make it simple for customer to see options and
  trade-offs

53
This slide shows how prices change depending upon
day of flight key here is that customer sees the
options and can make choices
54
Figure 3
55
Figure 4
56
Figure 5
57
Note departure and return are bundled Customers
knows price but has to buy prepackaged schedule
58
Customer chooses by schedule but does not know
price
59
Customer can easily get both price and schedule
and therefore it is easy to make choice
60
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

61
Example 4

• Frame by Bundling Gains and Losses
• un-bundle gains
• bundle losses

62
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

63
Frame by bundle losses

• Should we quote rates that include all taxes and
  airport fees?
• What losses that can be bundled?

64
Hotel Examples?
65
Example of Research Study Undertaking

• Test Condition Bundling Added
• Utilize proper opening dialogue
• Listen to callers requests
• Ask repeat guest question and determine reason
  for stay
• Provide normal sales strategy
• At time of purchase, ask the following

66
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).

67
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. 

68
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?

69
Framing and Reference Price Formation
70
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

71
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

72
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

73
Restaurant Study
74
Study Design

• Eight different menus
• Type of description
• Modest/Detailed
• Number of items
• Three per category/Two per category
• Prices
• High prices/Low prices

23
75
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

76
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
77
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78
What Influence Buyers Reference Prices

• Current Price Influences
• Past Price Influences
• Purchase Context Influences
• Prices of similar items
• Price considering cost of making item yourself

79
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 buyers perceptions of lower-priced
  products in the product line and influences
  low-end buyers to trade up to higher-priced items

80
Product Line Pricing Example Wine

• 38
• 48

81
Product Line Pricing Example Wine

• 38
• 48
• 58

82
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

83
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.

84
Current Price Influences - continued

• Suggested Reference Prices
• State a price charged previously
• State a price charged by a competitor
• State suggested retail price

85
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.

86
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 _____

87
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

88
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

89
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,
  run-down 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? _____

90
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? _____

91
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?

92
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
93
Restaurant Positioning Example
See Article in Handout
94

• Value for the
• Price, thinking about type of ingredients
• Price compared to other entrees at Brand_
• Price compared to entrees other places
• Price considered at Brand _
• Price Expected to pay
• Price considered amount of food
• Overall price/value
• Overall quality of food

-9
2
6
4
Z
Q
S
B
X
U
5
P
T
O
A
I
K
V
-5
L
M
H
D
E
N
G
W
J
C
1
F
Y
R
3
8
7
9
95
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 _________

96

• 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 _________

97

• 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 products
  price at which price changes are ignored

98

• When quoting rates, quote price differences
  instead of whole rate e.g., 320 versus 290.
  For 30 less get.

99
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?
• Higher Price Lower Price
• First Pair 0.89 0.75
• Second Pair 0.93 0.79
• Your answer _____

100

• 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)

101
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.

102
Phone calls to reservation centers to illustrate
the concepts discussed
103
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

104
Summary Slide

• Value Creation
• Financial, temporal, functional, experiential,
  emotional, social, trust, Identification with
  organization
• Anchoring
• What Influences Buyers Reference Prices

105
Section G

• Competitor Analysis and Positioning

106
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

107
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.

108
Research Will Help Determine the Following

• 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)
• Defines what strategic advantages the property
  has, or conversely, what challenges the property
  may face

109
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

110
Vintage Building
111
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112
Ways to Position

• 2. Positioning by how customer uses your
  product or service
• Arm Hammer baking soda as odor-destroying agent
  in refrigerators
• Long distance phone line Reach out and touch
  someone
• Campbells Soup for use at lunch, Gatorade as
  sports drink

113
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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116
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

120
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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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125
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.
126
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

127
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. Well 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

128
Calculation of Competitive Index

• 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)
• For each attribute, multiple average importance x
  average performance. Answers in Column C
• Sum all numbers in column C
• Calculate the CSI as -- Total C/Total in A
• Repeat steps for competitor's see columns D and
  E

129
Calculation of Competitive Index
130
Matrix of Competitive Advantages
Example Casino
high
Slot Club
Friendly Staff
Value of Promotions
Brand
Feel Safe
Service
Package
Level of Importance
Price
Good Entertainment
Non Smoking
low
Relative Performance
131
Steps to Developing a Positioning Strategy

• Identify the competitors
• From customers point of view
• Different competitors in different segments

132
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?

133
Best Way to Define True Competitors

• Based upon a definition of the core customer
  different competitors for different segments
• Avoid emotional opinions

134
Steps to Developing a Positioning Strategy

• Determine how the competitors are perceived and
  evaluated
• Determine the competitors positions
• Critical to also have reference points for data
  analysis

135

• 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

136

• 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

137

• 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

138

• 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

139
Example

• See handout on Las Vegas data

140
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141
53.16 Caesar
189
47.91 Bally
185
180
179
59.97 Rio
63.92 Boulder
43.41 Circus Circus
159
54.3 Fiesta
155
52.07 Excalibur
140
142
Exercise

• Develop positioning map for coffee shop data on
  the next slide

143
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144
Tweeter, Inc.

• Questions
• Objectively and subjectively, is Tweeter price
  competitive? Why or why not?
• Who are Tweeters core customers and who are
  Tweeters competitors for these customers? Are
  these the right customers to be going after?
• How does current buyer behavior fit with
  Tweeters 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?

145

• Section H
• Price Bundling

146
Objective of this section

• Explain the benefits of price bundling
• Show how bundling might work in the hotel industry

147

• Bundling

148
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

149
Goal of Bundling

• The objective of price bundling is to stimulate
  demand for the firms product line in a way that
  achieves cost economies for the operations as a
  whole while increasing net contributions to
  profits Kent Monroe

150
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)

151
Forms of Price Bundling

• Sales Rebates
• Companies offer customers a year-end rebate on
  total annual sales across all the companys
  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

152
Mixed Bundling

• Essentially Four Groups
• Non buyers
• Buy only A
• Buy only B
• Buy both

153
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

154
Reservation Prices,
Customer Product A Product B AB
1 9 1.5 10.5
2 8 5 13.0
3 4.5 8.5 13
4 2.5 9 11.5
155
Figure 1 Separate Pricing
Price for A 8.0
Price for B
.
.
10 8 6 4 4 0
Group 4
Group 3
Price for B 8.50
.
Group 2
.
Group 1
Price for A
0 2 4
6 8 10
156
Optimal Prices, Sales Volumes, and Revenues for
Different Forms of Pricing
157
Forms of Price Bundling

• Pure Price Bundling
• Can only buy items as a bundle

158
Reservation Prices,
Customer Product A Product B AB
1 9 1.5 10.5
2 8 5 13.0
3 4.5 8.5 13
4 2.5 9 11.5
159
Figure 2 Pure Bundling
Price for B
.
.
10 8 6 4 2 0
(2.5, 9)
(4.5, 8.5)
Group 3
Group 4
Price of 10.50
Reservation price
.
(8.0, 5.0)
Group 2
.
(9.0, 1.50)
Group 1
Price for A
0 2 4
6 8 10
160
Optimal Prices, Sales Volumes, and Revenues for
Different Forms of Pricing
161
Forms of Price Bundling

• Mixed Price Bundling
• Items sold either as a bundle or by themselves

162
Reservation Prices,
Customer Product A Product B AB
1 9 1.5 10.5
2 8 5 13.0
3 4.5 8.5 13
4 2.5 9 11.5
163
Figure 3 Mixed Bundling
Price for B
People in Y buy only B
.
Y
.
10 8 6 4 2 0
Price A 9
Group 3
Price B 9
Group 4
Price A B 13
.
People in this area Buy the bundle for 13
Group 2
People in X buy only A
.
X
Group 1
Price for A
0 2 4
6 8 10
164
Case Study

• Atlantic Computer A Bundle of Pricing Options

165
Section I

• Overbooking

166
Overbooking main concept

• The expected marginal gain of the overbooked room
  is at least equal to the potential loss for the
  same room.

167
Overbooking issues

• When to overbook?
• For what reason?
• With what kind of risk?

168
Internal factors

• Historical data per segment
• No-shows
• Cancellations
• Early departures
• Late departures
• Human error

169
External factors

• Seasonality (yearly, monthly, weekly, daily,)
• Special events
• Weather

170
Handling Overbooking

• Internal elements
• No-shows forecast
• Overbooking policy
• External elements
• Prepayment / deposit
• Cancellation policy
• Penalties

171
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 empty
  room contribution to fixed costs

172
Overbooking techniques

• (OB ratio) marginal cost analysis
• Where overbooking Ratio Walk/(WalkEmpty)
• Necessary data
• Probability distribution of no-shows
• Cost of empty room
• Cost of walk

173
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.

174
OB Ratio Mathematically
Where W cost of walk E cost of empty room
175
Probability distribution of no-shows
176
Example
177
Complete Table On Previous Page
178
Group Forecasting and Pricing

• What to do when group calls

179
Mathematically Expressing This Decision
180
This example comes from Group Revenue
Management Cornell Hotel and Administration
Quarterly Vol 47 3 2006
181
Principal Concept of Model

• Examines the amount of financial contribution
  lost from the transient customers turned away by
  the hotels decision to accept the group

182
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 C hotels capacity on day
I FG group room forecasted to be sold on day i
Calculate ?
183
Calculate displacement with one segment
184
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 hotels capacity on day I and segment
3 FG group room forecasted to be sold on day i
185
How to calculate transient displaced rooms
multiple price segments
186
Fill in the blanks on previous slide
187
Should the hotel accept the group? Why or Why Not
188
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 RTtransie
nt average displaced room rate
Where n is the number of days the group stays at
the hotel and m is number of Transient segments
189
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190
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191
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
192
Calculate Minimum Group Revenue Previous Slide
193
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

194
Accept Group If
VRvariable 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 DTtransient displaced rooms RT
transient displaced room rate p is number non
room revenue sources
195
Assumptions
196
Assumptions
197
Formula for Contribution Generated by Group Room
Rental
198
Displaced Contribution
199
Minimum Group Rate If Non-room revenue Included
200
Displaced Contribution and minimum price to be
charged group
201
The Pricing Process A Blue Print for Class

• Understand the steps to better pricing.
• Understand what is price and consider the two
  mail ways to price
• Investigate different pricing strategies
• Understand why we should have multiple prices
• Understand customer psychology and how to use
  this information to increase revenue

202
The Pricing Process A Blue Print for Class -
continued

• Understand competitor analysis especially
  segmentation and positioning (competitive value
  analysis)
• Understand methods to determine price thresholds
  (e.g., willingness to pay)
• Examine decision making and how it impacts the
  prices we offer the customer.
• Understand how to use pricing tools to maximize
  revenue (e.g., bundling group forecasting
  statistics to predict proper bookings)

203
The Pricing Process A Blue Print for Class -
continued

• Review basic math for pricing