Hotel capacity is defined as a product that cannot be stored or transported (Schutze, 2008). It is defined as an immaterial hospitality product. Owing to these vital features, various hotels offering airline services are likely to use prices that can easily be changed when they are supply the perishable goods to obtain more yields. Since the products are perishable, various hotels are expected to continuously change their prices depending on the time of arrival. Additionally, the prices are expected to steadily increase as arrival time approaches.
According to Forgacs (2010), active price valuation implies that hotels will have to make changes to their daily room charges depending on the market information. The market will play an important role in determining the adjustments. In addition, the charges are adjusted depending on the capability of the customer. It should also be based on the readiness of the customer to pay the charges. By quoting low prices, the person in charge of revenue will leave a lot of money uncounted for. Conversely, quoting higher prices means that the hotel might find itself giving some price which is not within the market price. Those individuals who carry out dynamic pricing consider that various hotels should change their prices depending on the variations on supply and demand. The biggest challenge it to determine the exact price of a product.
Demand-based pricing is a well known pricing rule that uses dynamic pricing. During the times when the demands are low, prices are also low. Conversely, increase in demand implies high charges. Demand-based pricing has been applied over the years and it is well known by most people. Currently, it is being recognized by its high-speed connectivity. Besides, it also has a wide network and high speed data processing. Revenue managers currently rely on the condition of the market. This is because more information is available in real time. The room charges can now easily be changed and the updates be made available in various distribution channels (Göthesson & Riman, 2004). It is vital to recognize that active price valuation implies that hotels will have to make changes to their daily room charges depending on the market information. This is a considerable provision in various contexts. The market will play an important role in determining the adjustments. In addition, the charges are adjusted depending on the capability of the customer. It should also be based on the readiness of the customer to pay the charges. By quoting low prices, the person in charge of revenue will leave a lot of money uncounted for. Conversely, quoting higher prices means that the hotel might find itself giving some price which is not within the market price. Those individuals who carry out dynamic pricing consider that various hotels should change their prices depending on the variations on supply and demand. The biggest challenge it to determine the exact price of a product.
To clearly distinguish the distinction between dynamic pricing and prices based on the market demand, there is need to use some examples. For instance, when 200 rooms out of 300 in Astoria hotel can be booked, then it means that the hotel has two different prices. The first one is a group charge of $ 90 and a collective charge of $130. In the second option, the hotel makes its low-demand charges at $90 and other charges at $110, $130, and $150 respectively. The charges will depend on the increasing rate of occupation as indicated below:
Making comparisons to the two scenarios, B has got $2,600 extra revenue, a $10.40 rise in ADR, and a RevPAR adjustment of $8.67. In the second scenario, the revenue officer was able to end the $90 charge after selling 80 rooms and later set the charges at $110. Additionally, after selling 60 rooms, the charges are again stopped and the next available 60 room are charged at $130. After booking 200 rooms, the remaining units are charged at $150. By doing this, the profits obtained by selling the rooms will increase by 9.8 percent.
Dynamic pricing does not only increase or decrease room charges, but they can be either way. For instance, when the revenue officer has predicted that 75 of the rooms will be booked when the price is $160, she speculates renewing the 10 percent rooms that are not booked (Schutz 2008). By the end of the day, there would be no further bookings. At 2 P.M. she settles on making interventions. She reduces the charges to $139. At this point people will start making calls. By late evening the rooms will be 80 percent booked. By checking at the market rate, she discovers that some hotels are booking their rooms. The revenue officer then decides to make changes. At 6:15 P.M., the discounted charges are stopped and new rates are put in place at $170.
The effect of differential pricing on customers’ satisfaction
According to Kimes and Wirtz (2003), “Several service organizations are not willing to put demand-based pricing into practice. This is based on the reactions of the customer. When the buyers consider that the prices are increased due to fluctuations in market prices, then they always consider the prices not to be fair (Kimes and Wirtz 2002a). Alleged fairness is being considered in various industries Arguably, this is a vital factor when it comes to customer satisfaction, faithfulness, and lasting profitability.
Consumers always regard the prices quoted due to demand to be unfair. Additionally, they also regard revenue management to be unjust for a number of reasons. For instance, reference prices can influence customer response to demand-based pricing. If peak-demand costs are higher than what they expected, the customers may regard the prices as unjust. Moreover, when the buyers feel that the companies does not offer a favorable charges on the peak-demand price, they may consider their rights to be violated. Conclusively, customers feel that the pricing should be done depending on their demands, and at a given value that will ensure that the company also makes profits.’’
According to Göthesson and Riman (2004), “The economic ideologies of changing prices like price inequity, demand-based pricing, and prices quoted during off-peak might make the customer consider that the prices are not fare (Kimes, 1994; Wirtz et al., 2003). Consequently, it is vital for the companies to give reasons for the difference in prices. The best ways to solve the problem is by increasing the frame rate and provide other charges on discount basis (Wirtz et al., 2003). Another plan is to use the price boundaries to explain the difference in pieces. Additionally, the boundaries may be physical or not physical (Hank et al., 1992; Kimes, 2002). Some of the Physical rate boundaries include; the kind of room, its location and the availability of the facilities. Physical rate boundaries like the type of room may result in reduced profits as only a few of some specific rooms may be available. Non-physical rate boundaries comprise of the personality of the customer, transaction features and consumption characteristics. The personality of the customer, limits the discounted rates to some people from given companies, workers of certain organization and some given group of buyers like frequent visitors or workers. Additionally, transaction features comprise of control of time of purchase, the area of purchase and the limited liability. Time characteristic rate boundaries comprise the days within the week and the length at which the customer stays. (Kimes, 2002).
Managers must make sure that the rate boundaries are clear, reasonable and easily interpreted. Additionally, the managers should not consider the type of rate boundaries used (Kimes, 2002). If these are not taken into consideration, the use of boundaries could confuse the customers hence they will not be satisfied with the prices. Consequently, hotel management should cautiously design their rate boundaries. They should also train their workers to ensure that the boundaries are incorporated in the reservation system. Through Proper designed rate boundaries, the hotels will make their prices depending on the customer’s demands. Consequently, they will also be increasing their demands. It is crucial for the companies to give reasons for the difference in prices as indicated before. The best ways to solve the problem is by increasing the frame rate and provide other charges on discount basis (Wirtz et al., 2003). Another plan is to use the price boundaries to explain the difference in pieces as shown before. Additionally, the boundaries may be physical or not physical.
Forgacs, G. (2010). Revenue Management: Dynamic Pricing. Web.
Göthesson, L. & Riman, S. (2004). Revenue Management Within Swedish Hotels. JPR Juornals. 1(1), 1-110.
Kimes, S. (2003). Has Revenue Management Become Acceptable?Journal of Service Research. 6(2), 125-135.
Schutz. J. (2008). Pricing strategies for perishable products: the case of Vienna and the hotel reservation system hrs.com. CEJOR. 16 (1), 43–66.