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Based on the situation described in the lecture, do you agree with the customers or business
students about the fairness of raising the price of the shovels?
Read the attached article. Based on that, the information in the lecture, and your experience
as a customer and student of revenue management, who do you think decides if a price is
View the following clip from a the movie A Beautiful Mind. Then share your thoughts on
how this might relate to pricing philosophy.
Based on your knowledge of hotels and consumer behavior, what are some considerations
hotels must take into account before implementing the price and inventory management
tactics outlined in the lecture? List at least 2.
What Is A Fair Price? – And Who Gets to Decide?
What Customer-centric Lodging Revenue Managers Need To Know
Dr. David Hayes and Allisha A. Miller
Revenue Managers are responsible for setting and managing prices for their businesses. In doing so, they must
identify fair prices for their products and services. The question of what makes a price â??fairâ?, and who has the power
to decide, is addressed and the answers may be surprising.
The lodging industry revenue managers set prices. Customer-centric revenue managers go further. They make sure
their prices are fair.
The difficulty for them, and for you if you are responsible for setting prices in your organization, comes in deciding
exactly what constitutes a fair price. The question is important for several reasons because:
Buyers must be convinced the prices they pay are fair if they are to become loyal, repeat customers.
The front desk and sales staff at a hotel must be convinced the prices they charge guests are fair if they are
to be effective salespersons for the business.
Regulatory agencies must be convinced prices charged are fair or they may be motivated to increase their
oversight and control of an industry.
Actually, while the issue of what constitutes a fair price is pretty interesting, even more interesting is the question of
who decides when a price is fair.
Sellers tend to think fair prices reflect their cost of doing business and their profit objectives. Sounds reasonable, but
itâ??s backwards. Thatâ??s because in the long run it is always the buyer, not the seller, who determines the fairness of a
Buyers will not repeatedly and willingly pay more for a product than they believe it is truly worth. And buyers are
notoriously unconcerned with a sellerâ??s costs or profits when buying an item. In fact, if you ask them, they are
happiest when buying at a price they think is below a sellerâ??s actual costs. And, when you buy, so are you.
Fortunately, in most cases, it is not the actual price charged for an item that makes buyers question its fairness.
Rather, it is the perception of the potential profit made by the seller that is most important.
Accusations of price gouging or unconscionable selling prices that can result in bad press for an industry (think
baggage fees and airlines!) or invite government regulations are always the result of thinking that profit, not price, is
too high.
Are My Prices Perceived As Fair By My Customers?
The question â??Are my prices perceived as fair by customers?â? calls for thoughtful consideration. Because all
customers naturally seek to pay low prices, sometimes it seems every customer thinks every price charged is â??too
highâ?. Thatâ??s because their preference, much like your own, is that itâ??s always best to pay the lowest price possible for
all of the things they want to buy.
Experienced revenue managers understand this natural tendency, but they also know that simply because a
customer feels a price is too high is not a legitimate reason for granting that customer a price reduction. They
recognize that the issue of a too high price is vastly different from that of an unfair price. Prices can easily be too high
for a potential buyer, but still be perceived as fair (just ask your local Mercedes Benz dealer!).
The truth is, revenue managers have little control over the inherent tendency of buyers to seek low prices. They have
a great deal of control, however, over their buyerâ??s perceptions of price fairness.
Most customers feel it is unfair for sellers to charge excessively high prices, even if the majority of buyers are willing
to pay those prices. Overwhelmingly, consumers feel they have a right to a reasonable price, and that sellers have a
right to a reasonable profit. Prices that appear to customers as having been established to increase profits beyond
reasonable levels will always be viewed as being unfair, even when those customers pay the prices charged.
Ignoring this critical customer viewpoint can be the cause of pricing fiascos brought about by some who honestly (but
erroneously) believe a fair price is ultimately defined by â??what the market will bear.â?
To see why that is such an appealing but dangerous position, consider the example of an upstate New York
hardware store that normally sells snow shovels for $25.99. The morning after a major snowstorm, the hardware
store knows it will sell all of the snow shovels it still has in stock so it raises the price on its five remaining shovels to
Question: Is the new price for snow shovels fair?
When posed with this actual question, an overwhelming majority of buyers (over 82% of respondents in one study)
found such an action to be inherently unfair. You might think so too.
Interestingly, in an identical study, 76% of the economics students in one of the nationâ??s leading business schools
found raising the prices of the shovels (because of increased demand and limited product supply) to be inherently
fair. They understood supply and demand curves better than they understood buyers. Interestingly, the same
business students were not asked if they thought the storeâ??s pricing decision would serve to build its repeat customer
base (maybe because the answer to that question was too self-evident!). As long as buyersâ?? and sellersâ?? perceptions
of fairness vary so much, it is likely pricing debacles and the strong consumer reactions they generate will not
disappear in the foreseeable future.
The fact is that most buyers will sympathize with a sellerâ??s cost increases much more than with a sellerâ??s supply
shortages. As a result, sellers who find they have only a few of an extremely popular item in stock (for example, this
Christmas seasonâ??s most popular video game release, newest iPhone, or even hotel rooms) must be careful. While
the price of the item could, of course, be raised significantly, or even auctioned to the highest bidder, doing so would
certainly be perceived as unfair by the majority of consumers. The result might be short term revenue maximization,
but it would not be long term revenue optimization.
Researchers have found that buyers use a variety of information sources to establish their reference price; the price
perceived by them to be the normal (and fair) price for a product or a service. They then evaluate all other prices for
that same item in comparison to that reference price.
It is for this reason that discounts from normal prices, even when those normal prices are set very high to begin with,
are so popular with buyers.
The lesson for hoteliers is clear, if often unheeded. Namely, it pays to keep reference prices (rack rates in the hotel
industry) high, and when it is advantageous to do so, offer targeted discounts from those reference prices. Reducing
rack rates across the board and then advertising the reduced prices widely makes no long-term pricing sense
because it simply drives down the guestâ??s reference price.
What Does It All Mean?
Customer-centric revenue management is about much more than the use of sophisticated data to set prices. It is also
about using pricing to capture and retain market share. While data is important in helping to determine prices,
understanding buyersâ?? perceptions of price fairness is more important if price is to be the effective and powerful tool it
can be for expanding a hotelâ??s customer base and building loyalty.
The best revenue managers always remember that it is their customersâ?? perceptions of pricing fairness, not their own,
which matters most. Are your prices fair? Just ask your customers.
About this Article: This article is based on information in Revenue Management for the Hospitality Industry by David K. Hayes and
Allisha A. Miller. © 2011 John Wiley & Sons, Inc. All rights reserved.
About the Authors: Dr. David K. Hayes and Allisha A. Miller operate Panda Professionals (www.pandapros.com) Hospitality
Education and Training where they create and deliver innovative and practical educational materials and training for those in the
hospitality industry.

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