Hotel revenue management and its impact on customers’ perception of fairness

Sunmee Choi and Anna S. Mattila

Journal of Revenue and Pricing Management

Article is available here


The relationship between RM and customer’s perception is an issue that bothered me for a long time. How it possible that customers actually agree to pay different rates for the same service. And more importantly, do they really agree to do so? Or maybe, hoteliers assume that customers’ perception of fairness is not affected by price – discrimination. I was trying to find some reliable information on internet and than I found this article. I hope you will like it. 


Demand-based pricing is popular concept among medium hotels, and a “must” for big hotels. Its benefits can me measured by increased Revenue. However, there is also a second part of the coin and in terms of hotels, this side is pretty important – customers.

Just to remind a good example of price description is a hotel that has two types of customers. Business customers that usually book rooms from Monday to Friday and leisure customers that book rooms on weekends. The main difference between this group is fact that leisure clients are far more price sensitive than those business ones. As a result, this hotel can discount these rates during weekend to attract price-sensitive customers. Another example of rate fences is when the hotel offer discounts for bookings that were  made on certain time before arrival date. As a result the hotel can with better accuracy forecast the final number of rooms and it gets the money earlier. Another way is to restrict the bookings on busy days (e.g. New Year’s Eve) by enabling customers to book at least certain number of days. The bottom line is, that some researchers (Kahmneaman et.al 1986; Kimes 1994) believe that such practices may actually  lead to decreased customer satisfaction and eventually to lost businesses.

On the other hand, people are highly sensitive issues of inequity (Colquitt, 2011) and unfair prices are likely to generate the perception of the injustice. However, when customers view that increase of prices is due to cost increases or changing situation on the market, such an increase is justifiable. The question which rises is whether, the dynamic pricing will be perceived as something that creates inequity or they will accept it. But before I will answer this question, I want to spend a bit more time with the concept of fairness.

Customers evaluate fairness using three factors:

  • outcomes (distributive justice) – the customers evaluate the outcomes that different customers receive – e.g. me, and three my neighbors have the same room.
  • procedural fairness (procedural justice) – the customers evaluate the rules and policies used to make decisions – e.g. I booked this room three days ago, but my neighbors booked it 4 months ago
  • interaction treatment (interactional justice) – the customers evaluate interactional justice treatment they receive during this process.

The other thing is how the perceived fairness will be changed when customers will use two different types of evaluating outcomes:

  • predictive expectations – outcomes better than expected will lead to positive evaluation and analogically with outcomes worse than expected;
  • social comparison – customers compare their outcomes to others and if it is equal or higher it leads to positive evaluation and analogically if opposite situation

The other interesting question is which of those types have bigger influence on customers’ perception of fairness. And I guess that it might be the second one.

 

The experiment conducted in this article was based on following assumptions:

  • Customers’ expectation was based on their previous stay in this hotel in the same room
  • Customers’ social comparison was based on their rate in current stay compare to rates of somebody else (who also stayed in this hotel)
  • The rates customer had might be lower, equal or higher than their expectations or compare to others
  • Therefore there were 6 scenarios (three outcomes x two reference types)
    – equal to expectations
    -worse than expectations
    – better than expectations
    – equal to others
    – worse than others
    – better than others
  • Each of those scenarios was tested under two conditions:
    – customers were informed about hotel’s variable pricing policies
    – customers were not informed about this
  • Customer perception of fairness was measured on seven point scale (1 – unfair; 7 – very fair) by two questions:
    – How would you rate the hotel’s pricing policy and practice?
    – How would you rate the hotel’s reservation service?
  • The assumptions of experiment:
    – the experiment was based on the story that travelers read (they were waiting to board an airplane on domestic gate
    – the story varied according to scenario
    – after reading travelers were fulfilling the survey
    – the goal was to obtain 240 surveys (20 per scenario)
    – one-way analysis of variance was used to test whether there is a significant difference between the scenarios

The results:

  • When the customers were unaware of pricing policies:
    – the changes in rates had no influence on perception of fairness when they compared the outcome to their expectations
    – increasing the rate had negative influence on perception of fairness, when their rate were higher than others.
  • When the customers were aware of pricing policies:
    – the changes in rates had no influence on perception of fairness in both types of evaluation

 

To sum up. According to this study, dynamic pricing has no negative influence of customers’ perception of fairness as long as the difference between prices is justified. However, we need to remember that prices should be adjusted to customers’ willingness to pay.

 


 

References:

Main article:  Choi, S. and Mattila, A. (2005). Impact of information on customer fairness perceptions of hotel revenue management. Cornell Hotel and Restaurant Administration Quarterly, 46(4), pp.444–451.

 

  1. Kahneman, D., Knetsch, J. L. and Thaler, R. H. 1986 ‘Fairness and the assumption of economics’,Journal of Business, 59, 3, 285–300.
  2. Colquitt, J. (2001) ‘On the dimensionality of organizational justice: a construct validation of a measure’, Journal of Applied Psychology, 86, 3, 386–400.
  3. Kimes, S. E. (1994) ‘Perceived fairness of yield management’, Cornell Hotel and Restaurant Administration Quarterly, 35, 1, 22–29.

 

 


Author: Mateusz Konopelski

LinkedInFacebookTwitterGoogle GmailShare

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>