Variable pricing through revenue management: a critical evaluation of effective outcomes

Adrian Palmer, Una McMahan-Beattie

Management Research News

source: here


The relationship between trust and purchase intention was analyzed by me before.  However, I am still interested in it, therefore I found an article studying similar problem to  see whether it’s foundings are the same as the one presented before. Moreover, this research is more specific and examine the relationship between variable and fixed pricing on different groups of customers.


Let’s start with idea of “customer surplus”. Basically, if customer’s perception of value of the product is above the price of this product, it’s a bargain and the customer will be willing to buy it. Otherwise, when the price exceeds the value, the purchase will not take place. This leads to a very important problem in revenue management. In service industry (e.g. hospitality) when prior evaluation is difficult, price is likely the most important indicator of quality. This made me think how customers evaluate the quality of service when they have to wait in long queues during peak times (additionally paying more than during off-peak periods). Previous article I analyzed shows the influence of variable pricing on short-term behavior such as purchase intention. The problem of trust is however much deeper as it is the central point of sustaining a relationship between buyer and seller. (Chow and Holden, 1997), (Dooney and Cannon, 1997). Therefore revenue management practices might undermine development of such relationship. Moreover, trust is not only crucial factor during setting up relationship but also an essential precondition for the relationship to move to more committed stages of development (Dwyer et al., 1987, Grayson and Ambler, 1999).

Now, when we identified key issue connected with this research let’s move to the interesting part. The aim of this research is to study long-term attitude change, especially effects on customers’ trust in brand. To do so, Palmer and McMahon-Beattie conducted two-stages experiment.

The first stage took part in restaurant where two groups of diners (clubs) were exposed to two different scenarios. In the first scenario discount was constant, while in the second one it varied over time). Moreover each group was divided into two subgroups (one received the offer via printed flyer, the other one via e-mails). The respondents were chosen from frequent customers of those restaurants and voluntarily agreed to take part in this experiment (encouraged by couple of free meals thought). Out of 250 people, 104 participated in the study. To sum up, participants were divided into 4 groups and were offered with following discounts:

  • Dining club 1: same discounts offered all the time (distr. via flyers)
  • Dining club 2: same discounts offered all the time (distr. via e-mail)
  • Dining club 3: once the discounts were heavy, other time the prices were higher than usual (distr. via flyers)
  • Dining club 4: once the discounts were heavy, other time the prices were higher than usual (distr. via e-mail)

Six iterations were conducted during over a period of six weeks and the trust was measured using Butler’s (1999) scale at the end of this research. Before I will analyze the results, let’s explain the second stage first.

The second stage involved also quasi-experimental approach but this time, the research was conducted on actual hotel customers. The respondents were chosen among leisure and “corporate direct” customers as both of this group is affected directly by variable prices and related promotional offers. A monthly newsletter was send to 2,273 customers who visited the hotel before. As in stage one, those customers were divided into two groups:

  • The first group was offered flat rate of £100 for room
  • The second group was offered with variable rates (£80, £100 and £120)

After the six months, respondents were invited to take part in online survey. The final number of respondents was 399 (after validation test).

 

Stage 1 – results.

Questions in the survey were designed to measure “overall trust”, “integrity” and “loyalty”. Exact questions and the percentages of responses can be found here:  I will just focus on analysis of those results. On first glance, it might seem that fixed discounts have wider range of responses and interesting is fact that 4% more respondents strongly agree that this company cannot be trusted. To compare the results statistically, authors used a parametric paired t-test (I) (can be found here) and a non-parametric Wilcoxon Rank Sign Test (II) (which can be found here). The results (I: t=3.018, df=48, p<0,05; II: t=-2,78, p<0,05) indicates that there is a difference in trust toward fixed discounts. The answers to the next two questions (“this company is basically honest” and “this company deals with me honestly”) further agree on advantage of steady discounts. The biggest difference (10% for favor of steady discounts) was observed to question: “this club would not make false claims to me about any offer”. What means that respondents feel safe with simple offer and any variation to it “rings the bell” that something might be suspicious.

 

Stage 2 – results

The initial findings of this stage were rather unexpected. Apparently participants form experimental group (variable pricing) seems to trust the company more than those with steady ones (t=3.086, df=397, p=0.002). Moreover, the experimental group also believes that it is harder to find an offer from hotel company that will suit them. This means that when it comes to trust based on second stage of this experiment, the hypothesis that variable pricing undermine trust is false. However, before the authors decided to dig deeper in this problem and evaluate the perception of trust in the context of demographic and behavioral background. Frequent hotel visitors were more likely to trust variable pricing then occasional ones. Moreover, among the experimental group there was an interesting difference between higher and lower educated customers. Higher educated customers were more likely to trust this hotel than lower ones (higher: 2.12; lower: 1.9; t=2.002, df=200, sig=0.047). Also young respondents consider variable pricing as a fair practice compare to older members (young = 2.42; old = 2.15; t = 2.528, df=186, sig=0.012). Moreover, when it comes to difference in gender, women were more likely to agree that company deals with them honestly (women=2,74; men=1,79; t=3.810, df=147, p=0.000).

The final knowledge that is derived from this study is fact, that it is not variable pricing that makes people untrustful but lack of knowledge about “the rules” of such a pricing.

 

Critics.

Unfortunately while reading this article I realized some problems. The first one is that authors stated that: “This indicated that respondents in the experimental group were more likely than the control group to believe it was easy to find an offer” what is in contrary to what the table say that mean score for question “it was hard to find an offer from the hotel company that suited me” was higher on experimental group than for control group. The second problem when they stated: “Younger, highly educated males who are frequent purchasers would appear to be most trusting of variable pricing practices”. As the age, education and frequency is in the line with their study, the findings about the gender were different. As I showed above, the mean for women was higher than for men in response to question: “this hotel company gives me a fair deal”. Moreover I cannot agree with the statement that: “It might be expected that frequent hotel visitors from the experimental group would be more likely to distrust variable pricing used by hotels”. Frequent visitors are those who agree and are aware to the rules of the game, therefore they trust hotels that use variable pricing, especially when we remember that this article was written in 2008 so the concept of variable pricing was already popular in many hotel chains (therefore frequent visitors should be aware of it).

 


 

Main Article:

Palmer, A. and McMahon‐Beattie, U. (2008). Variable pricing through revenue management: a critical evaluation of affective outcomes. Management Research News, 31(3), pp.189-199.

References:

  1. Butler, J.K. (1991), ‘‘Toward understanding and measuring conditions of trust: evolution of a conditions of trust inventory’’, Journal of Management, Vol. 17 No. 3, pp. 643-63.
  2. Chow, S. and Holden, R. (1997), ‘‘Toward and understanding of loyalty: the moderating role of trust’’, Journal of Managerial Studies, Vol. 9 No. 3, pp. 275-98.
  3. Dooney, P.M. and Cannon, J.P. (1997), ‘‘An examination of the nature of trust in buyer-seller relationships’’, Journal of Marketing, Vol. 61, pp. 35-51.
  4. Dwyer, F.R., Schurr, P.H. and Oh, S. (1987), ‘‘Developing buyer-seller relationships’’, Journal of Marketing, Vol. 51 No. April, pp. 11-27.
  5. Grayson, K. and Ambler, T. (1999), ‘‘The dark side of long-term relationships in marketing services’’, Journal of Marketing Research, Vol. 36 No. 1, p. 132.

 

 

 


 

Author: Mateusz Konopelski

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One thought on “Variable pricing through revenue management: a critical evaluation of effective outcomes

  • 17 October 2017 at 17:56
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