Revenue Management: Customer Impact and Pricing Strategies

Potential Drawbacks of Revenue Management

While revenue management offers significant advantages for businesses, certain practices can lead to customer dissatisfaction. Hotels, in particular, should avoid the following:

• Offering insufficient benefits in exchange for restrictions.
• Imposing overly severe restrictions on discounts.
• Not informing customers of changes in the reference transaction.

Insufficient Benefits for Restrictions

First, if hotels do not offer sufficient incentives to customers in exchange for imposing restrictions, customers are likely to view the practice as unacceptable. For example, in this study, respondents did not view a free breakfast or a room upgrade as an acceptable trade-off for cancellation penalties.

Overly Severe Discount Restrictions

Second, if there is an overly severe restriction on discounts, customers will perceive that the firm has tilted the transaction in its favor. For example, if a hotel imposes a non-refundable, non-changeable restriction on a discounted room, customers may feel unfairly treated or that the value proposition is diminished.

Lack of Transparency in Reference Transactions

If firms change the basis of the reference transaction without informing customers, customers have no way to assess the fair market price. This lack of transparency can erode trust and lead to negative perceptions.

Strategies for Price Increases

Companies employ several methods to increase prices while managing customer perception:

• Increasing the reference price; simply put, this means increasing the rack or full-fare rate.
• Attaching additional services or products to the services sold at the increased price.
• Selling services as part of a package, thereby obscuring the price of the individual service.
• Attaching restrictions to discounted prices so that higher prices (with fewer restrictions) seem fair by comparison.

Using Restrictions to Justify Higher Prices

The fourth method involves attaching restrictions to discounted prices so that higher prices (with fewer restrictions) seem fair by comparison. These restrictions may include:

1. Booking a certain length ahead of time.
2. Staying for a minimum length of time.
3. Staying over a particular night.
4. Having a change or cancellation penalty.
5. Having a non-refundable reservation.

When restrictions are clearly tied to different prices, customers may view the transaction differently and perceive the varying prices as fair.

Customer Benefits of Revenue Management

Despite potential drawbacks, revenue management can indeed benefit customers when implemented thoughtfully. Respondents in the study viewed changes as acceptable under these conditions:

1. Information on the different pricing options was made readily available.
2. A substantial discount was given in return for cancellation restrictions.
3. Reasonable restrictions were imposed in exchange for a discounted rate.
4. Different prices were charged for products perceived to be genuinely different.

In all these cases, there was a deviation from the standard reference transaction, but respondents viewed the change as acceptable due to transparency and perceived value.