Chapter 4 | Differential Pricing Flashcards
What are the two approaches of price control
- Differential pricing: Customize products and prices for each market segment
- Demand pricing: Overall demand varies by time of week / holidays / seasons –> changed perceived value
What are the three components of differential pricing
Location
Time
Quantity
Consumer surplus
WTP - actual purchase price
How do you implement differential pricing?
- Market segmentation
- Product versioning
- Self-selection
What is product versioning?
A series of similar products/services serving the same general market but sold at different prices
What are 7 things you need to know about product versioning?
- Tailor products for each segment
- Difference can be virtual or real
- Very low marginal cost to produce all versions
- Prices are driven by WTP, not by cost
- Allow customer self-selection
- Use rate fences to create different “versions” of hte same product/service
- Minor differences enable the seller to exploit differences in price sensitivity among customer segments
What are 4 things you need to know about self-selection?
- Both high & low prices are available to customers but it takes more effort to obtain the lower price
- Allow self-selection depending on the value they place on acquisition cost
- Facilitate “self-selection” by matching products with market segments through distribution channel management and rate fences
- Avoid discrimination and perceived unfairness
How to overcome 3 limits to price differentiation
- Imperfect segmentation: improve performance
- Arbitrage: increase cost of arbitraging
- Cannibalization: create proper rate fences
What is a rate fence?
Designed to allow customers to segment themselves into appropriate categories based on needs, behaviors, and WTP
What are the benefits of price differentiation?
Helps hotel penetrate each potential market segment and capture all potential revenue
What are the 5 rate fence mistakes?
- Too many discounts
- Ineffective in segmenting high paying from low paying guests
- Too difficult or complicated
- Insufficient price differentials
- Inaccurate market segmentation
What is dynamic pricing?
Based on demand, takes advantage of the perceived value changing with time and maximizes revenue for a given demand
4 keys to implementing dynamic pricing
- Should not be perceived as unfair
- Customers are willing to pay different prices
- Prices should be maintained within the latitude of price acceptance
- Logistical issues of changing prices through different channels need to be taken care of
