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| In the hectic daily life of a hotel revenue strategist, coming up with optimal pricing presents the greatest challenge – a challenge that’s typically handled through reliance on a sophisticated RMS, complex algorithms, and in-depth analysis. But there’s a creative component that comes into play as well. And this involves looking at some of the fascinating psychological research on consumer behavior and pricing. Here we balance proven theories on pricing psychology with practical takeaways that you can utilize in your revenue strategy. The
Phenomenon of Preference Reversal
Takeaways: This all comes down to preference toward risk. Preference reversal phenomenon presents an arbitrage opportunity for hotels – where the presence of risk subtly influences a customer’s ability to put an estimate on value. As a result, you may be able to extract additional value from customers based on the decisions they make. This can come into play when upselling guests to premium room types – by tailoring your sales approach to affect what a customer considers “risky.” There’s the “risk” of paying more for a room versus the “risk” of missing out on valuable features like a view or enhanced service. These types of risk often influence a customer’s willingness to make a purchase. Risky
Business
Dan Ariely, professor of psychology and behavior economics at Duke University, did research which he presented in a TED Talk showing the effect of “useless” price points in transforming “bargain hunters” into “value seekers.” To illustrate his point, Ariely described a pricing situation he encountered at The Economist:
Takeaways:
Apply techniques such as strike-through pricing that makes customers feel
they’re entering the “gains” domain. Unbundle gains, like detailing the
benefits of upgrades. And bundle losses. For instance, combine a room upgrade
with a “free” resort fee to make it more appealing, or package a high-priced
room with a complimentary breakfast to transform bargain hunters into value
seekers.
It’s All Relative Price anchoring is a technique of showing a very expensive price before revealing a cheaper price. The human brain tends to make judgments based on contrasts. (Which is why legendary Serendipity 3 restaurant’s $1,000 Golden Opulence Sundae makes their $9.95 fruit cup look like a steal!) Not only does the contrast have a powerful effect, but the high price by itself influences what a shopper expects to pay for any product from that seller. A practical example for hoteliers may be featuring a $10,000 penthouse suite on your website. Research shows that by doing so, you’re more likely to sell your $500 standard room, as opposed to if you’d simply presented your standard rate alone. Clearly, the presentation of an offer makes a difference in our decision-making and perceptions. Our perception of price also impacts our perception of the quality of something. A study by California Institute of Technology and Stanford University scholars,4 showed that people not only rated the same wine more highly when they were told it was expensive, but magnetic resonance imagery (MRI) scans of their brains showed that they even enjoyed the experience of drinking it more. Another study by marketing professors at Stanford and Rice universities5 used an auction site on eBay to evaluate the impact of implicit versus explicit price comparisons. They found that when a $1.99 CD was flanked either by identical versions priced at $6.99 or $0.99, the selling price of the original $1.99 CD captured much higher prices when flanked by the $6.99 CDs. In this case, shoppers made comparisons on their own. However, when auction participants were explicitly told to compare the $1.99 price to its neighbors, the buying price dropped. The simple fact that they were asked to make a comparison made shoppers more cautious and risk averse. They were suspicious they were being tricked in some way. Takeaways: Go big with anchoring! The more you ask for, the more you get. And while you may not intend to sell your high-priced penthouse suite often, its price can serve as an anchor for customers in placing a value on your standard rooms. Also, be aware that comparative selling is powerful, but overt comparisons with competitors can backfire. Time
& Experiences Over Money
“The Time vs. Money Effect” study by Stanford Graduate School of Business researchers, showed that mentioning time and increasing focus on “the experience,” led to a favorable shift in product attitudes and decisions – and to more purchases. As part of their study, the authors set up a lemonade stand operated by two six-year-olds. They used three different signs, displayed one at a time:
Takeaways: Our relationship with time and experiences are more personally meaningful than our relationship with money. Be aware of what experiences bring meaning to the lives of your potential customers to assist your pricing and marketing efforts. When it comes to pricing psychology, perception can be more important than reality. And frames of reference will differ across individuals. So, your guests’ perceptions may be very different from our own perceptions of your pricing and products – and will even vary from guest to guest. Hotels must clearly communicate the value they offer. It’s crucial for hotel revenue managers to understand how and why their guests book, so you can adjust rates accordingly. By considering the psychological pricing factors that influence travelers’ behaviors, you will enjoy healthier revenues and more robust profit margins. About
Dan Skodol
Dan previously held Director of Revenue Management roles for two casino organizations in Atlantic City and Archstone Communities. He holds a BA from Yale University and a Master of Management in Hospitality from Cornell. Dan and his wife reside in Denver, CO with their four-year-old son and enjoy skiing, hiking and travel. About
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