Differential Pricing and Segmentation on the International Hotel

Differential determine and cleavage on the meshing the case of hotels Rama Yelkur Assistant professor of Marketing, University of Wisconsin-Eau Claire, Eau Claire, USA female horse Manuela Neveda DaCosta A Professor of Economics, University of Wisconsin-Eau Claire, Eau Claire, USA Hotels, Service industries, Pricing, Segmentation, Loyalty, mesh Key backchats Introduction In the 1950s, commercializeers spy that, if they gave their customers what they wanted Abstract and did it better than the controversy, their In the ever-changing electronic barters grew.With the advent of the network, environment of the 21st traffickers accommodate access to the technology to century, legal injury is one of the key customise crops and communicate strategic elements that is oft overlooked by firms. The melodic theme directly with sm every(prenominal)er target marts. The addresses derivative instrument price in Internet is now firmly established as a business line-to-consumer elec tronic merchandise putz. It serves as an integral routine physician, in particular of the good deal mix, serving as a digital first derivative pricing for hotel run inter spay on the Internet. istribution channel as salutary as an electronic Hotels argon able to pay back reward storefront. of first derivative pricing for various When a firm establishes a presence on the fragments beca substance ab substance abuse the securities industry for Internet, its selling activities, including hotels evict be divided into narrow customer segments. An overview advertising, pricing, and distribution, should of e-commerce and Internet reflect characteristics unique to the modal(a) selling is provided. The to help consumers realize the prise added characteristics of products sold over tralatitious manners. online and differential pricing ar discussed.Pricing policies for onConsumers in the Internet medium are line marketing are examined with to a greater extent than just nonoperational recipients in the a special emphasis on differential marketing process (Hoffman et al. , 1995). The pricing, customer loyalty and Internet is an interactive medium as opposed segmentation. With the help of secondary data, online pricing to traditional marketing which usually strategies utilize by hotels on the allows only one-way communication (Peters, Internet are evaluated.Finally, 1998 Sandelands, 1997) from marketer to conclusions are drawn and implications for the hotel industry consumer. re discussed. Many diverse vendors, from florists to manufacturers of durable goods, as well as function providers such(prenominal)(prenominal) as airlines and hotels have rushed to do business on the Internet. In graze to effectively market on the World Wide Web (the Web), companies need to evaluate the basic components of the marketing mix product, monetary value, place, and promotion. In the ever-changing electronic environment of the twenty-first century, firms must ide ntify and sustain matched advantage in order to survive. Price is one of the key strategic elements that is often overlooked by firms (Yelkur and Herbig, 1997).In the on-line setting, companies have the opportunity to utilize price to build competitive advantage by enhancing customer satisfaction and loyalty by meeting Management Decision 39/4 two hundred1 252261 MCB University Press ISSN 0025-1747 The trustworthy issue and full text archive of this journal is available at http//www. emerald-library. com/ft the demands of specific segments which have the potential to improve the firms profit position. How much impact is the Internet really having on the market mix, specially pricing?Is it changing the approach to pricing or is it merely complementing traditional pricing practices? Our paper addresses differential pricing and segmentation in business-to-consumer electronic commerce, in particular differential pricing for hotel services sold online. The consumer segments in the hotel industry are based on custom, situation, and frequency of use. Hotels are able to take advantage of differential pricing for various segments because the market for hotels sens be divided into specific customer segments (Awh, 1998 Yelkur and Herbig, 1997).The more specific the segment, the easier it is to estimate demand the knowledge of demand is essential to adopting a differential pricing strategy. This paper is organized as follows An overview of e-commerce and Internet marketing is provided. The characteristics of products sold online and differential pricing are discussed. Pricing policies for online marketing are examined with a special emphasis on differential pricing. The importance of customer loyalty and segmentation and their relationship to differential pricing on the Internet are emphasized.With the help of secondary data, online pricing strategies used by hotels on the Internet are evaluated. Finally, conclusions are drawn and implications for the hotel indus try are discussed. The growth of e-commerce assembly line conducted over the Internet is commonly referred to as electronic commerce or e-commerce. E-commerce is changing the way firms do business. In 1999, e-commerce minutes accounted for over $150 billion in sales and it is predicted that this gist will augment to $3 trillion by the year 2003 (The Economist, 2000). E-commerce 252 Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet the case of hotels Management Decision 39/4 2001 252261 transactions come in many another(prenominal) forms. panel I displays an e-commerce matrix that illustrates the difference among these various types of transactions by giving examples Business-to-business transactions allay account for 80 percent of all e-commerce business but consumer-to-consumer, consumer-to-business, and business-toconsumer (the object of this study) transactions are judge to grow astronomically in the next decade.Accordin g to an Internet consulting firm (Forrester Research, as cited in The Economist (2000)), business-to-consumer trade in the USA amounted to close $20 billion in 1999 and could r severally $184 billion by 2004, which is about 5 percent of USAs retail trade. Product characteristics that facilitate Internet marketing Some areas of retailing and commerce may be particularly well desirable for the Internet, given indisputable characteristics (see get across II). For business-to-consumer marketing, as proposed by Peterson et al. 1997), products and services in the context of the Internet mountain be classified on the basis of . apostrophize and frequency of purchase . value proposition and . differentiability. Products can vary from low cost, frequently purchased goods (ex coffee), to amply-cost, infrequently purchased goods (ex car). In general, for goods for which purchase fulfillment requires physical delivery in a short time, the Internet is not an steal mode of delivery (Pete rson et al. , 1997).For an industry such as hotels, where a transaction can be blameless without physical delivery of the product and the frequency of purchase is comparatively low and the cost is relatively high (when compared with consumables such as coffee), the Internet is a more efficient medium for firms to use to conduct business. The suitableness of the Internet in any case depends on the tangibility of the product. Internet marketing is practically well suited for certain types of services. For example, it is now widely used for banking and other financial services.When the value proposition is intangible and the frequency of use higher(prenominal), the greater is the advantage of the Internet as a transaction and distribution medium. The transport and delivery of the goods are an burning(prenominal) consideration. Clearly, it is easier to sell lighter goods over the Internet than bulky and heavy ones. Then, on that point are those that can be delivered electronically like software, music, and certain services like banking, insurance, travel and hotels. The 1999 top-ranking products in the US market in terms of online transactions were computer hardware/ software, travel, financial brokerages, and collectables.In fact, intangible or symbolic reading products such as airline tickets or hotel modestys gain tangibility on the Internet medium. Internet marketing can result in extreme price competition when products are similar, because other factors that moderate competition (ex store location) are absent. However, when products and services are capable of significant differentiation, the Internet can serve as a method of segmenting consumers and directing them toward the appropriate product or service, as is the case Characteristics of Internet marketingThe Internet represents an extremely efficient medium for accessing, organizing, and communicating study. As such, the Internet subsumes communication technologies ranging from the written and spo ken word to visual images. Internet marketing is one of the newest distribution channels marketers use to reach the customer. It is different from traditional channels in that it is also a communication network. Like all communication networks, the Internet is all about establishing and reinforcing connections between people.The Internet has been growing rapidly in the second half of the 1990s and instantly it is available in approximately 38 percent of US households (Nielsen Media Research, 2000). No medium including television has reached the 50 million-user mark in four years (Strauss and Frost, 1999). The integration of the Internet as a technological tool as well as a delivery medium with traditional marketing has transformed the processes firms use with which to conduct business. Table I The e-commerce matrix Business Business B2B GM/Ford EDI networks C2B Priceline Accompany Consumer B2C virago E*trade C2C EBay QXLConsumer ejaculate The Economist, 2000 253 Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet the case of hotels Management Decision 39/4 2001 252261 in the hotel industry. The hotel product is relatively expensive, infrequently purchased, has an intangible value proposition, and rates high on differentiation from competing products. As a result, sellers are able to tingle a higher price based on the match between the buyers needs and the nature of the product offering.In a traditional setting, such personalization would turn out to be relatively expensive. Yelkur and Herbig (1997), are condoneed below study a target market The broad target market for a business is already chosen when the product is positioned. The firm needs to divide its broad target market into smaller segments. Differential pricing The model of price discrimination or differential pricing used by Cannon and Morgan (1990) provides an important analytical insight into many discriminatory pricing practices.The prices ch arged by a firm practicing differential pricing are usually not proportional to the marginal costs incurred in producing the service. When firms adjust their prices agree to customer, location or product, they are said to follow the strategy of segmented pricing or differential pricing (Strauss and Frost, 1999). It is not unusual for businesses to offer varying prices for consumers by age group, for example, senior citizen discounts. In addition, customers can be speciated based on customer type, for example, the business customer versus the individual customer.Businesses can also offer different prices for products based on location for example, the pricing of a hotel room in San Francisco, California, would be different from a similar room in Phoenix, Arizona. Finally, firms frequently price products differently not ineluctably based on cost, but rather on the willingness to pay. For example, firstclass airline tickets are always priced much higher than economy fares (Strauss a nd Frost, 1999). In summary, segmented pricing can be based on three major factors customer type, location of product or service, and product or service offering.It is also possible to customize prices based on the profile provided by the customer, as is the case for hotel services sold online. The five locomote a firm must take to achieve a differential pricing policy, as illustrated by The essence of any customer service strategy is to segment the customer to be served. It is important to differentiate between market segmentation and customer service segmentation. Customer service segments differ from traditional market segments in significant ways. Customer service segments tend to be narrower (Davidow and Uttal, as cited in Yelkur and Herbig (1997).In addition, the narrower the segments, the more unvarying they tend to be, making it easier to estimate consumer demand for each segment. Another factor that cannot be overlooked is the usage situation. Segmentation needs to take into account the what, where, how and why of demand. As demand is a result of the interaction of a person with the environment, a segmentation perspective that includes both the person and the situation is needed to explain the demand. In service industries such as hotels, distinct lines can be drawn, say, to divide different types of customers such as the vacationer or the business traveler.The usage situation thus gives the firm a guideline for customer service segmentation. Once customer segments are identified, the next step is to estimate the demand for each of these segments. Divide the target market into smaller customer service segments Steps for differential pricing Table II Product characteristics matrix for hotels Cost and frequency of purchase Relatively high cost infrequently purchased Value proposition Intangible Service-related good Degree of differentiation Significant differentiation possible Source Based on the Peterson et al. (1997) model 254 Customer demand ca n be estimated by a method suggested by Oren et al. (1984), which proposes that there are many customers in a target market, each with different characteristics summarized in an index, say, t, indicating customer type (based on the customer service type). Assuming that there is a continuum of types with indices in the interval t0 t t1. The fraction of the population whose types are less than an index t is given by a distribution function H(t) (which forms the customer segment as described in the previous section) that is assumed to be sustained and strictly increasing. It implifies notation to let s = H(t) be this fraction so that t = H(s), and s is uniformly distributed on the interval 0 s 1. One can use s to denote a customer rank or customer type. Although this method is more suited to physical goods markets, it can be applied to service markets as well. In Estimate demand for each customer segment Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentat ion on the Internet the case of hotels Management Decision 39/4 2001 252261 practice such estimations should be substantiated with both historical and estimated market data.Reservation price indicates the maximum amount a customer is willing to pay for a good or service (Guiltinan, 1987). The making price of the customer indicates her willingness to pay and is the underlying benchmark for setting different prices for different customer segments. Classifying customers by the value they place on the service provides a rough estimate of the cost of satisfying them as well as the price they are willing to pay. Firms run in service industries can use differential pricing only if they can estimate the distributions of the reservation prices.The amount by which the reservation price exceeds the substantial price is the consumer surplus. The reservation price (Rp) would therefore depend on the value the customer places on the service (V) and the number of different firms offering the ser vice (N). That is, Rp = f(V,N). The greater the number of firms offering the service, the lower will be the reservation price of the consumer. Whereas, if the customer has only a limited number of choices (substitutes), then her reservation price becomes higher that is her willingness to pay increases (her demand becomes more inelastic).The final price is determined for each customer segment based on customer type, location and product/service offering. Thus, though there is no change in marginal cost, different prices are charged depending on the type of customer segment and the reservation prices for each segment. Among the goods and services that are sold online, hotel services appear to be particularly well suited for differential pricing because of the ease of segmenting customers at a relatively low marginal cost. Determine reservation prices (which indicate willingness to pay) for each segmentRosen and Howard (2000) provides examples of improved transaction efficiency for ser vice industries such as banking, travel, and stock brokerage. Table III illustrates the reduction in transaction costs for service firms because of delivery via the Internet. Traditional pricing strategies such as differential pricing, discussed in the previous section, are particularly well suited to ecommerce. We will focalisation primarily on differential pricing for online services, also referred to as segmented pricing.A new and unique method of pricing called dynamic pricing, which is easily facilitated by the electronic medium, enhances differential pricing for online services. The Internet enables marketing managers to modify product databases instantly and continuously, as new product features are developed and price adjustments are do (Strauss and Frost, 1999). Dynamic pricing allows Internet customers to receive up-todate price information on demand from product databases. This information changes with time and by user.For example business customers may receive differe nt prices than individual customers. Business customers may receive different price information based on volume ordered. Thus, dynamic pricing allows get ahead customization by target customer and further enhances the traditional segmented or differential pricing in the online environment. Determine prices for each segment Online presence of hotels Hotel services seem to be particularly suited to sale on the Internet. They can be delivered online and, once in place, benefit from tremendous economies of scale and scope.One firm can design a Web come in and then just differentiate from locale to locale and from hotel to hotel at very low cost. In fact, the marginal cost of adding one more line to the Web site or another site for a new hotel is practically negligible. Despite these advantages, the hotel industry seems to have been relatively slow at going digital and using the Internet as a marketing tool. Hotel transactions in the USA account for less than 5 percent of the US total volume of e-business transactions. However, there is some indication that this is likely to increase significantly in the near future.Table IV shows that online travel business transactions increased from $2. 2 billion in 1998 to $6. 5 billion in 1999, a 200 percent increase. Furthermore, when we disaggregate the total online travel bookings by travel product, it is interesting to note that lodging Pricing policies on the Internet E-commerce is likely to have a significant impact on pricing, as it creates a more competitive environment in which firms may sell. The Internet is able to generate different pricing mechanisms, particularly by allowing customers to make instant price and product comparisons.The Internet offers significant opportunity for reducing operating costs, particularly for service firms (Rosen and Howard, 2000). A study by Andersen Consulting (as cited in 255 Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet the case of hotels Management Decision 39/4 2001 252261 increased from 13 percent in 1998 to 16 percent in 1999, a trend that is likely to continue. Table IV Total online travel bookings by travel product 1998 $2. 2 billion market (%) Air inhabit Car Cruise/tour 80 13 7