Chapter 4 | Differential Pricing

Question 1

What are the two approaches of price control

Answer 1

1. Differential pricing: Customize products and prices for each market segment
2. Demand pricing: Overall demand varies by time of week / holidays / seasons –> changed perceived value

Question 2

What are the three components of differential pricing

Answer 2

Location
Time
Quantity

Question 3

Consumer surplus

Answer 3

WTP - actual purchase price

Question 4

How do you implement differential pricing?

Answer 4

1. Market segmentation
2. Product versioning
3. Self-selection

Question 5

What is product versioning?

Answer 5

A series of similar products/services serving the same general market but sold at different prices

Question 6

What are 7 things you need to know about product versioning?

Answer 6

1. Tailor products for each segment
2. Difference can be virtual or real
3. Very low marginal cost to produce all versions
4. Prices are driven by WTP, not by cost
5. Allow customer self-selection
6. Use rate fences to create different “versions” of hte same product/service
7. Minor differences enable the seller to exploit differences in price sensitivity among customer segments

Question 7

What are 4 things you need to know about self-selection?

Answer 7

1. Both high & low prices are available to customers but it takes more effort to obtain the lower price
2. Allow self-selection depending on the value they place on acquisition cost
3. Facilitate “self-selection” by matching products with market segments through distribution channel management and rate fences
4. Avoid discrimination and perceived unfairness

Question 8

How to overcome 3 limits to price differentiation

Answer 8

1. Imperfect segmentation: improve performance
2. Arbitrage: increase cost of arbitraging
3. Cannibalization: create proper rate fences

Question 9

What is a rate fence?

Answer 9

Designed to allow customers to segment themselves into appropriate categories based on needs, behaviors, and WTP

Question 10

What are the benefits of price differentiation?

Answer 10

Helps hotel penetrate each potential market segment and capture all potential revenue

Question 11

What are the 5 rate fence mistakes?

Answer 11

1. Too many discounts
2. Ineffective in segmenting high paying from low paying guests
3. Too difficult or complicated
4. Insufficient price differentials
5. Inaccurate market segmentation

Question 12

What is dynamic pricing?

Answer 12

Based on demand, takes advantage of the perceived value changing with time and maximizes revenue for a given demand

Question 13

4 keys to implementing dynamic pricing

Answer 13

1. Should not be perceived as unfair
2. Customers are willing to pay different prices
3. Prices should be maintained within the latitude of price acceptance
4. Logistical issues of changing prices through different channels need to be taken care of