Revenue Management Techniques: Do Prices Really Need To End In 9?

Bob Weiser sent me an article today.  It really made me think about a subject that I have often thought about, yet never had the nerve to really dig deep into… and furthermore, even think these ideas out loud for fear of being thought stark, raving mad.  (I’ve copied the entire article below for those of you who want to read it.)

The article addresses the psycho-analysis of hotel pricing and how those numbers affect customers.

Do we always price the hotel in amounts ending in a 9?  $89, $99, $119, $139…..?  Why we do this (I think) has less to do with what we think the customer will choose, and more to the fact that we don’t want to be too different (i.e. the sore thumb analogy).   Do we feel kindred to products that are priced under $90, $100, $110, $120, and $140?  What is the tipping point?

Pull out your last revenue management report or competition survey of rates in your local hotel set.  I’ll bet it looks something like this:

Our Hotel – $89

Brand M – $99

Brand H – $99

Brand HI – $79

Brand I – $79

Brand B – $69

Why are we priced $10 lower than our comp set?  Is it to attract the customer to our hotel because it is not the highest priced hotel in our market thereby giving the consumer a better value in a like-condition/amenity environment?

(I will preface my comments from this point on, to say that I would NOT be willing to try this experiment if my hotel was priced the same as the highest rated hotels in the market – ONLY if you are the second highest!!!  If you were priced the same as the other hotels and lowered your rate you risk leaving money on the table, if you price yourself to exceed the other hotels then you risk alienating the customer.  With that being said….)

What do you think the customer would do if the pricing looked like this:

Our Hotel – $92

Brand M – $99

Brand H – $99

Brand HI – $79

Brand I – $79

Brand B – $69

By pricing ourselves with a an amount ending in a 2, do we lose a customer, or do we steal a customer from the $79 (because we are a good buy) and from the $99 priced hotels (because we are a good value)?  Are we leaving money on the table at $89?  Or, are we just being greedy?

So to examine the psycho-analytics I promised in the intro to this article and to learn what numbers mean, let’s look at the science (sic?) of numerology:

Positive Traits: Independent, assertive, original, inventive, ambitious, decisive, loves new beginnings.

Negative Traits: Arrogant, domineering, self-centered, greedy, quarrelsome.

Positive Traits: Sensitive, detail-oriented, balanced, cooperative, tactful, considerate, persuasive, diplomatic responsive.

Negative Traits: Blunt, scheming, bull-headed, overly sensitive, intolerant, cross, unfriendly.

Positive Traits: Creative, verbally expressive, happy, imaginative, sociable, friendly, joyful, charming.

Negative Traits: Faddish, gloomy, pessimistic, hostile, gossipy, snobbish.

Positive Traits: Dedicated, earthy, trustworthy, practical, methodical, economical, disciplined, orderly.

Negative Traits: Inflexible, narrow-minded, stubborn, dishonest, restricted, crude, discourteous, unyielding.

Positive Traits: Independent, versatile, active, free, progressive, accepting of change, spontaneous, opportunistic, unconventional, enterprising.

Negative Traits: Impulsive, fearful, restless, frenzied, nervous, eccentric, frivolous, shallow.

6

Positive Traits: Responsible, supportive, caring, appreciative, trustworthy, charitable, dutiful, happy, just, understanding.

Negative Traits: Irresponsible, vindictive, unyielding, possessive, ungracious, cynical, unreliable, hostile, unfeeling.

7

Positive Traits: Wise, understanding, truth-seeking, analytical, spiritual, specialist, intuitive, studious, solitary, dignified, intellectual.

Negative Traits: Incompetent, critical, impatient, reclusive, proud, extremist, nervous, impractical, eccentric, agnostic.

Positive Traits: Powerful, decisive, authoritative, materially successful, judgmental, balanced, disciplined, responsible, influential, self-confident, pioneering, venturesome.

Negative Traits: Tyrannical, restrictive, rigid, unyielding, fanatical, inconsiderate, militant, cold-blooded, rebellious, fraudulent, aggressive.

Positive Traits: Selfless giver, humanitarian, compassionate, idealistic, broad-minded, creative, loving, humble, understanding, forgiving.

Negative Traits: Greedy, unsympathetic, prejudiced, uninvolved, restrictive, resentful, narrow-minded, bitter, hateful.

So, if we go with the above analysis and use the rate ending in 9 – we are all either selfless givers who are compassionate, loving and understanding or we are greedy, restrictive, narrow-minded and bitter hotel operators – LOL.

What about the “ending in 2 scenario” – are we detail-oriented, considerate and diplomatic, or are we scheming and unfriendly?  Do we believe that customers care?  Will customers “bite” at this rate?  Or is this all just the weird raving of a confused corporate director of sales?

I have to say that I like numbers, and I also like to be different.  So, I might be willing to take a chance on straying from the norm, and pick a price that ends in anything else but a 9 (oh, and a 4 because of the feng shui connotation – LOL) to see if the theory of numerology has any play in the revenue management game.  But that is me….. what do you think?

Happy pricing!

Linda

P.S.  I was born on the first…. does that mean anything?

 

Do Hotel Prices Really Need to End In 9?

By Bill Kotrba, VP of Industry Strategy, Leisure, Travel and Hospitality, JDA Software

Is pricing ending in 9 an outdated 20th century carryover from the pre-e-commerce era? Does anyone care anymore what the last digit of a price is, when it’s displayed on a mobile phone in a list of 25 competing rates? At least as far as hotels are concerned, the way room rates are distributed and displayed, as well as the revenue management tools for determining those rates, have both changed dramatically in the last decade. I have reason to think the hotels pricing in “9” may be leaving money on the table.

Long before I was born, someone decided there was something special about prices ending with the number nine. $99. $199. $999.99. The “Art and Science” of pricing evolved this way–conventional wisdom has always been that adding that “next digit” crosses some mental line and causes a disproportionate change in a person’s willingness to buy the product or service. “Pretty” pricing has long been accepted as an effective technique, and also for what it really is—a way to obscure information from the customer about the true underlying value of whatever it is they are buying—while creating the perception that the price was Good Deal. It makes sense from personal experience, and I’m also sure that hundreds of scientific studies conducted over the years have verified that it is indeed effective.

I learned of one such study recently at a meeting with executives at a large retailer. The topic of our meeting was dynamic pricing and how a business can use price as a lever to manage demand. As a group we were standing around a large whiteboard, drawing supply and demand curves with sweeping smooth arcs. We talked about various quantitative approaches to identifying the pricing “sweet spot” that generates maximum revenue and profits for a business. The notion of the nice smooth demand curve was called into question though by studies the retailer had conducted in the preceding year.

The retail venue in this case was a gift shop, and the item was kids’ watches. They studied price elasticity using real market response data testing a variety of price points over a period of months. The results demonstrated that there was a maximum revenue point at $19.99. In other words, at $20.00 there was more than sufficient decline in demand to offset the extra penny of revenue. Same was true at $21, $22, etc., each generating less total revenue compared to the $19.99 price point.

As they continued to increase the price, however, an interesting thing happened. It turns out the demand curve for this particular item is “lumpy”. Total revenue from sales of this particular watch continued to decline until the price got into the mid-$30 range—and then it started to increase again. Revenue continued to increase until the price was $39.99. At $40.00, revenue began to decline again. The same thing happened as the price moved into the high $40’s, increasing revenue again until the price was $49.99. Then declined above $50. Evidently customers have a particular reference price in mind when buying a gift—and in this case it appeared that the price took on almost greater importance than the gift itself.

In the 21st century world of mobile-enabled hyper-transparent pricing, is the “nines” approach outdated? The retail example of the kids’ watch might make you think twice. But consider the lack of price transparency and price competition—gift shops sell to people browsing in person who are frequently buying something for someone else. Gift shops also don’t typically have competing gift shops close by for easy comparison shopping, the products are often one-of-a-kind items, and prices don’t change frequently. There are multiple levels of information conveyed by the price in this case. In this study, the customers’ perception of value was clearly associated with the price.

Big box stores practicing “Every Day Low Pricing” sit at the other end of the spectrum. For them, a low price not ending in 9 conveys a certain precision which suggests that somehow every penny of cost has been squeezed out and passed on to the customer in the form of a lower price. Even though this precision could be completely fabricated, when I buy a tube of toothpaste for $1.62 it feels like a “discount store” price compared to $1.99. There is the appearance of a good deal.

What does all this have to do with hotels?

I did my own study, highly scientific of course, to determine whether hotels are continuing to favor pretty prices ending in 9. I surveyed prices in 125 markets across the U.S. for a single night stay about 2 weeks in the future. I looked at the top 25 properties that were displayed on a popular online travel agency. How often did I observe per-night rates ending in 9, like $79, $89, $149? Slightly more than 36% of the time! It is clear that a disproportionate number of hotel pricers still believe that rates ending in 9 will give them some kind of advantage. (Incidentally, “7” was the least popular number that I observed, with hotel rates ending with that number only 4% of the time.)

Turning my informal study upside-down, I think it is actually more interesting to note that two-thirds of the hotel rates I observed did not end in 9. So much has changed in hotel rate distribution in the 21st century. A large percentage of buyers are making a purchase from a display of multiple rates. Those rates are changing frequently, and any given set of local competitors are seldom, if ever, perfectly in sync. Further, most segmentation has disappeared with channels converging on the Web, and advance purchase and length-of-stay restrictions not common. In this environment, considering that two-thirds of the rates do not end in 9, my intuition tells me there is much less to be gained from enticing a customer with a pretty price point.

Revenue management (RM) systems have also changed dramatically in the last decade, potentially further obscuring the advantage of a room rate ending 9. Traditional RM, as it evolved in the 80’s and 90’s, focused on yielding out low-rate demand during times when hotels were expected to be full. For traditional systems to be effective, underlying rate classes or “buckets” needed to be fenced and differentiated. This is difficult to achieve without meaningful separation of the rates in adjacent buckets. In other words, older RM systems were not good at accurately forecasting demand for separate rate buckets only a few dollars apart, and even more so without restrictions or fences in place to differentiate that demand.

Could it be that the hotels pricing with 9’s are the ones that still use older, traditional RM systems, or manage their prices manually with no RM system at all? Forcing prices to end in 9 creates large steps in price, i.e. ten dollar jumps from $79 to $89, etc., and this lends itself well to create enough separation between rate buckets for a traditional RM system to produce decent results. Over the last few years, though, several large U.S. chains have adopted a new approach to managing revenue and rates—price optimization. Instead of pushing up revenue by closing rate classes when hotels are expected to be full, the new solutions use price as the primary lever to manage demand. Price optimization systems recommend optimal rates based on elasticity of demand and customer willingness-to-pay, sometimes recommending rate increases even when hotels are not expected to be full.

Price optimization as an RM approach does not lend itself to pretty pricing. By definition, the optimal price that can be determined using an elasticity model is a very precise number – not constrained to end in 9. Indeed, forcing prices to end in 9 creates large steps in price, increasing the likelihood that the hotel is never priced at the sweet spot where profits are maximized. Perhaps $79 is a very low and compelling room rate in a particular market—but so is $82; that is nearly a 4% improvement in revenue, and an even bigger improvement in profit margin. In a world where all competitors’ rates are instantly displayed side-by-side for comparison, and two-thirds of the rates already do not end in nine—I would be willing to take my chances on a 4% advantage.

Setting the right price for a room is the fourth most important factor in determining the profitability of a hotel—after Location, Location and Location. Pricing is the profit lever for a hotel. A 10% improvement in net ADR produces a bigger profit improvement than a 10% increase in stay-nights, or a 10% decline in fixed or variable expenses. If you could choose a single discipline to improve in the management of a hotel to drive better results it would have to be pricing—and it looks like reconsidering a policy of pricing in 9’s might be good place to start.

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