The pricing puzzle: do you know what your customer is willing to pay?

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In-Depth: A customer’s willingness to pay is an important issue for all hotel companies but there are many factors to consider when it comes to pricing. EyeforTravel’s Ritesh Gupta assesses how willingness-to-pay based pricing varies for core products and ancillary offerings, and what is necessary for optimal results.

The primary focus of revenue management will always be identifying the right price for a product. As such RM professionals today are shifting their approach from cost-based logic to value-based pricing for both core and ancillary products.

Instead of taking a hotel company’s costs into account, value-based pricing focuses on the customers’ perception of value. There are, of course, examples of value-based pricing outside the travel industry. Last year, the UK’s Department of Health referred to a new value-based approach to the pricing of branded medicines. A system of value-based pricing was introduced so that patients could access what doctors thought were the right medicines and treatment. In this context, the purpose of value-based pricing is to improve patients’ access to effective and innovative drugs by ensuring they are available at a price that reflects the value they bring. 

So when it comes to value-based pricing there are two things to consider:

1.     Pricing based on the consumer’s willingness to pay for a service

2.     Pricing based on an individual’s overall, long-term value to the enterprise

While cost will always have some impact on pricing, for core products like rooms, the hospitality and travel industry has moved beyond pure, cost-based pricing where margins are fixed. Rather they have shifted to a more dynamic model which take a customer’s willingness to pay into account where margins can change with the market, explains Alex Dietz, principal product manager at business analytics specialist SAS adding that there is room for improvement in this area and cost is certainly no longer the primary driver. With regards to ancillary products (golf, spa, food & beverage, retail etc.), most pricing remains based on a cost-plus approach. “We have a long way to go there,” he says

Pricing based on an individual’s overall, long-term value to the enterprise, however, is still a relatively new concept and largely untapped by the industry. 

“There are certainly significant hurdles to overcome to achieve this kind of pricing,” says Dietz. “In my opinion it is unlikely that we will never be able to do all pricing based on enterprise customer value – but the long-term benefits of focusing on your customers’ long term value are, I think, readily apparent.”  So, despite the hurdles, further investment is expected in the near future as the industry moves in this direction.

Taking responsibility

In the move from cost-based logic to value-based pricing, revenue management has continued to bear the responsibility for consistent subject matter expertise across an increasing area of responsibility, says Douglas Hesley, director APAC RM, Four Seasons Hotels & Resorts. “It is often said that perception is reality; translating the perception of value associated with our products into pricing strategies is critical to our success,” he says. “Knowing we have different types of customers, we can deduce that understanding the varying perceptions of value among our customer segmentation is also critical to our success.”.

But there are a number of components that one needs to have in place in order to practice value-based pricing based on customers’ willingness to pay.

According to Dietz, these include:

1.     Availability of sales systems that allow management of pricing and sales in an intelligent manner

2.     Business processes that are consistent with sound revenue management

3.     Access to data relating to customers’ purchasing behaviour

4.     Decision support systems to distinguish customer value, and analyse and predict customer behaviour at a level at which this value is differentiated

5.     People that understand and can operate each of the above

The industry has spent a great deal of money piecing things together to support pay-based pricing for the core products – but there is much work to do on the ancillary side.  “We’re seeing progress in some of the more difficult technical areas, but there’s still much more to be done,” says Dietz.

Challenges ahead

According to SAS, pricing based on enterprise customer value brings a whole new set of challenges, including:

  • Understanding the customer’s full enterprise value can be difficult due to transactions contained in numerous systems around the enterprise (PMS, Spa system, Food & Beverage system, retail system etc).  This problem is exacerbated for brands and multi-property entities

  • Data quality in these operational systems is often poor – so even if we can access the data, pulling all the information together for a single customer consistently can be a significant challenge.

  • Delivering pricing based on enterprise customer value to selling systems is another challenge. These systems are not generally designed to provide distinct pricing based on a variable attribute like customer value at the time of sale. This can involve changes to reservations or property management systems, and can also impact business processes.

Not all customers can be readily ‘valued’ at the time of transaction. This may be because they are new customers, are booking through an external channel, or have chosen - for whatever reason - to follow a path that prohibits us from identifying them at the time of the transaction. For these customers, we still need the ability to price based on more general willingness to pay.

Making it possible

In the bid to move towards value-based pricing, Dietz advises focusing on the following:  

  • The first move to customer-value based pricing is to get that complete, enterprise view of your customers by pulling together the information that you have on them in your various systems. As part of this process, a data quality review is going to be necessary.  Of course, everyone believes their data is clean, but the first time you try to really get a 360-degree view of your customer you will realise how untrue that is.  And if we’re really going to price on customer value, then it is essential that we understand the full, enterprise value of our customers.

  • The next step is developing that 360-degree view of each customer, so that you can assess their full, enterprise value.

  • The final step is operationalising the delivery of pricing based on each customer’s value. This piece is challenging from both a technical as well as a change management standpoint, as a myriad of systems and processes will be impacted.  There can be an upside here, though, which is that by pushing this value out to your contact points with customers - where these transactions are made - you can now really start match customer service with value on a very individual basis.

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