An Inquiry Into Pricing Of Hotels

2,894 views

Published on

1 Comment
0 Likes
Statistics
Notes
  • Be the first to like this

No Downloads
Views
Total views
2,894
On SlideShare
0
From Embeds
0
Number of Embeds
96
Actions
Shares
0
Downloads
66
Comments
1
Likes
0
Embeds 0
No embeds

No notes for slide

An Inquiry Into Pricing Of Hotels

  1. 1. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ Table of Contents C h a p t e r 1 : C o n c e p t u a l i s a t i o n o f I s s u e  ....................................................................... 4 1 . 1 I n t r o d u c t i o n  ..................................................................................................................... 4 1 . 2 I s s u e I d e n t i f i c a t i o n  ...................................................................................................... 4 1 . 3 D i s s e r t a t i o n A i m  ........................................................................................................... 6 1 . 4 D i s s e r t a t i o n O b j e c t i v e s  .............................................................................................. 6 1 . 5 S c o p e a n d L i m i t a t i o n  .................................................................................................. 6 1 . 6 D i s s e r t a t i o n S t r u c t u r e   ................................................................................................ 7  .1 . 7 C o n c l u s i o n  ........................................................................................................................ 7 C h a p t e r 2 : R e v i e w o f L i t e r a t u r e  .................................................................................... 8 2 . 1 I n t r o d u c t i o n  ..................................................................................................................... 8 2 . 2 R e v e n u e M a n a g e m e n t P a r a d i g m  ............................................................................. 8 2 . 3 P r i c i n g f r o m t h e P e r s p e c t i v e o f E c o n o m i c s a n d M a r k e t i n g  ................... 11  2 . 3 . 1 B u y e r s R e s p o n s e t o P r i c e  ............................................................................... 11  T H E M A R K E T I N G M I X  ................................................................................................. 14  2 . 3 . 2 H o t e l s D e t e r m i n a t i o n o f P r i c e s   ................................................................... 16  . M O N O P O L Y  ...................................................................................................................... 18  O L I G O P O L Y ...................................................................................................................... 19  M O N O P O L I S T I C C O M P E T I T I O N  ................................................................................ 20  2 . 3 . 2 I n d u s t r y a n d E c o n o m y W i d e R o l e P r o c e s s  ............................................. 22 2 . 4 B a r g a i n i n g T h e o r y o f P r i c i n g  ............................................................................... 24 2 . 5 P r i c e i n S e r v i c e O r g a n i s a t i o n s  ............................................................................. 27  2 . 5 . 1 S e l e c t i n g a P r i c i n g M e t h o d  ............................................................................ 29  C O S T - B A S E D M E T H O D S  ............................................................................................. 29  C O M P E T I T I O N - B A S E D M E T H O D S  ............................................................................ 29  C U S T O M E R - B A S E D P R I C I N G   .................................................................................... 30  . 2 . 5 . 2 S e l e c t i n g a P r i c i n g P o l i c y  .............................................................................. 30  2 . 5 . 2 E n v i r o n m e n t   .......................................................................................................... 32  . E C O N O M I C F A C T O R S  ................................................................................................... 33  M A R K E T F A C T O R S  ........................................................................................................ 34 2 . 6 C o n c l u s i o n  ...................................................................................................................... 35   1 | P a g e     Lehry, A. (H‐1270)  
  2. 2. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ C h a p t e r 3 : R e s e a r c h M e t h o d o l o g y  .............................................................................. 36 3 . 1 I n t r o d u c t i o n  ................................................................................................................... 36 3 . 2 T h e R e s e a r c h P u r p o s e a n d F r a m e w o r k  ............................................................. 36 3 . 3 T h e R e s e a r c h P r o c e s s   ............................................................................................... 39  . 3 . 3 . 1 H y p o t h e t i c o - D e d u c t i v e M e t h o d  ................................................................... 40  O B S E R V A T I O N S T A G E  ................................................................................................. 40  P R E L I M I N A R Y D A T A G A T H E R I N G  .......................................................................... 41  T H E O R Y F O R M U L A T I O N  ............................................................................................. 42  H Y P O T H E S I S I N G  ............................................................................................................ 43  F U R T H E R S C I E N T I F I C D A T A C O L L E C T I O N  ......................................................... 44  D A T A A N A L Y S I S  ........................................................................................................... 47  C O N C L U S I O N  ................................................................................................................... 47 C h a p t e r 4 : D a t a A n a l y s i s a n d I n t e r p r e t a t i o n   ........................................................ 48  .4 . 1 I n t r o d u c t i o n  ................................................................................................................... 48 4 . 2 R e s p o n d e n t O n e  ............................................................................................................ 49 4 . 3 R e s p o n d e n t T w o  ........................................................................................................... 52 4 . 4 R e s p o n d e n t T h r e e  ........................................................................................................ 55 4 . 5 R e s p o n d e n t F o u r   .......................................................................................................... 58  .4 . 6 R e s p o n d e n t F i v e  ........................................................................................................... 61 4 . 7 I n f e r e n c e o f P r i c i n g M e t h o d s  ............................................................................... 65 4 . 8 I n f e r e n c e o f P r i c i n g P o l i c i e s  ................................................................................. 65 4 . 9 I n f e r e n c e o f E n v i r o n m e n t a l C h a r a c t e r i s t i c s  ................................................... 67  .4 . 1 0 C o n c l u s i o n  ................................................................................................................... 68 C h a p t e r 5 : C o n c l u s i o n a n d I m p l i c a t i o n  ................................................................... 69 5 . 1 I n t r o d u c t i o n  ................................................................................................................... 69 5 . 2 R e s e a r c h O v e r v i e w  ..................................................................................................... 69 5 . 3 I m p l i c a t i o n s  ................................................................................................................... 73 5 . 4 S c o p e f o r F u r t h e r R e s e a r c h   ................................................................................... 74  .B i b l i o g r a p h y  .......................................................................................................................... 75  B o o k s  ..................................................................................................................................... 75  A r t i c l e s   ................................................................................................................................ 75  . 2 | P a g e     Lehry, A. (H‐1270)  
  3. 3. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’List of FiguresF I G U R E   2 .   1 :   F O U R   P ’ S   O F   M A R K E T I N G   M I X .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 14 F I G U R E   2 .   2 :   F O R M S   O F   I M P E R F E C T   C O M P E T I T I O N .   ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 18  ‐ F I G U R E   3.   1:   P R O P O S E D   R E S E A R C H   F R A M E W O R K  ................................................................................ 38 F I G U R E   3.   2:   H Y P O T H E T I C O ‐ D E D U C T I V E   R E S E A R C H   M E T H O D   A D O P T E D   F R O M   S E K A R A N   (1992)  ..... 40  .List of TablesT A B L E   4 .   1 :   R E S P O N D E N T   O N E ’ S   R E S P O N S E   T O   P R I C I N G   S T R A T E G Y .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 49 T A B L E   4 .   2 :   R E S P O N D E N T   O N E ’ S   R E S P O N S E   T O   E N V I R O N M E N T A L   C H A R A C T E R I S T I C S .  ‐‐‐‐‐‐‐‐ 50 T A B L E   4 .   3 :   R E S P O N D E N T   T W O ’ S   R E S P O N S E   T O   P R I C I N G   S T R A T E G Y .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 52 T A B L E   4 .   4 :   R E S P O N D E N T   T W O ’ S   R E S P O N S E   T O   E N V I R O N M E N T A L   C H A R A C T E R I S T I C S .  ‐‐‐‐‐‐‐‐ 53 T A B L E   4 .   5 :   R E S P O N D E N T   T H R E E ’ S   R E S P O N S E   T O   P R I C I N G   S T R A T E G Y .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 55 T A B L E   4 .   6 :   R E S P O N D E N T   T H R E E ’ S   R E S P O N S E   T O   E N V I R O N M E N T A L   C H A R A C T E R I S T I C S .  ‐‐‐‐‐ 56 T A B L E   4 .   7 :   R E S P O N D E N T   F O U R ’ S   R E S P O N S E   T O   P R I C I N G   S T R A T E G Y .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 58 T A B L E   4 .   8 :   R E S P O N D E N T   F O U R ’ S   R E S P O N S E   T O   E N V I R O N M E N T A L   C H A R A C T E R I S T I C S . ‐‐‐‐‐‐‐ 59 T A B L E   4 .   9 :   R E S P O N D E N T   F I V E ’ S   R E S P O N S E   T O   P R I C I N G   S T R A T E G Y .  ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 61 T A B L E   4 .   1 0 :   R E S P O N D E N T   F I V E ’ S   R E S P O N S E   T O   E N V I R O N M E N T A L   C H A R A C T E R I S T I C S .  ‐‐‐‐‐‐ 62 3 | P a g e     Lehry, A. (H‐1270)  
  4. 4. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Chapter 1: Conceptualisation of Issue1.1 IntroductionThis chapter consists of a brief description of the issue that theresearcher would like to pursue. In this description the authoridentifies the main area of research. The chapter then continues todescribe the aims, objectives, scope and limitations of the research.This research aims to find out the relationship between twovariables.1.2 Issue IdentificationAccording to Mckinsey’s consultants, the fastest and most effectiveway for a firm to achieve maximum profit is to price servicesappropriately, Tung et al. (1997). Price of a product or service isthe only market mix element that helps generate revenue for theorganisation. A number of authors have recommended the value ofpricing for every organisation’s profitability and long-termsurvival. Thus, it is crucial that managers have a goodunderstanding of price. If a product or service is over charged thenthere is a threat of losing present and prospective customers, whilewhen charging a diminutive amount an organisation will loserevenue that would help maintain the operations properly or help inthe future expansion.In the hotel industry, the industry cost structure and the perishablenature of its product make it extremely crucial to sell their productat an optimum price. A hotel room which is unsold on anyparticular night cannot be stocked to subsequently offer to guestsat a later stage. Thus, selling each room each night at the bestpossible price is critical to a hotel’s long-term success. From amicro-economic perspective, price is the single most importantdecision in marketing.4 | P a g e     Lehry, A. (H‐1270)  
  5. 5. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Pricing is traditionally recognized to play a central role in thefunctioning of the economic system. The three macro-economicfunctions of price are: allocation or rationing, or the balancing ofthe quantities demanded and those supplied; stimulation, and actingas an incentive for new players and products to enter amarketplace; and distributive, whereby income is distributedbetween buyers and sellers.Internal monetary considerations and external marketconsiderations are in most organisations, important forces thatdetermine the organisations pricing strategies. In today’s highlycompetitive market, organisations must be aware of theenvironment in which they operate and the external factors thatinfluence them. These factors can affect the main internal factorsof the organisation and its pricing policies or marketing strategies.The external environment is unpredictable to large extent and manyof the external forces can change quickly and dramatically and areusually beyond a firm’s control. Although some external factorscan pose a threat to a business, they can also create newopportunities.This dissertation aims to analyse the relationship betweenenvironmental characteristics and pricing strategies in the Indianhospitality sector. It is argued by many authors that environmentalcharacters such as political scenario, economics, and socio-cultureoften are the driving factors for an organisation in adopting pricingpractices. The author however through the research would like tofind out how change in environmental characteristics would affectthe pricing strategy of a hotel in India.The dissertation is inspired from the study of George J. Avlonitisand Kostis A. Indounas, Department of Marketing andCommunications, Athens University of Economics and Business,Athens, Greece who have carried out extensive research in the areaof pricing in the Greek service sector.5 | P a g e     Lehry, A. (H‐1270)  
  6. 6. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’1.3 Dissertation AimThe aim of this research is to investigate the effect of changes inenvironmental characteristics on pricing strategies of anorganisation.1.4 Dissertation ObjectivesThe objectives of this research are: Explore the environmental characteristics that influence pricing. To provide a theoretical framework on pricing methods and pricing policies in the hotel industry. Determine whether hotels can respond to change in environment through pricing.1.5 Scope and LimitationThe dissertation attempts to examine empirically the potentialrelationship between pricing strategies and environmentalcharacteristics. Though, a lot of importance is attached tocompetitive issues when setting prices, organisations need to treatthe concept of pricing in a more “holistic” approach, where apartfrom competition; emphasis will also be laid on otherenvironmentally related characteristics. The significance of thesefindings notwithstanding, the context of the study is a caveat, sinceit limits the ability to generalize the results to other countriesother than Indian hotel industry. This research is limited to thestudy of pricing from the rooms division point of view only.6 | P a g e     Lehry, A. (H‐1270)  
  7. 7. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’1.6 Dissertation StructureThe dissertation is organized as follows: first, a comprehensivereview of the existing literature on pricing strategies andenvironmental variables is presented. Second, the researchmethodology used is provided. Third, the data analysis and theinference of results are presented, while, finally, the conclusionsalong with the basic implications of the main findings of the studyand the directions for future research are presented.1.7 ConclusionThis chapter describes the area of research which the researcherwould like to pursue. It is clearly evident that pricing of productsand services is of paramount importance to an organisation. Thequestion here is how they get this concept of pricing right.Having talked about the importance of price in generating revenueand its contribution to the long-term sustainability of anorganisation, this research will further decipher the concept ofpricing from different perspectives and will aim to operationaliseits finding to the real world scenario.Note: The term organisation and firm has been used randomly inthe document with reference to hotels in the Indian hospitalitysector.7 | P a g e     Lehry, A. (H‐1270)  
  8. 8. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Chapter 2: Review of Literature2.1 IntroductionOn having identified the broad area of research and narrowingdown on the issue to think about on, this chapter aims to gaininsight into the issue of pricing in service industry i.e. hotels, fromthe perspective of different disciplines.Revenue is generally realised and earned when there is aconvincing evidence that an arrangement exists, delivery hasoccurred or services have been rendered , the sellers price to thebuyer is fixed or determinable and collectability is reasonablyassured. 2.2 Revenue Management Paradigm “Revenue Management has proven to be a devastatingly effective competitive device.” - Dr. Alfred KahnRevenue management emerged first from the airline industry. Itserved as a tool to deal with new competitors (invariably low cost)and fierce pricing wars that resulted from deregulation. Currentlyrevenue management is a business practice used by a wide range ofindustries. Revenue management is the art and science offorecasting real-time customer demand and optimise the price giventhe availability of products.“Revenue Management is defined as the application of disciplinedtactics that predict consumer behaviour at the micro-market leveland optimise product availability at the requisite price to maximiserevenue growth.” (Cross, 1997, pg 32).8 | P a g e     Lehry, A. (H‐1270)  
  9. 9. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’This definition builds a base for study of issues pertaining tomaximising revenue earning. It also involves research of marketsand competition, while developing correct pricing strategies foreach market segment. Revenue management is a new way to managesupply and demand. It enhances revenue productivity by achievinga precise understanding of the demand for a company’s productsand services at the micro-market level. The smooth management ofall three processes results in revenue maximisation.Yield Management + Pricing strategy + Market Optimisation =Revenue Maximisation.Revenue management was conceptualised to overcome the need toequalize the opportunity losses primarily due to the perishablenature of inventory. Organisations dealing in perishable inventoryneed to take advantage of supply and demand conditions in themarket to maximise on the revenue generation potential bytweaking the pricing, i.e. increasing prices when demand exceedssupply and vice versa. (Kasavana and Brooks, 1996).Nykiel (1997) added that revenue management is an enriched mixof strategies to maximise revenue based on customer perception ofthe competitor, positioning of the product and a suitable strategy togain advantage from corresponding market conditions. Based onthis technique inventory managers can decide what value can beoffered to customers in terms of price, products or other intangiblebenefits.9 | P a g e     Lehry, A. (H‐1270)  
  10. 10. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Robert Cross on the other hand has described seven core conceptsof revenue management – Focus on price rather than costs when balancing supply and demand. Replace cost-based pricing with market based pricing. Sell to segmented micro markets, not to mass markets. Save your products for your most valuable customers. Make decisions based on knowledge, not supposition. Continually re-evaluate your revenue opportunities.Donaghy et al. (1997) say that revenue management is a tool thathelps to increase revenue through the forecasted distribution ofroom inventory to predetermined market segments at an optimumprice.Many authors present a comprehensive view by interpreting yieldmanagement as an instrument with the capability to generate betterrevenue with the help of information systems, technology,profitability, statistics, organisation theory, business experienceand knowledge.The objective of revenue management is to ensure that companieswill sell the right product to the right customer at the right timefor the right price.Price discrimination is the term used to describe the practice ofsetting variable pricing policy, and selling the same product orservice to different customers at different prices.10 | P a g e     Lehry, A. (H‐1270)  
  11. 11. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’2.3 Pricing from the Perspective of Economicsand MarketingFrom the earlier section it is clearly evident that pricing ofproducts and services is of utmost importance for an organisation’sprofitability and long-term success. Revenue management looks atpricing from the point of view of economics (demand and supply)and marketing (an essential component of the marketing mix) andamalgamates the essence of pricing from both the disciplines toform powerful tools in-order to maximise an organisations revenuegeneration capacity. Now let us look at pricing from theperspective of economics and marketing.Pricing is a vital issue both for marketing and economics. Pricingas a concept is critical for organisations and its consumers andplays a vital role in the economics of any country or industry.Skouras et al. (2005) have studied the transitional basis of price inthree different perspectives. Each of these perspectives have beendiscussed in detail.2.3.1 Buyers Response to PriceThe primary distinguishing factor of pricing in economics andmarketing is the buyers’ behaviour of rationality, whether thebuyer can be considered rational or not during a transaction.Economics as a discipline believes that buyers are rational so thatthey can maximise utility. This is also in consonance to the utility-maximisation theory. Thus price is a determinant of this utility.This maximisation of utility is dependent upon the disposableincome or purchasing power of the buyer. Hence “buyers’ responseto prices is, according to economics, an exercise in utility-maximisation under constraints.”(Skouras et. al., 2005).11 | P a g e     Lehry, A. (H‐1270)  
  12. 12. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The law of demand is derived from this theory that when thedemand of a product or service falls the price rises and vice versa.Many theorists contradict the law of demand by positing that itdoes not necessitate the assumption of rationality. The inverserelationship between price and demand may be inferred fromvarious behavioural assumptions like habit and random buying.Therefore, economics looks at rational buyer behaviour rather thanfocussing on how buyers behave in reality. Thus pricing is the mostimportant criterion in buyer’s decision.The subject of marketing looks at the entire story from a differentperspective. Firstly it proposes that the buyer relates higher pricewith higher quality as they do not have any other method to securethe quality of the product. Secondly, Weber-Fechner’s’ Law statesthat “buyers tend to perceive price differences in proportionalrather than in absolute term.”, Skouras et al. (2005). For exampleif a buyer has a choice to choose between, Case A: a $1000 word processor and a $400 word processor, Case B: a $20,000 word processor and a $19,600 word processor.The buyer in case A would go for the $400 processor and in case Bwould go for the $20,000 processor as the buyer perceives a fortypercent price difference in the first case and a two percent pricedifference in the second. According to economics the rationalbuyer would not exhibit a difference in behaviour in both the cases.Suri et al. (2004) as cited Skouras et al. (2005) have alsoempirically established that buyer observe prices from left to rightand their decisions are based on the calculation of price difference,from the digits on to the left.The fourth buyer response to pricing, deals with the presentation ofprices to the buyer. It says that buyers may alter their referenceprices in different situations.12 | P a g e     Lehry, A. (H‐1270)  
  13. 13. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’When a high price product is introduced in a product line then thebuyer perceives the other less expensive products and worthwhile.The fifth buyer response to price elaborates on how buyers react todifferent prices in the prospect theory, i.e. “buyers evaluate pricesin terms of gains or losses relative to their present status, with aparticular loss being judged as more painful than an equivalentgain.”(Skouras et al., 2005) For example Nagle and Holden (1995)in their book illustrate, if station A sells fuel at $1.30 per gallonand gives $0.10 discount if the customer pays in cash, while stationB sells fuel at $1.20 and charges a surcharge of $0.10 when acustomer pays with a credit card, then the customer would prefer tofill fuel from station A.The sixth approach by as talks about assimilation and contrasttheory i.e. consumers either contrast or assimilate the price levelsencountered in the market place with their reference prices. Forexample, offers like ‘was Rs 100, now Rs 70’ is more appealingthan ‘was Rs 100, now Rs 85’.Marketing challenges the belief that buyers’ have completeknowledge about prices offered in the market. Empirical study byMcGoldrick and Marks (1987), as cited in Skouras et al. (2005)proves that consumers lack the ability to recall prices of frequentlypurchased products. Hence it can be inferred that consumer do notpay attention to price for those products and services theyfrequently purchase.Estelami et al. (2001) as cited in Skouras et al. (2005) hasconducted a meta-analysis to investigate the macro-economicfactors that determine consumer price knowledge and establishedthat with increase in GDP growth rate and with the course of time,buyers find it difficult to recollect prices of products or services.They have also studied that the interest rates prevalent in theecono my has no effect to the recollection of price by consumers.13 | P a g e     Lehry, A. (H‐1270)  
  14. 14. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’THE MARKETING MIXIn marketing, pricing needs to placed in perspective along withother components of marketing. Developed by E. Jerome McCarthythe marketing mix (refer to figure 2.1) is a tool used by managersto develop their marketing strategy. Managers use this model toattract their clientele by blending the four different variables in aneffective way. Many practitioners across the world believe that thefour P model assists managers to decide on the product and itscharacteristics, set the price, decide how to distribute their productand choose methods of promoting their product.  Figure 2. 1: Four P’s of Marketing Mix.Kotler et al (1996) elucidates price as the amount of moneycharged for a good or service i.e. it is the sum of the valuescustomers exchange for the benefits of having or using the productor service. Pricing decisions should take into account profitmargins and the probable pricing response of competitors.14 | P a g e     Lehry, A. (H‐1270)  
  15. 15. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Pricing includes not only the list price, but also financing andother options such as: Pricing strategy (skim, Cash and early payment penetration, etc.) discounts Suggested retail price Seasonal pricing Volume discounts and Bundling wholesale pricing Price flexibility Price discriminationEach of these four Ps is controllable and is subjected to theinternal and external constraints of the marketing environment.Many regard price as an important component of marketing mix asit the only element that generates revenue, while the othersrepresent cost. Nevertheless pricing is controllable in anunregulated market. Pricing should be in harmony with the othercomponents of the marketing mix which requires an integratedmarketing strategy. Hence, organisation may charge a high price ifthe marketing team strategizes to capture a niche market.Pricing and price competition are vital problems that managers facedue to a lack of understanding when compared to other componentsof marketing mix. Often managers change their prices too fastwithout proper analysis of the situation. Sometimes prices areextremely cost oriented and do not take into consideration themarket scenario, while sometime prices are extremely marketdriven and do not take market into consideration. An organisationcan fail in its long-term sustainability if the pricing strategyadopted is not right. Many authors add that marketing has delvedinto psychology so as to gain insight into how buyers perceive andevaluate prices.15 | P a g e     Lehry, A. (H‐1270)  
  16. 16. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Given below are the empirical results on pricing research carriedout by various authors some of which are cited in Skouras et al.(2005). Coulter (2001), Estelami (1999), Gendall et al. (1997) and Gendall (1998): Consumers prefer odd prises (Rs 199) than even prices (Rs 200). Fearne et al. (1999), Kendrick (1998), Madan and Suri (2001), McGoldrick et al. (2000): Price promotions such as price discounts and coupons and their effectiveness on sales. Hsu and Liu (1998): Moods play a role in price promotions. Maxwell (1999): Price increase is perceived differently by gender and cultural differences. Huber et al. (2001): Buyers satisfaction depends on the acceptance level of price as fair.Marketing has adopted various facts and notion of pricing fromeconomics. The difference between economic concept of pricingand marketing concept of pricing is that economics bases itsresearch on statistical data of market transactions; while marketinghas opened itself to insights from empirical data and psychology.Marketing takes up a behaviourist approach to pricing, which ispractical, functional and elastic, where as economics is stuck to itsprinciple of utility-maximisation which not based on empirical datafrom psychology.2 . 3 . 2 H o t e l s D e t e r mi n a t i o n o f P r i c e sIn a dynamic market, organisations have been accused of adoptingpricing from both marketing and economic perspective. On reviewof economic literature one can deduce that formal models seekpricing to yield the optimum or maximum result. They furtherelaborate that as per economic theories, the primary aim oforganisations is to maximise on profit.16 | P a g e     Lehry, A. (H‐1270)  
  17. 17. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Price is also determined by different forms of competition:a) Perfect Competitionb) Imperfect CompetitionThe concept of imperfect competition is described extensively byan English economist Joan Robinson (1903 – 1983) in her work“The Economics of Imperfect Competition”. According to economictheories imperfect competition is a market situation that displayscharacteristics different from market situation that of perfectcompetition. Perfect competition as opposed to imperfectcompetition has the following characteristics: 1. Large Number of Buyer and Seller where no single seller has the capability to influence the market price by varying respectively his supply and,2. Homogenous Product i.e. the products and services produced by different organisations should be standardised or identical.3. Perfect Knowledge: the buyers and sellers are aware of the prices that are being offered in the market.4. Absence of Transportation Costs: If the transportation cost features, then prices would differ in different sectors of market.5. Perfect Mobility of the factors of Production: It is essential to enable the organisation and the industry to attain a balance by adjusting the supply to demand.Unless all the mentioned criteria are fulfilled, it leads to imperfectcompetition in the market. Imperfect competition can also occurdue to a time lag in a market. For example there are plenty ofgrowth opportunities available after a recession. It takes theemployees a while to react, leading to high unemployment. Highunemployment decreases wages, which makes hiring moreattractive, but it would take time for new jobs to be created.17 | P a g e     Lehry, A. (H‐1270)  
  18. 18. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Imperfect competition can take varied forms as seen below:  Figure 2. 2: Forms of Imperfect Competition. The subject of imperfect competition brings about several issuesregarding pricing policies of imperfectly competitiveorganisations. Pricing under perfect competition and pricing underimperfect competition has significant differences.MONOPOLYMonopoly is defined as the market form in which a single producercontrols the whole supply of a single commodity which has noclose substitutes. Monopoly is thus characterised by a lack ofeconomic competition for the good or service in the market (i.e.only one seller and the seller may be an individual, a firm ofpartners or a joint stock company) and that there is no threat ofsubstitution from other or better products.Under monopoly the distinction between the firm and the industrydisappears. In contrast with perfect competition where no singleseller has the power to influence the price of his commodity bychanging his own supply, in monopoly the monopolist caninfluence the price. In monopoly the monopolist sets the price inthe market.18 | P a g e     Lehry, A. (H‐1270)  
  19. 19. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The monopolist is in complete control of the supply of his productin the market and hence the monopolist can set prices in two ways1. The monopolist can fix the price and offer to supply the quantity demanded at that price or2. The monopolist can fix the supply and then let the price be determined by the demand of his product in the market.Interestingly, monopoly price is not necessarily the highest price.Due to the absence of competition the monopolist does not have toinvest in advertising and hence this cost is ruled out. Themonopolist gains from the economic condition as it results in largescale production. This form of market also ensures that the sellercan demand his price for the product (the seller can practice anindependent price output policy) and that the seller does notundergo price pressure from competition. “Power to influence priceis the essence of monopoly”, Dewett and Varma (2005).OLIGOPOLYOligopoly is derived from the Greek words ‘Olig’ and ‘poly’ whichstand for ‘a few’ and ‘sellers’ respectively. Oligopoly is a marketform where there are a few sellers. Hence, each seller is aware ofthe actions of the other sellers. The decisions of one firm persuade,and are influenced by the decisions of other firms.Pricing in oligopoly depends on the following characteristics:1. Interdependence: Since there are a few sellers in the market the price output decision of one seller is takes into consideration by other sellers which influences their decision making on pricing.2. Intermediate demand curve: No seller can be certain about the quantity of product he can sell at a price, as in this market form it is difficult to predict the behaviour of other sellers on the price output decision, leading to uncertainty. Thus the demand curve is intermediate.19 | P a g e     Lehry, A. (H‐1270)  
  20. 20. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’3. High Pressure Salesmanship: The seller in the market invests in advertisement to capture the market effectively as there are other sellers present in the market. Thus the other sellers also display a tendency to increase their selling cost as a counter campaign measure, affecting their pricing decision.4. Sticky Prices: The sellers in the market do not indulge in changing the price of their commodity as it will avoid unfavourable response from competitors. Hence there is comparative price stability in an oligopoly market.From the above characteristics of oligopoly it can be inferred thatno single price output decision is possible as the decision of oneseller affects the price decision of the others. Strategic planning byoligopolists always involves taking into account the likelyresponses of the other market participants. This causesoligopolistic markets and industries to be at the highest risk forcomplicity.MONOPOLISTIC COMPETITIONIn the real world monopoly and perfect competition rarely exist. Ingeneral there are a large number of sellers / producers but not aslarge in the case of perfect competition. Secondly the productsproduced by the firms are not homogenous i.e. they aredifferentiated by the means of different labels and brands. Boththese above characteristics of present day market do not fulfil theconditions for monopoly or perfect competition. It is monopolisticbecause each brand in itself is a different product and is producedby a single firm; there is competition among different firms whoproduce similar products; and it is imperfect as prices areinfluenced by the actions of different firms in the market.20 | P a g e     Lehry, A. (H‐1270)  
  21. 21. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The characteristics of "monopolistic competition" are: Many buyers and sellers (not as large as perfect competition) Differentiated products Sufficient knowledge of the market i.e. producers have a degree control over price. There are few barriers to entry and exit.Monopolistic markets include firms like restaurants, cereal,clothing, shoes and service industries in large cities. From theworks of Dewett and Varma (2005) it can be inferred that, giventhat competition is imperfect and price of products varies in themarket i.e. the market is split into different segments where eachproduct excels and attracts its own clientele. Each of thesesegments displays monopoly and accordingly the price for theproduct is determined. The demand for each good is not perfectlyelastic. Monopolistic firms command brand loyalty and thereforeare not price-takers. Under this form of competition, total productequals the sum of marginal cost and marginal revenue.Hall and Hitch (1939) as cited in Skouras et al. (2005) present acontrary view through their research that organisation do not targetprofit maximisation nor do they base their price on marginalanalysis. This led them to develop the theory using full-costpricing approach to set their prices. Taking this further Andrew(1949) also cited in Skouras et al. (2005) developed normal-costpricing i.e. prices is based only on variable costs at the targeted ornormal level of capacity utilization.21 | P a g e     Lehry, A. (H‐1270)  
  22. 22. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Thus an organisations pricing is primarily dependent on processesby which prices are determined and behavioural examination ofissues such as pricing objectives, pricing methods followed (i.e.cost-based, demand-based and competition-based), the pricingpolicies adopted (i.e. list pricing, negotiated pricing, geographicalpricing, price bundling etc.), factors that affect pricing (service,organisational and environmental) and the departments responsiblefor pricing decision related to pricing of existing and new productsand the examination of the health of the company in general todetermine an increase or decrease in price.Skouras et al. (2005) draws a parallel between in the fields ofeconomics and marketing. Economics considers pricing to theessence of business decision in-order for profit maximisation,while marketing regards pricing as important as the othercomponents of the marketing mix and is behaviourist in approach.Economics is supported by the fact that there is no discrepancybetween general equilibrium theory and firms’ determination ofprices except on the basis of profit maximisation.2.3.2 Industry and Economy Wide Role ProcessIndustry and Economy wide process is of great significance toeconomics and has no part to play in marketing. There are a numberof vital questions that have formed economic research.The question that arises at the sector level is regarding structuralcharacteristics, the intensity of competition in the market and howthe competition if performing, Skouras et al. (2005). In the 1930’sand 1950’s American economists made immense contribution to thefield of economics by defining a separate branch known asindustrial economics, the foundations of which had been laid byMarshall (1920).22 | P a g e     Lehry, A. (H‐1270)  
  23. 23. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The main concepts of Industrial economics are economies of scale,barriers to entry or exit from a market, governmental interventionthrough price and other controls, vertical integration,diversification, product differentiation and different forms of pricecompetition in oligopolistic market situations, McGee (1988),Scherer (1980), Tirole (1989) as cited in Skouras et al. (2005).Under this industrial organisation approach pricing is determinedon the understanding of how the nature of competition affectspricing behaviour and is not evaluated at an organisation level.The economy-wide level consists of two approaches; generalequilibrium analysis and macroeconomics. In general equilibriumanalysis prices are determined after the equilibrium price is set.Though this concept remotely exists it consists of neoclassicaleconomics. Macroeconomics is empirically oriented where thedetermination of price takes place taking into considerationconsumption, investment, the rate of interest, income andemployment. Macroeconomics and general equilibrium theoryresemble each other with the exception that the primary variablesare different.General equilibrium theory consists of microeconomics such asutility-maximisation consumers and profit maximising organisationunder perfect competition, while macro economics is concernedwith empirically observable counterparts. The pricing system underthese two approaches is empirically not observable.Marketing has nothing to chip in to the issue of industry andecono my wide role of pricing where as economics has its theoriescentered on the issue of price determination.23 | P a g e     Lehry, A. (H‐1270)  
  24. 24. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’As mentioned by Skouras et al.(2005) that marketing as a studyoriginated out of business concern to align management with themarket and its chief aim is to enhance business performance, whereas economics originates from political philosophy and strives tothe organisation of society. Thus, marketing is a disciplineconcerned with business practice while economics is essentially asocial science discipline.As cited in Avlonitis and Indounas (2006), “price management is acritical element in marketing and competitive strategy and a keydeterminant of performance. Price is the measure by whichcustomers judge the value of an offering and it strongly impactsbrand selection among competing alternatives.” (Shipley andJobber 2001)2.4 Bargaining Theory of PricingThere exists more than one price for a product in the market due tobargaining. This difference in pricing is be present not only due tocompetitors but is also caused by sellers in the market who chargewho charges different prices. Moyer (1971) points out that thesecircumstances are opposite the traditional pricing theory (perfectcompetition) that the presence of more than one price in the marketis not possible. This situation is created due to the unwillingnessof rational buyers to pay more than the prevailing price in theabsence of extraordinary circumstances (for example coercion).In our daily life we have experienced that different prices arebeing charged for a product of service due to bargaining. A walk-inguest is usually asked to pay at the rack rate for his stay while acorporate guest is charged a different rate (corporate rate) as hiscompany has a contracted rate with the hotel. This happens due tobargaining power of the buyer.24 | P a g e     Lehry, A. (H‐1270)  
  25. 25. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Similarly many other segment of guests are charged differently dueto their individual bargaining power, travel agents bargainingpower, bargaining power of groups and MICE. Most deliberateprice discrimination schemes fall into this category. Themanagement seek out to create different markets between which theservice is almost non-transferable. Hence, what appears to bedifferent prices in a single market is in fact individual prices indifferent market segments.Moyer (1971) further elaborates that for identical products inimperfect markets other factors such as imperfect knowledge,indifference to the availability of lower or higher prices, advantagedue to location are the causes to charging different prices. Hestates that it is an organisation’s lack of power to affect prices thatgives way to bargaining power of the buyer as in case of hotelindustry in Sri Lanka where that travel agents dominate the lodgingindustry by providing hotels with business at a rate feasible tothem due to the political instability of the country. He alsoelaborates on the fact that in perfectly competitive market noorganisation is commanding enough to influence price in anobvious manner. Whereas on the other hand a monopolist avoidsbargaining as his market position makes him extremely powerfuland he can do without it. The monopolist is the sole seller in themarket and the buyers are compelled to accept his price.The concept of bargaining persists in all types of markets such asoligopoly, monopolistically competitive but the question nowarises as to what determines bargaining power.The determinants of bargaining power are listed as follows:1. Market structure: It involves the number and size of buyers and sellers. The bargaining power of the sellers is weak when many sellers are present in the market as the consumer has the alternative to approach another seller.25 | P a g e     Lehry, A. (H‐1270)  
  26. 26. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ When the market consists of few buyers then the seller are profoundly dependent on them for benefaction. In this case also the bargaining power of buyer presides over the bargaining power of sellers.2. Availability of close substitutes: Competition in the market can take place directly or indirectly. Sellers who sell close substitute of products area small step away from being direct competitors. Substitution of an existing product is often an outcome of changes in production processes and through design changes or because substitution bring about profitability in the short run. In both the cases substitute product concern buyers and sellers and have an effect on bargaining positions either explicitly or implicitly.3. Level and trend of demand: Buyers bargaining power is weakened when the sellers demand for a product increases. The seller benefits by narrowing of operating rates which usually follows increased demand. In this situation a seller might reinforce his bargaining position by increasing the spot delivery price or he may capture new business from troubled buyers who evaded him in the past.4. Perishability: As in case of hotels a room which is unsold on any particular night cannot be stocked to subsequently offer to guests at a later stage. Hence the consumer can take advantage of this fact that in case of low demand the organisation is constrained to make price deduction without duress.5. Financial resources of the participants: In times of financial crisis the buyer attains that bargaining power as a seller would not want to lose out on business when the business is tough to secure and the organisations future is uncertain.6. Bargaining skill and effectiveness of buyer and seller: This factor is firstly dependent upon the eagerness to exercise ones bargaining power.26 | P a g e     Lehry, A. (H‐1270)  
  27. 27. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ This difference between effortless and tough bargainers take places more on the buying than on the selling side in industrial purchasing situations. The opposite phenomenon is seen in retail consumer goods markets. Secondly knowledge of market condition knowledge of the extent of the competitors bargaining power is also important. For example: when a travel agent is aware about the special deals accessible to his competition, then he can also demand the same concessions. The knowledge of the sellers cost allows the buyer to enquire the seller on high prices, thus giving the buyer a bargaining power over the seller. Finally the bargaining effectiveness is also influenced by experience. An expert bargainer knows when to cling on to a situation, what price to extract and how best to persuade.Moyer (1971) through his research brings out that thoughbargaining is important it would be a mistake to overstress on thisit not the only controlling factor of pricing. Price bargain mayoccur in basic operational environment faced by the buyer andseller. In favourable market conditions the buyer or the seller willmake complete use of their bargaining advantage. It is apermutation of various factors that encourages the fascinatingphenomenon of sellers commanding different prices for a particularproduct in a single market. Price-bargaining generally existsbetween wholesaler and retailer or producers and manufacturersagent.2.5 Price in Service OrganisationsService industry products in comparison with manufacturingindustry products are often associated with intangibility,inseparability, heterogeneity and perishability, which requiredifferent and effective marketing strategies.27 | P a g e     Lehry, A. (H‐1270)  
  28. 28. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’A study of 323 service organisations in the 1980’s, demonstratedthat at an average, service organisation practised cost-basedpricing more often that competition-based pricing, Zeithaml et al.(1985) as cited in Finch et al. (1998). It was also observed thatservice organisations found it difficult to reduce price in lowdemand period to take in volume business. It was identified thatduring fluctuating demand period organisations handled thesituation with supply oriented strategy such as overtime, cross-training or part-time rather than adjusting their pricing accordingto the demand situation in the market, as low price was usuallyperceived with depreciation in quality. Price is a tangible aspect ofquality; hence it was considered important to maintain a high price.Finch et al. (1998) contradicted Palmer and Cole byconceptualising the strategy of highlighting demand curve byperiods of peak, lean and shoulder. They said that to cover thechallenges of fluctuations in demand by inducing consumers to useservices voluntarily, thus avoiding the perception of lower quality.The strategy of simultaneous actions to manipulate demand andsupply to accomplish a balance was suggested by Sasser (1976).Service industry is challenged by the element of perishability of itsproducts (such as rooms, food and beverage material etc). A roomunsold at a particular night cannot be accumulated to besubsequently offered to a guest at a later date.Thus, selling each room each night at the best possible price iscritical to a hotel’s long-term success. The goal here is tomaximise on the revenue at point in the demand curve. Hence,decrease in prices is necessary due to the perishable nature of hotelindustry products and / or services and is similar to the pricedynamics of perishable products; this nature of pricing is similar topricing dynamics of products close to expiration.28 | P a g e     Lehry, A. (H‐1270)  
  29. 29. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’2.5.1 Selecting a Pricing MethodPricing methods refer to the basic principles used in order tocharge a price. These principles can range from mathematicallycalculated ones (example break-even analysis) to ratheruncomplicated ones (example pricing according to the market’saverage prices). Furthermore, the intricacies of pricing decisionspromote the need to implement more than one pricing method. Forexample, a specific pricing method may be used in everydaypricing decisions, while another pricing method may be adopted insome special circumstances.After the extensive review of literature on service pricing thefollowing are the pricing methods classified. The classification isadopted from Avlonitis and Indounas (2005). Pricing methods areusually determined after analysing demand, estimating cost,analysing competitors cost, pricing and offers.COST-BASED METHODS Cost-plus method: cost + profit margin. Target return pricing: the price is determined at the point that yields the firm’s target rate of return on investment. Break-even analysis: determination of price at a point where total revenue is equal to total cost. Contribution analysis: Only direct cost of product is considered to determine its price, a deviation from break-even analysis. Marginal pricing: price is determined to cover marginal costs only. Hence price is usually set below total and variable cost.COMPETITION-BASED METHODS Pricing similar to competitors or according to the market’s average prices.29 | P a g e     Lehry, A. (H‐1270)  
  30. 30. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ Pricing above competitors. Pricing below competitors. Pricing according to the dominant price in the market: the leader’s price that is adopted by the rest of the organisation in the market.CUSTOMER-BASED PRICING Perceived-value pricing: price is determined after obtaining information on customers’ perception of product / service value. Value pricing: a fairly low price is set for a high quality service. Pricing according to the customers’ needs.2.5.2 Selecting a Pricing PolicyOxenfeldt (1983) as cited in Avlonitis and Indounas (2007) definespricing policies as the particular actions and procedures necessaryfor reaching the final price. He also elucidates that pricing policiescan help to attain stability and validity in an organisations pricingpractice and present solutions to unanticipated pricing situations.According to Avlonitis and Indounas (2007) the empirical researchconducted on pricing policies in service organisations is limited.Some of these pricing policies are applicable to a specific service.For example yield management policy is extensively used in hotelsand airlines where as the other policies are used by used by manyservice organisations.After the extensive review of literature on service pricing thefollowing are the pricing methods classified. The classification isadopted from Avlonitis and Indounas (2006) List pricing: Price is determined without differentiating it according to the different market segments that the company might target.30 | P a g e     Lehry, A. (H‐1270)  
  31. 31. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ Differentiated pricing: Charging different prices to different customers on the basis factors such as the time of the purchase, the place of the purchase or consumption of the service and the customers’ personal characteristics. Geographical pricing: Charging different prices to customers that are located in different geographical locations. Negotiated pricing: Price is determined on the basis of individual agreements between the company and its customers. Quantity discounts: Price discounts for those customers that purchase large quantities. Cash discounts: Price discounts for those customers that pay their total amount within a pre-determined time period. Trade discounts: Price discounts to agents and distributors in order to promote and support the product or service. Loss-leader pricing: Charging a low price for service in order to attract customers that will be offered other more profitable and higher-priced services. Image pricing: Price is set high in order to convey an exclusivity image. Pure bundling: Bundling of such services which cannot be purchased independently and is offered at a reduced price. Mixed bundling: Bundling of two services that can be purchased independently and is offered at a reduced price. Relationship pricing: An approach which aims at developing long-term relationships with customers, understanding their needs and pricing according to these needs. Yield management: Price is determined by analysing different market segments’ demand and charge maximum price to segments that they are willing to pay along with managing the existing capacity. Efficiency pricing: Price is determined in-order to lower the company’s cost to a minimum level (For example through the adoption of sophisticated technologies) that will continually31 | P a g e     Lehry, A. (H‐1270)  
  32. 32. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ permit the determination of low prices for those customers that are price-sensitive.2.5.2 EnvironmentAfter an extensive review of pricing literature now let us focus onwhat influences pricing. Determination of pricing involves analysisof both inward (company-oriented) and outward (environmentallyoriented) characteristics. The inward characteristics can be furtherdivided into service (i.e. cost) and organisational characteristics(organisational goals, marketing objectives etc), Avlonitis andIndounas (2006).According to Lovelock (1996) cost, competition and customer-based characteristics, which he refers to as tripod, are crucialwhen, determining prices. He prioritises these characteristics suchthat the value that the customers attach to the service or their priceelasticity forms the ‘ceiling’ of the tripod, whereas competitorscharacteristics (i.e. their prices or their expected reactions) isplaced in the middle of the tripod. A good understanding will helpthe organisation to narrow down on a price that is acceptable bothby the organisation and customers.Macroeconomic characteristics, the corporate marketing strategyand objectives, the market structure, Service innovation etc alsohave an influential affect in determining prices.Shipley and Jobber (2001) as cited in Avlonitis and Indounas(2007) have said that a blend of service, organisational andenvironmental characteristics help to determine effective pricingstrategy.32 | P a g e     Lehry, A. (H‐1270)  
  33. 33. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’There have been few empirical studies that prove that cost is themain determinant of pricing decision, while a study conducted bySegal (1991), as cited in Avlonitis and Indounas (2006), of 103 USaccounting firms has established that time required to complete thejob was of primary concern in determining correct pricing strategy.To support this Meidan and Chin (1995), as cited in Avlonitis andIndounas (2007), say that cost and competitors prices are the twomain determinants of pricing.Since cost and organisational characteristics are by far controllableby the organisation, environmental characteristics are somethingthat organisations need to watch out for. Therefore, this researchwould focus on environmental characteristics. In this dynamicenvironment with immense growth opportunities organisation needto be aware about the change in the business environment in-orderto tap the right resource (market segment), analyse the current andfuture requirements of the market and deliver it at an optimal priceso as to maximise their revenue.After the extensive review of literature on pricing strategies thefollowing are environmental characteristics classified. Theclassification is adopted from Avlonitis and Indounas (2007). Theresearcher has classified them into Economic and Market factors.ECONOMIC FACTORS The existing level of the interest rates: The existing interest rates in the country formulated by the central bank. The future expected level of the interest rates: The predicted changes in the interest rates. Other macroeconomic characteristics: A change in characters such as GDP, unemployment rates, growth rates, inflation, etc. The level of governmental intervention: The extent to which government interferes in an industry’s pricing practices.33 | P a g e     Lehry, A. (H‐1270)  
  34. 34. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’ The existing regulation regarding pricing practices: The laws associated with specific pricing practices such as pricing below cost, price collusions and price differentiation.MARKET FACTORS The process that customers adopt in order to evaluate the service: Criteria such as price, fame, and customer service that customer’s use for judging the service’s outcome. The value that customers attach to the service: The costs (i.e. monetary, psychic, energy, time) that customers must incur vs. the benefits associated with obtaining the service. The customers’ personal characteristics: The demographic of the customers. The distribution channel that customers use: The extent to which customers purchase the service via internet or telephone. The customers’ price elasticity: The customers’ purchase behaviour. The competitors’ prices. The existing Brand value in society. The expected competitive reactions: The competitors’ responses to the company’s price initiatives. The threat of new competitors entering into the market. The intensity of competition among the existing companies. The threat from substitutes: The extent to which there are similar but not identical services. The buyers’ bargaining power: The extent to which customers can impose their will when making business with the company. The suppliers’ bargaining power: The extent to which suppliers can impose their will when making business with the company.34 | P a g e     Lehry, A. (H‐1270)  
  35. 35. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’2.6 ConclusionA hotel manager repeatedly seeks the best strategy to set theirprices for profit. Within this context they need determine whetheran increase in price would cause their customers to stop purchasingtheir hotel rooms and send them to a competitor or whether a pricediscount initiated by their competitor would cause their customersto switch from their property to another. Thus, begins the race toprice your hotel room’s right.The researcher through this chapter has brought out pricing fromthe point of view of economics and marketing, the difference beingin the origin, mission centrality of theory and doctrinal evolutionof the two disciplines. Marketing takes up a behaviourist approachto pricing while economics it glued to its principle of utility-maximisation. Economics considers pricing to be the essence ofbusiness decision in-order for profit maximisation while marketingregards pricing as important as the other components of themarketing mix.It is evident that environmental characteristics and pricingstrategies have been studied extensively from an empirical andtheoretical perspective. Thus, from the literature of pricingstrategy it has emerged that service, organisational characteristicsand environmental characteristics influence the pricing strategy ofany organisation. Since cost and organisational characteristics areby far controllable by the organisation, environmentalcharacteristics are something that organisations need to watch outfor. Therefore, this research would focus on environmentalcharacteristics. In this dynamic environment with immense growthopportunities organisation need to be aware about the change in thebusiness environment in-order to tap the right resource (marketsegment), analyse the current and future requirements of the marketand deliver it at an optimal price so as to maximise their revenue.35 | P a g e     Lehry, A. (H‐1270)  
  36. 36. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Chapter 3: Research Methodology3.1 IntroductionThe intent of this chapter is to highlight the research methodologyimplemented by the researcher to establish a framework for thedissertation. After having identified the pricing strategy andenvironmental characteristics as the research variables, this chapterfurthers explains the research tools adopted for carrying out theprimary research and evaluating the hypothesis derived from thesecondary research.3.2 The Research Purpose and FrameworkThe purpose of this study is to investigate how changingenvironmental characteristics affect the pricing strategy of hotelsin India. In order to arrive at a comprehensive conclusion at theend of the research the researcher has utilised descriptive,hypothetico-deductive methodology.Descriptive research is designed to describe the characteristics orbehaviours of a particular sample in a systematic and accuratefashion. It is also referred to as non-experimental or correlationresearch. Descriptive research is used to acquire informationconcerning the current status of the phenomena to describe "whatexists" with respect to variables or conditions in a situation. Incontext to this research descriptive research is used to identify thepricing methods and policies used in the Indian Hotel Industry inthe current environmental scenario. The method involved isdevelopmental studies which seek to determine changes over time.There have been various attempts by authors to define research butthe most widely accepted definition of research is stated bySekaran (1992).36 | P a g e     Lehry, A. (H‐1270)  
  37. 37. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’She states that:“Research can be defined as an organised, systematic, data based,critical, scientific inquiry or investigation into a specific problem,undertaken with the objective of finding answers or solutions toit.”This research is an effort to identify the pricing strategies adoptedby Indian hotel industry and understand the environmental contextin which these pricing strategies are applied in order to maximiseon revenue generation. Further the researcher will delve into theconcept of pricing as the key element of the three discipline i.e.revenue management, economics and marketing.The preliminary step in this process is to examine where theproblem lies and to gather information regarding the same.Focussing on the basic perspective the researcher attempts tounderstand pricing strategy from the point of view of revenuemanagement, economics and marketing as the key element thatdetermines the long term success of a company. The researcheruses information from other research articles and books publishedon the subject of pricing to conceptualise that problem domain,which is carved out in the literature review.The argument presented in the literature review will be tested tothrough personally administer questionnaire (qualitativetechnique). The data obtained would be processed to findsimilarities and dissimilarities amongst various respondents intheir practices to arrive at comprehensive conclusion regarding theissue.The framework of the research is diagrammatically represented inthe next page.37 | P a g e     Lehry, A. (H‐1270)  
  38. 38. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’  Figure 3. 1: Proposed Research Framework38 | P a g e     Lehry, A. (H‐1270)  
  39. 39. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’3.3 The Research ProcessSekaran (1992) distinguishes research into two basic typesaccording to its purpose. One aim of research is to decipher anexisting problem in the working environment and the other goal isto add value to the knowledge bank of a particular subject ofsignificance to the researcher. She states that when research isused to employ the final results to crack specific problemscurrently being experienced in the organisation, it is known asApplied Research. Nevertheless, when research is primarilyconducted to enhance our understanding of certain issues thatcommonly occur in organisational setting and how to solve them,then it is referred to Basic, Fundamental or Pure research.Research consists of logical steps of well reflected and carefullyperformed activities that allows the researcher to know how theissue on hand can be analysed, constructed and resolved. It is asystematically planned and structured approach to investigate aspecific problem that needs a solution. Research thus encompassesthe process of inquiry, investigation, examination andexperimentation.This research being academically inclined, wish to operationaliseits findings from literature review to the real world scenario. Theresearcher as proposed earlier, has employed the hypothetico-deductive research methodology keeping in mind the scope andlimitations of this research to guarantee strength in the results.This research will be empirically tested from the Indian hotelindustry and the basket of sample would include revenue managersfrom prominent hotel chain (Taj group of hotels, Hyatt andMarriott’s India Pvt Ltd).39 | P a g e     Lehry, A. (H‐1270)  
  40. 40. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’3.3.1 Hypothetico-Deductive MethodThe hypothetico-deductive research method involves sevendifferent stages. For the ease of understanding the researcher hasdiagrammatically represented (in figure 3.2) the flow of thisresearch method. The researcher has described in detail theresearch on hand in accordance to the hypothetico-deductiveresearch method.  F i g u r e   3 .   2 :   H y p o t h e t i c o ‐ D e d u c t i v e   r es e a r c h   m e t h o d   a d o p t ed   f r o m   S e k a r a n   ( 1 9 9 2 )OBSERVATION STAGEThis is the first stage of research where the one senses that certainchanges are taking place, or that some new behaviours, attitudesand feelings are emerging in the environment. In this context theresearcher has learnt from the literature that all the threedisciplines revenue management, marketing and economics layemphasis on pricing practices as the key driver of an organisationprofitability and long-term success. Pricing is perhaps the mostdifficult marketing task for businesses big or small. A hotel roomwhich is unsold on any particular night cannot be stocked tosubsequently offer to guests at a later stage.40 | P a g e     Lehry, A. (H‐1270)  
  41. 41. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Thus, selling each room each night at the best possible price iscritical to a hotel’s long-term success. Now how is this bestpossible price achieved? The best possible price is determined byvarious factors such as organisational goals, the market in whichthe organisation exists, the financial state of the organisation andthe products and services of the organisation. With changing timethe business environment also changes and demands differentrequirements from an organisation. It is how well the organisationreads the changing requirements of the environment and caters to itthrough innovation and pricing. This dissertation will concentrateon the pricing aspect rather than innovation.PRELIMINARY DATA GATHERINGThis stage of the research encompasses of seeking of informationto know more about one observed. Sekaran (1992) has stated thatpreliminary data can be gathered through secondary data.Secondary data consists of copyright articles and e-books andbooks available from sources such as publication (published orunpublished) and library research.To gather necessary data, the researcher explored many searchengines and information databases such as Google, Science direct,Sage publication, EBSCO electronic journal and services, e-brary,Emerald Full text, The Center for Hospitality Research, etc. bytyping key words ‘pricing + pdf’, ‘pricing of services + pdf’,‘pricing of service organisations’, ‘pricing strategy of serviceorganisations’, ‘service pricing’, ‘factors affecting pricing ofservice industry’, ‘principles of pricing’, ‘environmental factors ofbusiness’, ‘strategic pricing’, ‘pricing in imperfect competition’,‘marketing and pricing’, ‘economic theories of pricing’, etc. in thesearch engines.41 | P a g e     Lehry, A. (H‐1270)  
  42. 42. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The researcher has collected a large quantity of information onpricing strategy and environmental characteristics from variousauthors such as Avlonitis and Indounas (2005), Cross, R.G (1997),Dewett, K.K and Varma, J.D. (2005), Maxwell, S. (1999), Moyer,R. (1971), Kasavana and Brooks (1996), Skouras et al. (2005),Finch et al. (1998), Lovelock, C.H. (1996), etc.The information was gained from the above mentioned informationdatabases from the ATHENS database through various journals suchas Journal of Services Marketing, Journal of Product & BrandManagement, European Journal of Marketing, The Service IndustryJournal, etc.The method of ‘snowballing’ was used to find relevant articleswhich were researched by other authors mentioned in thereferences. The authors name and the article title was typed in theGoogle search engine to procure these articles. For those articlesthat could not be procured by this method due accessibility issue,the email address was obtained through Google by typing theauthors name and / or university name + email address or othersimilar combination.THEORY FORMULATIONOnce the relevant data is gathered the next step of action is toreview the literature available on the subject of concern and formthe literature review. According to Sekaran (1992), a theoreticalframework is a conceptual model of how one hypothesises therelationships between the factors considered for study. Theoryformulation integrates all the information in a logical manner, sothat the determinants for the issue can be conceptualised andtested.42 | P a g e     Lehry, A. (H‐1270)  
  43. 43. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’VariablesAt this stage significant variables are scrutinized as to theircontribution or influence in explaining why the problem occurs andhow it can solved. The case is segregated into dependant andindependent variable, which are of primary interest to theresearcher and constitute the main variables of the hypothesis. Dependent Variable: This variable is of primary interest to the researcher. It is the key variable that lends itself as a viable factor for investigation. It is possible to find solution to the problem in hand through this variable, Sekaran (1992). In this research the dependant variable is ‘Pricing Strategy’. Independent Variable: This variable influences the dependent variable either in a positive or negative manner. The variance in the dependent is accounted for by the independent variable, Sekaran (1992). Hence, the independent variable in this research is identified as ‘Environmental Characteristics’.HYPOTHESISINGSekaran (1992) defines that, “a hypothesis is logically conjecturedrelationship between two or more variables expressed in the formof testable statement based on a network on of associationsestablished in the theoretical framework formulated for theresearch study.”A hypothesis is an educated guess about a problem’s solution. Itlogically builds a relationship between the variables in order toform a testable proclamation.43 | P a g e     Lehry, A. (H‐1270)  
  44. 44. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’As learned from the literature review that an organisations pricingis primarily dependent on processes by which prices are determinedand the behavioural examination of issues such as pricingobjectives, pricing methods followed (i.e. cost-based, demand-based and competition-based), the pricing policies adopted (i.e. listpricing, negotiated pricing, geographical pricing, price bundlingetc.), factors that affect pricing (service, organisational andenvironmental).After studying relevant data and literature available on the issueand keeping in mind the research aim and objectives, the researcherhas been able to generate the following hypothesis:The hypothesis mentioned would be tested through qualitativeanalysis considering the learning from the literature review.FURTHER SCIENTIFIC DATA COLLECTIONSekaran (1992) says that scientific data collection is necessary totest hypothesis that is generated from the study. This data furtherforms the basis for data analysis.After formulating the hypothesis, data needs to be collected toevaluate the extent of relationship between the two variables, gapsis any and test the hypothesis. Data pertaining to every variable inthe literature review from which the hypothesis is generated shouldbe collected. This helps the researcher for further data analysis.There are many ways to seek empirical data, the most commonmethods being personal interviews, observation, document analysistelephonic interview, email or regular mail, email survey or face-to-face survey.44 | P a g e     Lehry, A. (H‐1270)  
  45. 45. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’The researcher plans to test the proposed hypothesis in the Indianhotel industry context. The researcher intends on capturing theviews of revenue managers from the prominent hotel chain such asMarriott and the Taj group of hotels.Research tools AppliedThe research intends to examine the effect of change inenvironmental characteristics on pricing strategies of hotels.Specific questions have to be asked in order to effectively capturetheir views on the above theme.The researcher has used the qualitative method to conductempirical research. The data was secured by means of aquestionnaire.Following the suggestions of many marketing research academics,an effort was made to avoid leading and unambiguous questions,paying particular attention to the wording and sequence ofquestions and ensuring a professional style and format.Pricing methods and Pricing Policy (Pricing Strategy)In order to identify the pricing methods and pricing policypracticed in the Indian hotel industry, the operationalisation putforward by Avlonitis and Indounas (2005) and Avlonitis andIndounas (2006) with regard to pricing methods and pricingpolicies respectively was adopted. Data regarding pricing wasgathered in the form of open-ended question which is situationspecific.Environmental CharacteristicsIn order to identify the change environmental characteristics thatinfluence pricing strategies practiced in the Indian hotel industry,the operationalisation put forward by Avlonitis and Indounas(2007) with environmental characteristics was adopted.45 | P a g e     Lehry, A. (H‐1270)  
  46. 46. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Data regarding environmental characteristics was gathered in theform of:a) A 5-point Likert scale reflecting the range of responses between strongly disagree to strongly agree.b) Open ended question which demanded the context in which the change in environment characteristics would cause a change in pricing.SamplingSekaran (1992) defines sampling as “the method of selecting anadequate number of elements from the population so that bystudying the sample and understanding the properties or thefeatures of the sample subjects, one can generalise the propertiesor features of the sample subjects, one can generalise theproperties or features to the population element.”It is the most important factor, which can determine the validityand robustness as well as the destiny of hypothesis of the research.The sampling of this research has been limited to the revenuemanagers of hotels in Indian only. Keeping in mind the researchaims and objectives and the hypothesis to be tested, it wasnecessary to make certain that the sample chosen for this researchis educated, knowledgeable about the research area and understandthe implication of both the aspects being compared, pricingstrategy and environmental characteristics.The sample included revenue managers from Taj Mahal Palace andTower, Taj President Mumbai, Taj Lands End Mumbai, J WMarriott Mumbai, Hyatt Regency Mumbai, J W Marriot Goa and JW Marriott Hyderabad.46 | P a g e     Lehry, A. (H‐1270)  
  47. 47. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’DATA ANALYSISThe gathered information from empirical study is analysed in thisstage of the research, thus testing the hypothesis generated fromthe literature review. Though the literature review has givenenough strength and insight on the issue and substantiates theargument, it is not sufficient to arrive at a conclusion in thisresearch.The data obtained through the questionnaire from the variousparticipants was fed into Microsoft Excel spreadsheet. Theresponses were analysed for similarities and dissimilarities inpractices and this inference was used to arrive at a comprehensiveconclusion.The environmental factors were analysed with simple average ofthe degree of response for an element in the factors. Each elementwas given a rating from 1 to 5 by the respondent. Then the ratingof each element by each respondent was added and further dividedby the total number of respondent to obtain an average rating of theelement.CONCLUSIONThe research methodology chosen to carry out a research brings outthe depth of the research, its strength in the development of theresearch variables, recognising the factors which may affect theresearch process and developing contingency plans to ensure thatthe research does not lose track. Hence, as discussed earlierhypothetico-deductive research methodology has been used withqualitative analysis techniques.The hypothesis generated through the literature review, keeping inmind the aim and objective of the research, was tested against theempirical research results, which paved a way to the conclusionregarding the relationship between the two variables.47 | P a g e     Lehry, A. (H‐1270)  
  48. 48. IHM-A AN INQUIRY INTO ‘PRICING OF HOTELS’Chapter 4: Data Analysis and Interpretation4.1 IntroductionThe literature review has attempted to provide well-builtunderstanding of the issue and substantiates the argument, but it isnot sufficient to arrive at a conclusion on this research. Thegathered information from empirical study is analysed in this stageof the research, thus testing the hypothesis generated from theliterature review.In order to label a research process qualitative investigation meansthat the research generally aims at understanding the meaning ofhuman action. The best way to express qualitative data isnonnumeric data in the form of words. Rather than controllingvariables, qualitative research is open-ended and sets up researchopportunities designed to lead the researcher into unforeseen areasof discovery with the area or topic of investigation. Qualitativeinquiry begins from the point of view that inquiry is a matter of theperception of qualities of some object or event and an appraisal oftheir value. Qualitative denotes quality, an inherent or phenomenalproperty or essential characteristics of some object or experience.Broadly speaking, qualitative methods are procedures includingunstructured open-ended interview, open-ended questionnaire andparticipant observation that generate qualitative data.As mentioned in the previous chapter the elements of the variables,pricing strategy and environmental characteristics, have beenadopted from the research of other authors. The data collectionstyle with regards to the various elements has been modified to suitthe needs of this research. The research tool applied as beendiscussed in detail in the previous chapter. Further this chapterdeals with review of responses of revenue managers and endeavoursto highlight their views pertaining to the issue of this research.48 | P a g e     Lehry, A. (H‐1270)  

×