Question

5. When consumer demand for hotel rooms increases, the average selling prices for those rooms typically increase as well. In the foodservice business that has not historically been the case. Fluctuations in consumer demand (e.g., volume differences between high demand Saturday nights and lower­volume Sunday nights) in restaurants do not typically result in menu price changes. Given that both hotels and restaurants are part of the hospitality industry, how do you account for these fundamental differences in approach toward strategic pricing? As a customer, which approach do you believe sends you the better value message? Explain your position.

Answer 1

The elasticity of demand is essentially a measurement of change in demand resulting from a change in another economic factor, for example, the cost. Most companies depend on the calculation of demand elasticity to forecast the potential change in demand for a product upon implementation of change in the price of the goods or services offered, other goods or services and also other important market factors. An accurate analysis of the elasticity of demand helps companies to manage competition more effectively due to Awareness of available elasticity in pricing. The price elasticity of demand specifically is utilized for calculation of sensitiveness of the quantity of demand for goods or services in relation to a change in its price. Price elasticity of demand historical data clearly indicates consumer response to the change in demand. Cross elasticity of demand is another major factor to be considered for change in pricing, which reflects the percentage of change in the quantity of demand of goods or services divided by percentage change of price on Other goods or services. This indicates the impact of change in the price of other goods upon the demand for a particular product or service.

The buying intention for any product or service by an individual is largely governed by the need for the service or product, identification of the preferred option of the service or product within the market and the decision based on the selection of the option exhibiting a maximum perceived value for the individual. Considering that generating maximum sales is important for the achievement of the major goal of every business enterprise of optimization of profits, it is crucial for sustenance and growth of every organization to provide maximum perceived value for the user within the product or service becoming the main ancillary goal for achieving the major goal.

When consumer demand for hotel rooms increases the adoption of a strategy of price adjustment with dynamic pricing attaining maximization of profit results in a flexible and dynamic price structure along with segmented pricing being used as a supportive strategy by hotels to optimally exploit the elasticity of demand for their benefit. A similar pattern not observed within restaurants as they operate an entirely different segment which is based on both product and service with the service offered being immediate. Restaurants are mostly walk-in places and the cost is an important factor which controls the number of walk-ins and the demand itself due to to the perception of the entire food and service offered to have a specific value for the customers which is not very flexible. Once a customer is paying a certain amount for a meal within a specific restaurant the satisfaction results from the value perception for the meal at that specific cost. In case the cost was flexible and open to constant fluctuations on the basis of demand it would result in immediate dissatisfaction which would lead to immediate dissatisfaction which would lead to a loss of customers within an extremely competitive segment where a large range of options exists with the product and service being easily imitable and replaceable with the exception of few restaurants offering unique products or services. If the value perception itself is flexible this cost change can be implemented with the creation of improved value and can be accepted by customers but within this segment Customer satisfaction and retention is a major factor for long time growth and sustenance of an organization with pricing strategy being an extremely useful tool for achieving this goal. It is important that generated with the customer being sent the message of them being valuable to the company and not maximizing profits.

Within the hotel industry, the implementation of a price strategy based upon changes in demand can be implemented without major risk of losing customers as it is not a repetitive service which is provided and customers mostly arrived at much longer intervals when price changes can be expected and explained. Also the hotel industry has a major advantage due to a flexible value perception for the product which may arise due to to the location, from an event various other personal requirements which could lead to exceptional value perception and subsequence satisfaction in spite of the cost being higher for the product and service in comparison to similar offerings in other places.

The better value message, in my opinion, is by keeping the price uniform as it results in generating trust within the company and brand. To consider the consumer as the means to an end of maximization of profit irrespective of the impact of the price change on the customer results in the customer feeling exploited by the company when in need and can lead to disloyalty.