'Differential Pricing and Segmentation on the International Hotel\r'

' derived function impairment and air division on the net income: the gaffe of hotels Rama Yelkur adjunct Professor of Marketing, University of Wisconsin-Eau Claire, Eau Claire, USA Maria Manuela Neveda DaCosta A Professor of Economics, University of Wisconsin-Eau Claire, Eau Claire, USA Hotels, Service industries, determine, Segmentation, Loyalty, profits Keywords Introduction In the 1950s, goaleters discovered that, if they gave their nodes what they wanted Abstract and did it better than the competition, their In the changing electronic sales grew.With the advent of the meshwork, surround of the twenty-first foodstuffers comport access to the engineering to century, monetary economic value is one of the key tailor-make crops and communicate strategic elements that is often unmarked by unassailables. The constitution directly with littler channelise markets. The addresses derivative set in cyberspace is presently firmly establish as a line of work-to-cons umer electronic merchandising tool. It serves as an integral part commerce, in particular of the selling go, serving as a digital contraryial set for hotel gains interchange on the net profit. istribution deport as well(p) as an electronic Hotels be able to military issue return storefront. of derivative instrument set for mixed When a firm establishes a presence on the separates beca intent the market for net profit, its trade activities, including hotels bum be shargond into narrow guest surgical incisions. An overview advertising, footing, and scattering, should of e-commerce and net income reflect characteristics remarkable to the mass agencyrate marketing is provided. The to benefactor consumers realize the value added characteristics of harvests sold over tralatitious rules. online and diametricial damage ar discussed.Pricing policies for onConsumers in the lucre specialty be line marketing be examined with more(prenominal) than just pas sive recipients in the a special emphasis on differential gear marketing process (Hoffman et al. , 1995). The expenditure, client faithfulness and earnings is an interactive medium as opposed constituentation. With the help of substitute data, online bell to conventional marketing which usu anyy strategies used by hotels on the al deplorables that one-way communicating (Peters, internet be evaluated.Finally, 1998; Sandelands, 1997) from marketer to conclusions atomic enactment 18 drawn and implications for the hotel effort consumer. re discussed. Many diverse vendors, from florists to manufacturers of indestructible goods, as well as serve up providers such as respiratory tracts and hotels have rush along to do business on the meshwork. In rear to effectively market on the World Wide tissue (the meshing), companies use up to evaluate the basic components of the marketing mix: harvest, price, dress, and promotion. In the ever-changing electronic surroun dings of the twenty-first century, firms must identify and back up militant advantage in order to survive. Price is one of the key strategic elements that is often overlook by firms (Yelkur and Herbig, 1997).In the on-line setting, companies have the opportunity to utilize price to build competitive advantage by enhancing guest satisfaction and loyalty by meeting Management decisiveness 39/4 [2001] 252±261 # MCB University Press [ISSN 0025-1747] The current discover and full text archive of this journal is available at http://www. emerald-library. com/ft the cut aways of item segments which have the potential to improve the firms profit position. How truly much impact is the Internet very having on the market mix, especially price?Is it changing the approach to price or is it merely complementing traditional determine practices? Our paper addresses differential set and segmentation in business-to-consumer electronic commerce, in particular differential price for hotel armed service sold online. The consumer segments in the hotel industry atomic enactment 18 establish on utilisation, situation, and relative oftenness of use. Hotels atomic number 18 able to take advantage of differential price for various segments because the market for hotels mickle be divided into special(prenominal) guest segments (Awh, 1998; Yelkur and Herbig, 1997).The more specific the segment, the easier it is to estimate motivation; the knowledge of demand is essential to adopting a differential determine strategy. This paper is organized as follows: An overview of e-commerce and Internet marketing is provided. The characteristics of growths sold online and differential pricing atomic number 18 discussed. Pricing policies for online marketing are examined with a special emphasis on differential pricing. The importance of node loyalty and segmentation and their relationship to differential pricing on the Internet are emphasized.With the help of secondary data , online pricing strategies used by hotels on the Internet are evaluated. Finally, conclusions are drawn and implications for the hotel industry are discussed. The emergence of e-commerce crease dribbleed over the Internet is unremarkably referred to as electronic commerce or e-commerce. E-commerce is changing the way firms do business. In 1999, e-commerce transactions news reported for over $150 cardinal in sales and it is predicted that this amount impart increase to $3 trillion by the year 2003 (The Economist, 2000). E-commerce [ 252 ]Rama Yelkur and Maria Manuela Neveda A DaCosta differential pricing and segmentation on the Internet: the case of hotels Management Decision 39/4 [2001] 252±261 transactions come in many forms. hold over I displays an e-commerce hyaloplasm that illustrates the difference among these various types of transactions by giving examples: pipeline-to-business transactions still bank bill for 80 percentage of all e-commerce business but con sumer-to-consumer, consumer-to-business, and business-toconsumer (the object of this study) transactions are expected to grow astronomically in the next decade.According to an Internet consulting firm (Forrester Research, as cited in The Economist (2000)), business-to-consumer trade in the USA amounted to about(predicate) $20 one thousand thousand in 1999 and could r for individually one $184 million by 2004, which is about 5 percent of USAs retail trade. Product characteristics that facilitate Internet marketing Some areas of retailing and commerce whitethorn be peculiarly well suited for the Internet, given certain characteristics (see Table II). For business-to-consumer marketing, as proposed by Peterson et al. 1997), yields and serve in the circumstance of the Internet can be separate on the basis of: . make up and frequency of purchase; . value proposition; and . differentiability. Products can vary from low cost, frequently purchased goods (ex: coffee), to steep- cost, infrequently purchased goods (ex: car). In general, for goods for which purchase fulfillment requires corporeal delivery in a of a sudden sequence, the Internet is not an appropriate mode of delivery (Peterson et al. , 1997).For an industry such as hotels, where a transaction can be completed without physical delivery of the product and the frequency of purchase is comparatively low and the cost is relatively high (when compared with consumables such as coffee), the Internet is a more efficient medium for firms to use to target business. The suitability of the Internet overly depends on the tangibility of the product. Internet marketing is a good deal well suited for certain types of services. For example, it is now widely used for banking and other financial services.When the value proposition is intangible and the frequency of use high, the great is the advantage of the Internet as a transaction and dispersal medium. The transport and delivery of the goods are an consequential consideration. Clearly, it is easier to sell lighter goods over the Internet than bulky and heavy ones. Then, at that place are those that can be delivered electronically interchangeable software, music, and certain services like banking, insurance, hold out and hotels. The 1999 top-ranking products in the US market in terms of online transactions were computer hardware/ software, displace, financial brokerages, and collectables.In fact, intangible or emblematic information products such as airline tickets or hotel makings gain tangibility on the Internet medium. Internet marketing can result in extreme price competition when products are mistakable, because other factors that conquer competition (ex: store attitude) are absent. However, when products and services are capable of momentous differentiation, the Internet can serve as a method of segmenting consumers and directing them toward the appropriate product or service, as is the case Characteristics of Internet marketingThe Internet represents an extremely efficient medium for accessing, organizing, and communicating information. As such, the Internet subsumes communication technologies ranging from the written and spoken word to visual images. Internet marketing is one of the newest distribution channels marketers use to reach the node. It is different from traditional channels in that it is overly a communication network. Like all communication networks, the Internet is all about establishing and reinforcing connections between people.The Internet has been growing quickly in the second half of the mid-nineties and today it is available in round 38 percent of US households (Nielsen Media Research, 2000). No medium including television has reached the 50 million-user mark in four years (Strauss and Frost, 1999). The integrating of the Internet as a technical tool as well as a delivery medium with traditional marketing has transformed the processes firms use with which to con duct business. Table I The e-commerce ground substance Business Business B2B GM/Ford EDI networks C2B Priceline succeed Consumer B2C Amazon E*trade C2C EBay QXLConsumer extension: The Economist, 2000 [ 253 ] Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet: the case of hotels Management Decision 39/4 [2001] 252±261 in the hotel industry. The â€Å"hotel” product is relatively expensive, infrequently purchased, has an intangible value proposition, and rates high on differentiation from competing products. As a result, sellers are able to charge a higher price found on the match between the buyers call for and the disposition of the product straitsing.In a traditional setting, such personalization would turn out to be relatively expensive. Yelkur and Herbig (1997), are explained below: Select a target market The broad target market for a business is already chosen when the product is positioned. The firm needs to div ide its broad target market into smaller segments. Differential pricing The copyling of price discrimination or differential pricing used by shank and Morgan (1990) provides an important analytical insight into many discriminatory pricing practices.The prices charged by a firm practicing differential pricing are usually not comparative to the marginal be incurred in producing the service. When firms lay out their prices according to guest, location or product, they are said to follow the strategy of section pricing or differential pricing (Strauss and Frost, 1999). It is not unusual for businesses to offer vary prices for consumers by age group, for example, senior citizen discounts. In addition, clients can be pick outd found on customer type, for example, the business customer versus the individual customer.Businesses can also offer different prices for products based on location; for example, the pricing of a hotel room in San Francisco, California, would be differe nt from a similar room in Phoenix, Arizona. Finally, firms frequently price products differently not necessarily based on cost, but rather on the impartingness to pay. For example, firstclass airline tickets are always priced much higher than economy fares (Strauss and Frost, 1999). In summary, segmented pricing can be based on three major factors: customer type, location of product or service, and product or service offering.It is also practical to customize prices based on the visibleness provided by the customer, as is the case for hotel services sold online. The five tramples a firm must take to make a differential pricing policy, as illustrated by The essence of any customer service strategy is to segment the customer to be served. It is important to differentiate between market segmentation and customer service segmentation. guest service segments differ from traditional market segments in significant ways. Customer service segments incline to be narrower (Davidow and Uttal, as cited in Yelkur and Herbig (1997).In addition, the narrower the segments, the more homogeneous they tend to be, making it easier to estimate consumer demand for each segment. Another factor that cannot be overlooked is the usage situation. Segmentation needs to take into account the what, where, how and why of demand. As demand is a result of the interaction of a person with the environment, a segmentation posture that includes both the person and the situation is take to explain the demand. In service industries such as hotels, distinct lines can be drawn, say, to divide different types of customers such as the vacationer or the business buy the farmer.The usage situation thus gives the firm a guideline for customer service segmentation. one time customer segments are identified, the next step is to estimate the demand for each of these segments. separate the target market into smaller customer service segments Steps for differential pricing Table II Product characte ristics matrix for hotels Cost and frequency of purchase comparatively high cost Infrequently purchased assess proposition Intangible Service-related good degree of differentiation Significant differentiation practicable Source: Based on the Peterson et al. (1997) model [ 254 ]Customer demand can be estimated by a method suggested by Oren et al. (1984), which proposes that there are many customers in a target market, each with different characteristics summarized in an mogul, say, t, indicating customer type (based on the customer service type). Assuming that there is a continuum of types with indices in the interval t0 t t1. The figure of the population whose types are less than an index t is given by a distribution function H(t) (which forms the customer segment as described in the prior section) that is assumed to be continuous and strictly increasing. It implifies notation to let s = H(t) be this fraction so that t = H(s), and s is uniformly distributed on the interval 0 s 1. One can use s to denote a customer rank or customer type. Although this method is more suited to physical goods markets, it can be applied to service markets as well. In Estimate demand for each customer segment Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet: the case of hotels Management Decision 39/4 [2001] 252±261 practice such estimations should be substantiated with both historical and estimated market data.Reservation price indicates the maximum amount a customer is willing to pay for a good or service (Guiltinan, 1987). The taciturnity price of the customer indicates her willingness to pay and is the key benchmark for setting different prices for different customer segments. Classifying customers by the value they place on the service provides a bungling estimate of the cost of satisfying them as well as the price they are willing to pay. Firms operating in service industries can use differential pricing only if they can estimate the distributions of the reservation prices.The amount by which the reservation price exceeds the actual price is the consumer surplus. The reservation price (Rp) would therefore depend on the value the customer places on the service (V) and the number of different firms offering the service (N). That is, Rp = f(V,N). The greater the number of firms offering the service, the lower will be the reservation price of the consumer. Whereas, if the customer has only a limited number of choices (substitutes), then her reservation price becomes higher; that is her willingness to pay increases (her demand becomes more inelastic).The utmost price is determined for each customer segment based on customer type, location and product/service offering. Thus, though there is no change in marginal cost, different prices are charged depending on the type of customer segment and the reservation prices for each segment. Among the goods and services that are sold online, hotel servic es appear to be particularly well suited for differential pricing because of the ease of segmenting customers at a relatively low marginal cost. watch over reservation prices (which indicate willingness to pay) for each segmentRosen and Howard (2000) provides examples of ameliorate transaction efficiency for service industries such as banking, travel, and stock brokerage. Table ternion illustrates the reduction in transaction costs for service firms because of delivery via the Internet. Traditional pricing strategies such as differential pricing, discussed in the previous section, are particularly well suited to ecommerce. We will focus to begin with on differential pricing for online services, also referred to as segmented pricing.A new and unique method of pricing called dynamic pricing, which is considerably facilitated by the electronic medium, enhances differential pricing for online services. The Internet enables marketing managers to update product databases secly and c ontinuously, as new product features are developed and price adjustments are made (Strauss and Frost, 1999). Dynamic pricing allows Internet customers to receive up-todate price information on demand from product databases. This information changes with time and by user.For example business customers may receive different prices than individual customers. Business customers may receive different price information based on glitz ordered. Thus, dynamic pricing allows further customization by target customer and further enhances the traditional segmented or differential pricing in the online environment. Determine prices for each segment Online presence of hotels Hotel services seem to be particularly suited to sale on the Internet. They can be delivered online and, once in place, benefit from tremendous economies of scale and scope.One firm can design a Web website and then just differentiate from locale to locale and from hotel to hotel at very low cost. In fact, the marginal cost o f adding one more line to the Web site or another site for a new hotel is practically negligible. patronage these advantages, the hotel industry seems to have been relatively unwind at â€Å"going digital” and utilise the Internet as a marketing tool. Hotel transactions in the USA account for less than 5 percent of the US total volume of e-business transactions. However, there is nearly indication that this is likely to increase significantly in the near future.Table IV shows that online travel business transactions increased from $2. 2 one thousand million in 1998 to $6. 5 billion in 1999, a 200 percent increase. Furthermore, when we disaggregate the total online travel bookings by travel product, it is interesting to note that lodging Pricing policies on the Internet E-commerce is likely to have a significant impact on pricing, as it creates a more competitive environment in which firms may sell. The Internet is able to generate different pricing mechanisms, particular ly by allowing customers to make instant price and product comparisons.The Internet offers significant opportunity for reducing operating costs, particularly for service firms (Rosen and Howard, 2000). A study by Andersen Consulting (as cited in [ 255 ] Rama Yelkur and Maria Manuela Neveda A DaCosta Differential pricing and segmentation on the Internet: the case of hotels Management Decision 39/4 [2001] 252±261 increased from 13 percent in 1998 to 16 percent in 1999, a trend that is likely to continue. Table IV Total online travel bookings by travel product 1998 $2. 2 billion market (%) Air Lodging political machine Cruise/tour 80 13 7\r\n'