AGIFORS 2006 - Cancun, May 1 Impacts of Consumer's Loyalty on Revenue Management Fairness Perceptions: an Explanatory Analysis in Tourism Industry Jean

AGIFORS 2006 - Cancun, May

1

Impacts of Consumer's Loyalty on Impacts of Consumer's Loyalty on Revenue Management Fairness Revenue Management Fairness

Perceptions: an Explanatory Analysis in Perceptions: an Explanatory Analysis in Tourism IndustryTourism Industry

Jean Michel Chapuis

and Jean Michel Sahut

Assistant Professor, University of La Rochelle

and Professor, Business School of La Rochelle

[email protected]


2

Motivations

• If RM strategies are Pareto optimal, why some people say they are upset and think

“it’s unfair!”

• Research suggests that consumer perceptions of fairness may influence their reactions to price changes.

• The loyal ones could be the most disappointed.


3

Structure

• Revenue Management efficiency and Consumer's Perceived Fairness

• Consumer’s Loyalty and Perceived Fairness of Revenue Management

• Empirical Test with a Convenience Sample of Guests in a 3* hotel.


4

Structure



• Empirical Test with a Convenience Sample of Guests in a 4* hotel.


5

Revenue Management

• Is the process by which a manager controls the availability of a product or service, marketed with a dynamic pricing.– Control can be effective by pricing, setting booking

limits, and managing fences.

• Price based RM: newsboy, auctions, bid prices...

• Quantity Based RM: early bird, . . . . overbooking, protect level...


6

Fairness

• The reference transaction theory• Kahneman et al. (1986)

• The attribution theory,• Campbell (1999) and Vaidyanathan and Aggarwal

(2003)


7

Perceptions of Fairness (1) The Reference Transaction

• Kahneman et al. (1986) consider :

• Contractors expect that future exchanges will be entitled by same reference transaction terms – a reference price and a positive reference profit.

• The higher the difference between an actual transaction and a relevant transaction, the higher the perceived unfairness


8


• Kahneman et al. (1986) stated (p. 735) that "community standards of fairness effectively require the firm to absorb an opportunity cost in the presence of excess demand, by charging less than the clearing price.”

• => dynamic pricing is unfair.

• Think about Rf . p{Demf > Cap}


9

Internal Reference Transaction(1)

• Bolton et al. JCR, 2003


10

Internal Reference Transaction (2)

• Kahneman et al. (1986) pointed out that when competitors change their price, the current terms set by the firm and the new terms set by competitors define alternative reference transactions (p 730).

• Only few papers assess fairness using market prices (i.e. consumer’s opportunity cost)


11

Perceptions of Fairness (3)The Attribution Theory

• people attempt to make causal inferences about observed actions or why an event occurred and these causal inferences influence their responses.– Locus of causality (internal or external): who

is responsible for a given action.– Controllability: whether an action is in

volitional control of an actor or not.– Inferred motive: firm’s motive for the price

change


12


• Vaidyanathan and Aggarwal (2003)

• Consumers react more unfavorably if the locus of causality of a negative outcome can be linked to a firm

• Consumers would evaluate a price increase to be more unfair (or less fair) if the cause of that increase was perceived to be within the volitional control of the seller.


13


• Campbell (1999)

• Consumer perceives a price increase as unfair when s/he infers that the firm is trying to take advantage whether or not the action increases the firm’s profit.


14

Conclusion

• According to those theories, various papers (mostly Kimes’s ones) conclude that RM could be perceived as unfair– expropriation of client's rent as market power– first degree price discrimination or auction

• However, the RM is based on market segmentation. Then, what’s about loyal customers?


15

Structure



• Empirical Test with a Convenience Sample of guests in a 3* hotel.


16

Loyalty (1) Emotional

• “the customer feels so strongly that you can best meet his or her relevant needs; that your competition is virtually excluded from the consideration set and the customer buys almost exclusively from you”.

• Loyal buyers “rely on trusted suppliers to continue providing it. Their ongoing loyalty is driven fundamentally by the uncertainty associated with untested suppliers”


17

Loyalty (1) Behavioral

• “Consumers’ Loyalty as customers ‘selecting in’ and ‘selecting out’ certain products over others”.

• Starting with our model, we then review the literature that sheds light on the debate about consumer loyalty and RM.


18

Our proposition is that

• Consumer's loyalty impacts on Revenue Management fairness perceptions

Level ofsatisfaction

Perceptionof

Fairness

Dynamic Pricing

Inventory Control

Loyalty

H1 H2

Moderating Effects

Revenue Management Consumer Behavior


19

Bolton et al., JCR 2003

• Find that fairness declined over repeated transactions.

• Suggest that fairness constraint becomes stronger while trust has to be built.


20

Shoemaker, JRPM 2003

• postulates that RM destroys customer loyalty due to adverse effects on guests' perception of the hotel. RM "appears to be the type of opportunistic behavior that inhibits guests' trust and loyalty".

• gives very few arguments, but his results suggest that manipulating the price for loyal cardholders leads to guests more likely to negotiate room rates and check competitor rates.


21

Noone et al., JRPM 2003

• Given a high-demand forecast, RM results in both discount rate denied availability and a high-rate quote, without consideration of the lifetime value of an individual to the firm.

• The long-term revenues will be decreased if a high lifetime value customer chooses, either through price resistance or lack of room availability, to switch to a competitor.


22

Wirtz et al., JRPM 2003

• Regular customers might expect to be accorded priority seat allocation during peak times, even if higher-paying occasional clients show up.– members of Qantas' frequent-flyer schemes found

that they were unable to redeem points on flights in peak periods

– members of Qatar Airways' privilege club found that they have to double their free miles to ticket in high season, while the same earning rate.


23

Wirtz et al., JRPM 2003

• Applying minimum length of stay for certain discounted rates, loyal customers perceived more unfair than others that early check-out imposes a fee.


24

Our proposition is that

• Consumer's loyalty impacts on Revenue Management fairness perceptions

++Level ofsatisfaction

Perceptionof

Fairness

Dynamic Pricing

Inventory Control

Loyalty

H1 H2

Moderating Effects

Revenue Management Consumer Behavior


25

Our hypotheses are that

• Loyal customers perceive more than others that the firm is acting unfairly when it executes pricing (H1) and inventory controls (H2).


26

Structure



• Empirical Test with a Convenience Sample of guests in a 3* hotel.


27

Study I: Novotel, La Rochelle

• 70 men, 82 women• familiars with hospitality (2/3rd stayed in the same hotel)

• same proportion of stays for business and for leisure

• 50 loyalty cardholders (mostly Accor, but Hilton, Sheraton, Starewood, BestWestern…)

• price conscientiousness – (85 pay themselves ; for 67, room paid by the company)


28

Study I: Novotel, La Rochelle

• we shown the next image during the interview in the lobby, and recorded consumer’s perception of fairness and other reactions.


29

• According to the previous image, what do you think about the hotel pricing practice?

• See no reason Think no client’s respect


30

Cross tabulation (1)

• Reason of stay at the hotel and fairness perception

• business = // = leisure

• even if people pay themselves the room


31

Cross tabulation (2)

• Familiarity to hotels and fairness perception

• Loyalty and fairness rating

• number of privilege cards


32

Study II: Experiments

• We will present scenarii to participants who have to rate whether the firm’s action is fair.

• A between-subjects experiment is designed such that the questioned factor will be manipulated.


33

scenario

• A small hostelry rents a smart room for $50, next to the office of your main client, which you used to stay a day per week since 6 months and own a privilege card. Business continues to be satisfying, but a chain hotel in the area raised his rates to $60 for similar rooms. The manager increases the rack to $60.

( ) Unfair ( ) Unacceptable ( ) Unreasonable ( ) Neutral ( ) Reasonable ( ) Acceptable ( ) Fair


34

scenario

• A small hostelry rents a smart room for $50, next to the office of your main client, which you used to stay a day per week since 6 months. Business continues to be satisfying, but a chain hotel in the area has raised his

rates to $60 for similar rooms. You swap your position with a colleague in the company, and the manager increases the rack to $60 to the no-privilege card new incumbent.

( ) Unfair ( ) Unacceptable ( ) Unreasonable ( ) Neutral ( ) Reasonable ( ) Acceptable ( ) Fair


35

Conclusion

• Fairness has a long history in economics, but it’s only first steps assessing Revenue Management perceived (un)fairness.

• We share the common point that a combination of factors reduces perceived unfairness of pricing.

• But we still have to go further by testing different scenarii, about consumer’s loyalty.


36

Conclusion

• It would be smart to test the different fairness rating of a similar situation but one framed with dynamic pricing and another framed with restriction condition.

• Belobaba argued in 1989 that booking limits are easier to manage than DP, which is now expanding. It could be possible that it looks like more fair to the consumer.


37

Impacts of Consumer's Loyalty on Revenue Impacts of Consumer's Loyalty on Revenue Management Fairness Perceptions: an Explanatory Management Fairness Perceptions: an Explanatory

Analysis in Tourism IndustryAnalysis in Tourism Industry

¿ Questions ?¿ Questions ?

Jean Michel Chapuis

and Jean Michel Sahut

Assistant Professor, University of La Rochelle

and Professor, Business School of La Rochelle

[email protected]


38


• Kahneman et al. (1986) consider :

• As a central concept in analyzing the fairness of actions in which a firm sets the terms of future exchanges

• A relevant precedent that is characterized by a reference price and by a positive reference profit.

• Contractors expect that future exchanges will be entitled by same reference transaction terms

Documents

AGIFORS 2006 - Cancun, May 1 Impacts of Consumer's Loyalty on Revenue Management Fairness Perceptions: an Explanatory Analysis in Tourism Industry Jean