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The Link Between Quality, Service, and Price

In the hospitality industry, most buyers’ assessments of value are determined by their individual perceptions of benefi ts derived from product quality and service quality, less (minus) the price they must pay. This relationship was presented mathematically in the previous chapter as follows:

Perceived benefit – Price =Value

Students with a background in basic algebra will recognize that the revised buyer’s view of value formula can also be expressed as:

(A +B) - C = D


A _ Perceived tangible product benefi t

B _ Perceived intangible service benefi t

C _ Price

D _ Value (profi t)

It is important to recognize that changes in product quality and service may only be noticed by guests over a period of time. Price, however, has the incredible power to immediately infl uence consumer perceptions of value. Unfortunately, the extraordinary power of price is too often misunderstood and thus misused; frequently with damaging effects.

Price is easily the most dynamic of the 4 Ps of Marketing. RMs know that in most consumer transactions price behaves exactly like a super action hero (think Spiderman). It is truly all-powerful and produces extraordinary results in an incredibly short time period. Strategic pricing can optimize a business’s revenues regardless of the business’s product orits place. Best of all, strategic pricing is a tool that is available to RMs instantaneously and at all times.



1. What is perceived value in hospitality?

2. Four I’s of Service?

3. Buyer’s view of value formula?



1. Hayes, D. & Miller, A. (2011). Revenue Management for the Hospitality Industry. Hoboken, NJ: John Wiley & Sons, Inc.


Topic 4. Differential pricing in Hospitality (guest lecture)

4.1. Ten Principles of Managing Revenue

4.2. Differential Pricing

4.3. Limits to Differential Pricing

4.4. Applying Differential Pricing

4.5. Revenue Management or Revenue Optimization?


Ten Principles of Managing Revenue

Ten Principles of Managing Revenue

1.Businesses exist only to create wealth (value) for their customers.

2.Successful businesses are careful to focus externally; on their customers’ needs, rather than internally; on their own needs.

3.Consumers make rational buying decisions based on their perceptions of the value they receive for the prices they pay.

4.The true value of a product or service is equal to what a buyer will willingly pay for it.

5.Product quality is important, but service quality is just as important when delivering value to buyers of hospitality products and services.

6.Any change in product quality, service quality, or price will have a direct impact on buyers’ perceptions of value.

7.While it may be viewed simply as a number, a price is a very powerful message sent by sellers to buyers.

8.Different buyers place different values on the same products or services, and as a result are willing to pay different prices for them.

9.Strategic pricing is the application of data and insight to effectively match prices charged with buyers’ perceptions of value and willingness to pay.

10.Revenue managers are those individuals or teams directly responsible for optimizing a business’s income and profits.

Being ready to make informed data-related decisions assumes RMs have a solid understanding of fi nancial accounting, managerial accounting and cost control as well as of the basic mathematics and algebra need to organize and assess revenue managementrelated data.


Differential Pricing

Value based (pricing): The practice of establishing prices for a fi rm’s products and services based

primarily on the buyer’s perceived value of those products and services.

Differential pricing: The practice of a seller charging different prices to different buyers for the same product or slightly different versions of the same product. This is sometimes referred to as demand-based pricing, segmented pricing, price differentiation, or price discrimination.

Some industry professionals do not believe pricing can or even should be value based. Those hospitality managers with a background in accounting often make the case for a numerical formula-based approach to pricing. Such an approach typically considers fixed and variable costs, desired profi t level, and the costs of a business owner’s initial investment.

Familiar terms for these managers include the Hubbart room rate formula, contribution margin pricing (for restaurants), and investment rates of return. Readers unfamiliar with these terms and how they impact price decisions will not have diffi culty locating them in the hospitality literature.

Similarly, those managers who view pricing as essentially a marketing-related task make the case for the utilization of a variety of pricing approaches depending upon the goals of management. These approaches include skim pricing, penetration pricing, neutral pricing and cost-oriented pricing, demand-oriented pricing, and competitive pricing.

Despite the cases that can be made for accounting and marketing-related pricing approaches, in nearly all casesthey recommend the use of fixed pricing.

Experienced RMs understand that differential pricing is a more powerful pricing approach than is fi xed pricing. Thisis true, in part, because price differentiation also provides the rationale to practice inventory management; one of themost critical tasks that can be undertaken by effective RMs.

Inventory management: The process of allocating and modifying the number of products available for sale at various prices and through various distribution channels.

Differential pricing means charging different prices to different guests. The potential ethical issues related to differential pricing will be addressed in the next chapter, but it is important for you to recognize that your customers, as well as your hotel, clearly benefit from differential pricing. Using your 500-room hotel as an example, consider that when differential pricing was applied, the same 250 buyers purchase their room for $150.00. For them, differential pricing had no effect.


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