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

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Impacts of Consumer's Loyalty on Revenue
Management Fairness Perceptions an Explanatory
Analysis in Tourism Industry

• Jean Michel Chapuis
• and Jean Michel Sahut
• Assistant Professor, University of La Rochelle
• and Professor, Business School of La Rochelle
• jean-michel.chapuis_at_univ-lr.fr

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Motivations

• If RM strategies are Pareto optimal, why some
  people say they are upset and think its
  unfair!
• Research suggests that consumer perceptions of
  fairness may influence their reactions to price
  changes.
• The loyal ones could be the most disappointed.

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Structure

• Revenue Management efficiency and Consumer's
  Perceived Fairness
• Consumers Loyalty and Perceived Fairness of
  Revenue Management
• Empirical Test with a Convenience Sample of
  Guests in a 3 hotel.

4
Structure

• Revenue Management efficiency and Consumer's
  Perceived Fairness
• Consumers Loyalty and Perceived Fairness of
  Revenue Management
• Empirical Test with a Convenience Sample of
  Guests in a 4 hotel.

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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...

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Fairness

• The reference transaction theory
• Kahneman et al. (1986)
• The attribution theory,
• Campbell (1999) and Vaidyanathan and Aggarwal
  (2003)

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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

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Perceptions of Fairness (2) The Reference
Transaction

• 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.
• gt dynamic pricing is unfair.
• Think about Rf . pDemf gt Cap

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Internal Reference Transaction(1)

• Bolton et al. JCR, 2003

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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. consumers opportunity cost)

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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 firms motive for the price
  change

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Perceptions of Fairness (4)The Attribution Theory

• 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.

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Perceptions of Fairness (5)The Attribution Theory

• 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
  firms profit.

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Conclusion

• According to those theories, various papers
  (mostly Kimess 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, whats about loyal customers?

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Structure

• Revenue Management efficiency and Consumer's
  Perceived Fairness
• Consumers Loyalty and Perceived Fairness of
  Revenue Management
• Empirical Test with a Convenience Sample of
  guests in a 3 hotel.

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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

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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.

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Our proposition is that

• Consumer's loyalty impacts on Revenue Management
  fairness perceptions

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Bolton et al., JCR 2003

• Find that fairness declined over repeated
  transactions.
• Suggest that fairness constraint becomes stronger
  while trust has to be built.

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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.

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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.

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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.

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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.

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Our proposition is that

• Consumer's loyalty impacts on Revenue Management
  fairness perceptions

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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).

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Structure

• Revenue Management efficiency and Consumer's
  Perceived Fairness
• Consumers Loyalty and Perceived Fairness of
  Revenue Management
• Empirical Test with a Convenience Sample of
  guests in a 3 hotel.

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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)

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Study I Novotel, La Rochelle

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

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• According to the previous image, what do you
  think about the hotel pricing practice?
  
• See no reason Think no clients respect

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Cross tabulation (1)

• Reason of stay at the hotel and fairness
  perception
• business // leisure
• even if people pay themselves the room

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Cross tabulation (2)

• Familiarity to hotels and fairness perception
• Loyalty and fairness rating
• number of privilege cards

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Study II Experiments

• We will present scenarii to participants who have
  to rate whether the firms action is fair.
• A between-subjects experiment is designed such
  that the questioned factor will be manipulated.

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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.

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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.

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Conclusion

• Fairness has a long history in economics, but
  its 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 consumers loyalty.

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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.

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Impacts of Consumer's Loyalty on Revenue
Management Fairness Perceptions an Explanatory
Analysis in Tourism Industry Questions ?

• Jean Michel Chapuis
• and Jean Michel Sahut
• Assistant Professor, University of La Rochelle
• and Professor, Business School of La Rochelle
• jean-michel.chapuis_at_univ-lr.fr

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Perceptions of Fairness (1) The Reference
Transaction

• 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