Revenue management in luxury hotels
In this paper, we show that the application of revenue management (RM) in luxury hotels is different because of the role that price and service delivery play in driving the luxury hotel customer experience. Luxury consumers often take price as a cue for quality and luxury, and given that luxury consumers are less price sensitive, the focus becomes more one of providing the experiences that they desire and expect. We illustrate our discussion with examples from the luxury brands operated by AccorHotels.
Keywordshotels revenue management luxury implementation customer experience
The application of revenue management (RM) in luxury hotels is different because of the role of price. RM typically deploys selected discounting, assumes a variety of customer price sensitivities, and tends to focus on the bottom portion of the demand curve. Given that luxury hotel guests are not particularly price sensitive, the focus is more on the top part of the demand curve. But, in order to charge a price premium, luxury hotels must also focus on designing and delivering the service experiences that luxury consumers may desire.
Given that both price and experience play a different role in luxury hotels, how can RM best be deployed? After a brief background of luxury products and services, we will discuss the role of price and then delve into the design and delivery of experiences. We will illustrate our discussion with examples from the luxury brands operated by AccorHotels.
Luxury consumers often take price as a cue for quality and luxury (Erickson and Johansson, 1985) and prestige (Berkowitz et al, 1992). They may also view the luxury service as exclusive in nature and place a high value on it (Lynn, 1991; Verhallen and Robben, 1994; Yeoman, 2011).
As Keller discussed in his seminar article on luxury brand marketing (Keller, 2009), luxury brands must employ a premium pricing strategy with strong quality cues and few discounts and markdowns. In order to justify their price premiums, they must create strong intrinsic and extrinsic value by providing quality products and services and also provide pleasurable purchase and consumption experiences.
But, as Keller also points out, the purchase and consumption experience must be pleasurable. As a result, experience design and delivery become of paramount importance (Vigneron and Johnson, 2004) since luxury consumers do not purchase luxury brands for utilitarian purposes (Pine and Gilmore, 1998, 2011). For example, the Burj-al-Arab in Dubai promotes its 7-star luxury experience, not its rooms or other services that it offers. If a luxury hotel does not design and deliver the service in a way that provides value to the customer, potential guests are unlikely to be willing to pay the associated price premium (Dubois and Duquesne, 1993; Zhang and Bloemer, 2008; Hennigs et al, 2015).
Role of Pricing
Since luxury consumers are less price sensitive, the focus becomes more one of providing the experiences that they desire and expect. One of the key questions is how best to design experiences that provide value to the luxury consumer (Dubois and Duquesne, 1993; Yeoman, 2011; Zhang and Bloemer, 2008).
For example, Nike changed their pricing strategy from cost-plus to customer value based. In fact, a new pricing department was set up, and to break their mindset, the pricing team purposefully avoided having any knowledge of the cost of any one new shoe model. They were focused on understanding in which market and customer segment would a model fetch a premium in (MacLeod, 2015).
Value is particularly complex in luxury brands since consumers are typically purchasing more than just a utilitarian service (Berthon et al, 2009; Hennigs et al, 2015). Value can be measured in three ways including experiential value (what value means to individuals), the symbolic value (what the brand means to others), and the functional value (the physical and service values of the brand) (Berthon et al, 2009).
The price–value relationship is often measured on customer satisfaction surveys and it is commonly assumed that the price–value relationship will be rated lower at higher priced hotels. At Fairmont Raffles Hotels International (FRHI), we found that high-end brands with the highest ADRs also had the highest customer value evaluation. It seems that the perceived value is what matters the most, but the question is how best to design and deliver that value.
Role of room type
Luxury hotel brands were slower to adopt RM practices than more moderately priced brands. One of the reasons that we believe that this occurred was because most commercial RM systems did not revenue manage by room type. As more RM systems began to offer that capability, RM became a more powerful and valuable tool for luxury hotels since room type does matter for the luxury guest.
For example, consider the pricing strategy for junior suites and heritage rooms at the Raffles Beijing. European leisure guests appreciate the rich heritage rooms in the historical wing and are willing to pay a premium for this. On the other hand, the contemporary rooms in the new wing are more spacious with a separate work area, and business guests prefer to pay a premium for this over the heritage rooms. So they switched the pricing order of the room types depending on the channel and expected type of guests.
Similarly, at the Peace Hotel in Shanghai, Europeans were upsold to inner courtyard rooms for a more peaceful and quiet experience, while the Chinese were upsold to the rooms overlooking Nanjing Road as it is a historically significant thoroughfare and was seen to be more prestigious, albeit less quiet.
Prospect Theory is a behavioral economics theory that evaluates how people choose between alternatives that involve risk. Kahneman and Tversky (1979) found that people tend to make decisions depending on whether the decision is framed as a loss or a gain. Basically, customers are more likely to choose an option when it is framed as a gain than when framed as a loss.
Prospect theory can also be used to help drive perceived value and revenue in luxury hotels. Consumers frame gains differently than losses and often view prepaid costs as sunk costs. As a result, customers are more apt to view ancillary costs as separate and may them to be more likely to purchase add-on products and services. In general, it is considered to be better to bundle losses and unbundle gains. For example, at Raffles and Fairmont Hotels, we found that guests who had prepaid for their rooms had a 6% higher ancillary spend than those who had used a non-prepaid BAR rate. The logic behind this is similar to what airlines and rental car companies do with upgrading. Once consumers have committed or spent a certain amount, they are more likely to view the cost of an upgrade in isolation rather than combine its cost with what they already spent. As a result, customers are more apt to view ancillary costs as separate from their original purchase and may then view the upgrade as more valuable.
We have been focusing on the value portion of the price–value relationship, but let us move on to a more in-depth discussion on the role that the design and delivery of the guest experience play in perceived value. We will again use examples from the AccorHotels luxury brands to help illustrate our points.
The Role of Experience Design and Delivery
Both the design and delivery of the service experience matter. Data analytics can help hotels better understand what their customers value and help them create more customized experiences. For example, consider companies such as Airbnb and onefinestay (Arikolu, 2017; Gallagher, 2017). They emphasize that they are selling experiences rather than just selling a place to stay. Their customers can even design their own experiences from a curated set of experiences.
As Pine and Gilmore (1998, 2011) have put forth, experience matters. AccorHotels recently purchased John Paul (Adams, 2017), a virtual concierge company to provide customized experiences for guests at their luxury brands. John Paul uses guest data from multiple sources along with artificial intelligence (Adams, 2017) to design their experiences. For example, consider the honeymoon experience. Most hotels offer some sort of honeymoon package, but honeymooners may desire different and more customized experiences than those that are offered. With the use of a virtual concierge, a curated set of honeymoon experiences can be developed for honeymooners to choose from. Or, consider the Middle Eastern travel market, particularly Middle Eastern women. If they can be directed to a Middle Eastern travel specialist who can help them design their experience and help assure them that they will have services such as a female driver, be staying on a female-only floor and encountering only female staff members, their travel experience is likely to be much more valued.
Global concierge services can also be used to enhance the guest experience even when the guest is not staying at the hotel. For example, the use of a global concierge service allows guests of Raffles Residences to continue their experience even when not staying at the residence.
The personalized or customized dimension of the luxury experience matters as well (Pine and Gilmore, 1998, 2011; Vigneron and Johnson, 2004). For example, at Raffles and Fairmont, we found that luxury guests preferred booking with a customer service representative rather than with the website. Websites provide general information and inspiration. Often, there are insufficient data on a single booker to use modeling to personalize the travel offer. Thus, at Raffles and Fairmont, we encourage bookers to speak with our customer service teams, who can personalize the recommendations and often upsell the experience to either a better room or suite and recommend services such as spa, golf, private dining, or family activity that would enhance the overall experience. Reservations booked via our highly trained Customer Care teams have a Total Revenue per reservation that is 12% higher and enjoy a customer satisfaction rating that is 9% higher than internet reservations.
Underlying all of our discussion is the role that big data and artificial intelligence (AI) can play in helping luxury hotels design customized experiences. While our focus has been on luxury hotels, these tools also have potential for other hotel sectors and take on particular significance as companies such as Airbnb and onefinestay (Arikoglu, 2017) continue to promote the experiential nature of the services that they offer.
The challenge for luxury hotels is how to provide the experiences that provide their guests with the highest value. By doing so, they will be able to justify higher room rates and also be able to generate additional ancillary revenue.
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