READING RESOURCE 1

1. PRICING
It is important to understand that, for an RM, the term price is both a noun and a verb.
Price: Noun: A measure of the value given up (exchanged) by a buyer and a seller in a business
transaction. For example: “The price of the guided city tour is $75.00 per person.”
Verb: To establish the value to be given up (exchanged) by a buyer and a seller in a business
transaction. For example: “We need to meet with the revenue management team to price the New
Year’s Eve dinner package.”
Value: In a buyer or seller transaction, the amount of perceived benefit gained minus the price paid.
Expressed as a formula: Perceived benefit x Price = Value

Value based (pricing): The practice of establishing prices for a firm’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.
Fixed pricing: The practice of a seller charging the same price to all buyers. This is sometimes referred
to as flat or single pricing.
Experienced RMs understand that differential pricing is a more powerful pricing approach than is fixed
pricing. This is true, in part, because price differentiation also provides the rationale to practice
inventory management; one of the most critical tasks that can be undertaken by effective RMs.
2. DIFFERENTIAL PRICING
Experienced RMs know that there are a wide variety of important ways rational differential pricing
strategies can be applied in the tourism and hospitality industry. These strategies can be grouped into
eight broad categories that can impact differential pricing.

Figure 2: Factors Impacting Differential Pricing

2.1. Customer Characteristics
One of the most common differential pricing strategies is that of offering the same product or service, at
different prices, to selected groups of buyers known or assumed to have different willingness to buy.
The identification of such groups requires that RMs consider the unique buyer characteristics of their
specific market segments. In the tourism and hospitality industry, some common examples of such
groups include senior citizens, students, families, frequent customers, favored customers, members of
select organizations Possessors of a special offer or coupon.
To be successful when using customer characteristics as a differential pricing strategy it is important to
ensure that:
 There is an accurate method of determining the customer’s identifying characteristic. I.D. cards used
to verify age, seller or buyer-maintained records of purchase frequency and organizationally issued
membership cards are all examples of accurate and distinct identification methods used to separate
those who qualify for a special price from those who do not.
 The product or service sold cannot be easily exchanged among buyers. This is necessary to avoid
arbitrage. One method of doing so is to institute a “one-per-customer” restriction on purchases. That
prevents a potential arbitrager from buying large quantities of a product at a low price with the
intention of reselling the products at a higher price. Ticket scalping for concert and sporting events is
one example of arbitrage. Some online sales of discounted hotel rooms are another.
 The characteristic used is defendable, and acceptable, to other buyers. For example, consider the use
of advancing age as a characteristic to grant favored pricing status to senior citizens taking their
grandchildren to an amusement park. This is a common attractions-industry pricing strategy. Most
park visitors view it as acceptable because seniors are perceived as not as likely as others to use the
park’s most popular ride attractions. Thus, other park attenders do not perceive the granting of this
benefit as reducing the value of their own purchases.
For many hospitality businesses, the customer characteristic of “possession of a coupon” has been an
excellent way to regulate or limit the number of their special reduced price offers. Possession of the
coupon also serves to definitively identify the coupon holder as entitled to the discount. Today’s RMs
increasingly utilize the Internet to publicize their coupon or other special offers and they save marketing
dollars by permitting buyers to self-print the coupons.
2.2. Location
Differential pricing can often be instituted based on the location of the seller. Revenue managers for
large lodging chains are well aware that hotel room buyers in Manhattan are, for a variety of reasons,
likely to pay more for a guest room there than would a buyer purchasing an identical room located in
Milwaukee, Wisconsin. For the same reason, a draft beer at the airport or a professional ball park can
typically be sold for a higher price than the exact same draft beer purchased in a small neighborhood
tavern. Product and service prices are often based on the location of the seller.
A variation of this location-based approach exists when the location of the buyer varies. Ski resorts
utilize this approach. For an annual fee, skiers in many locations can purchase a season pass that
provides unlimited skiing. The season passes are sold at a significant sav- ings compared to the cost of
buying daily lift tickets.
2.3. Time
Segmenting prices by time also helps sellers who experience idle production capacity. Movie theater
owners implement this strategy when they offer highly discounted mid-day matinee prices. Airlines
address variations in demand for preferred times by pricing flights higher during those periods when
most fliers prefer to fly. Of course, this strategy also permits those fliers who place a lower value on a
specific departure time to benefit from the reduced prices offered to minimize the impact of the airline’s
idle production capacity (i.e., empty seats.)
Time-sensitive pricing is one of the most commonly used differential pricing techniques because it
affects so many businesses. Hotels and restaurants are just a few examples of businesses whose products
are time sensitive. Astute RMs, however, soon recognize that instituting a reduction in price for all
buyers choosing to purchase during the off-peak periods is not the best pricing approach.
2.4. Quantity
The quantity of an item purchased is one of the most universally accepted reasons for a seller’s price
differentiation. Variations, typically in the form of reductions, in price can be given in response to a
buyer’s increased order size; the amount purchased at one time or for the total purchase amount; or the
amount purchased over a defined time period.
As a seller, offering lower prices for large purchases serves three purposes. First, it rewards those good
customers who buy a great deal of product or services from you. Second, it encourages buyers to buy
more. Customers who buy in large volume are often price sensitive and knowledgeable because they
buy so much. They also typically have significant experience in the negotiation of prices. These buyers
appreciate the lower prices resulting from quantity buying. For this reason, a barbeque restaurant that
offers its customers six beers sold in a “bucket” at a price lower than that of six individual beers knows
that its customers benefit by paying a lower price per beer purchased, while the operation benefits as
well because it sells more product. Third, while large volume customers may be harder to obtain, when
their business is won they are generally easier and less costly to service than other buyers. This is so
because the costs of selling and servicing an account do not increase proportionately with the volume of
purchases made. This makes the per-unit cost of selling to high-volume buyers less than the cost
associated with low-volume buyers.
2.5. Distribution channel
From a differential pricing perspective, distribution channels are important for two key reasons. The
first is that some buyers prefer to use a specific channel when making their purchases and they are
willing to pay more; or may feel they should pay less, when they use that channel.
The second reason why distribution channels affect pricing is that channel operators, including
intermediaries of all types, charge sellers for their services. Intermediaries in any business certainly have
a right to charge for the services they provide. In some cases, these charges are levied on the buyer of
products sold. In other cases, however, it is the seller who is charged for use of the distribution channel.
2.6. Product versioning
Product versioning refers to the practice of varying the form of the product or service and then varying
price. Product versioning is a powerful differentiation technique because often the difference in seller
costs between the product versions offered is slight, but the impact on buyers is significant.
Airlines use product versioning by offering both First Class and economy seating. Some airlines offer
Business Class seats as a mid-grade option. Food operations routinely practice product versioning when
they sell “half-sized” portions for a price numerically equal to, or slightly greater than, one half the
selling price of a full portion.
Interestingly, restaurants themselves are the beneficiaries of product versioning when chefs buy brand-
name vegetables or fruits that have been canned and sold to distributors to be resold, for a lower price,
under these distributors’ own private labels (e.g., Sysco, Gordon, or US Foodservice brands).
2.7. Bundling
Offering products and services for sale both individually and in combinations allow sellers to increase
revenues while reducing prices for those who purchase multiple items. This bundling concept is most
effective when the price of the items included in the bundle is less than if the same items were
purchased individually.
Actually, bundling occurs many more times than some RMs realize. Hotels that offer free overnight
parking to its guests are engaging in a form of bundling (i.e., room 1 park- ing at one price). Full-service
restaurants have traditionally offered prix fixe, or table d’hôte menus, which are complete meals
consisting of, for example, appetizer, soup or salad, entrée with vegetable and dessert, all for one price.
Theater and sports venues bundle by offering buyers season tickets at a price much lower than the sum
of the prices that are charged for individual game tickets.
Hoteliers most often use the term package when referring to the bundles they create.
2.8. Payment terms
In the hospitality industry, payment terms are an often-underused means of differentiating prices.
Experienced lodging industry RMs seeking to optimize GOPPAR recognize that the method and timing
of payments for goods and services directly impact the profits of the operation. Food service RMs also
know that payment form affects their income directly. Hospitality businesses typically pay a fee of 1 to
5 percent of the selling price charged when their customers utilize payment cards (i.e., credit, debit, and
entertainment) rather than cash to pay for their purchases. These discount fees can be significant on
large purchases and always impact the net profitability of a sale.
READING RESOURCE 2

3. SOME KEY PERFORMANCE METRICS IN PRICING OF TOURISM AND HOSPITALITY

BUSINESSES
3.1. In tourism businesses
3.1.1. Average Revenue per User (ARPU)
Average Revenue per User (ARPU): the average revenue generated per tourist

Total revenue / number of tourists = ARPU

3.1.2. Booking Conversion Rate

Booking Conversion Rate: the percentage of website visitors who complete a booking. It measures the
effectiveness of the booking process and website conversion. Higher conversion rates indicate better
user experience and pricing attractiveness.
(Number of bookings/ number of website visitors) *100
3.2. In hospitality businesses
3.2.1. Average daily rate (ADR)
Average daily rate (ADR): The average (mean) selling price of guest rooms during a specific time
period, such as a day, week, month, or year.
The formula for ADR is:
Total room revenue / total rooms sold = ADR
3.2.2. Occupancy percentage
The number of rooms sold during a specific time period; expressed as a percentage of all rooms
available to sell during that same period.
The formula for occupancy percentage is:
Total rooms sold ÷ Totals rooms available for sale = occupancy percentage
3.2.3. Revenue per available room (RevPAR)
RevPAR is the average revenue generated by each available guest room during a specific period of time.
The two formulas for RevPAR yield identical results and are:
ADR × Occupancy percentage = RevPAR
or
Total revenue ÷ Total rooms available for sale = RevPAR
Unless otherwise stated, the revenue figure utilized for RevPAR calculations is “rooms revenue” only.
3.2.4. Revenue per occupied room (Rev POR)
Rev POR is the average revenue generated by each occupied guest room during a specific period of
time.
The formula for RevPOR is:
Total revenue ÷ Total occupied rooms = RevPOR

Unless otherwise stated, the revenue figure utilized for Rev POR calculations consists of “all rooms and
non-rooms revenue.”
3.2.5. Gross operating profit per available room (GOPPAR)
GOPPAR is the average gross operating profit (GOP) generated by each available guest room during a
specific period of time. Also written as GoPAR.
The formula for GOPPAR is:
total revenue−management controllable expense
= GOPPAR
total rooms available for sale

The revenue figure utilized for GOPPAR calculations consists of all rooms and non-rooms (total)
operating revenue.