The rule-of-thumb model and Hubbart formula pricing strategies present a weakness during the pricing of hotel rooms, mainly because; they do not consider market conditions and changes, which are competitive and complex. These market conditions are the characteristic traits of the hotel industry or a certain sector within the industry, as they influence the buyers and sellers of hotel services within the sector or industry.
These factors include the number of business rivals, where a surplus may mean that new entrants will find it difficult to enter the industry. The complexity of the market conditions further makes the pricing strategies of competitors change, which may threaten the businesses using these two pricing strategies.
Therefore, as Gu (1997, p. 44 – 45) notes, the hotel industry requires pricing done based on a quadratic room-pricing model, which considers operating costs, as well as the dynamics of the market environment, especially when operating in a highly competitive market (Mattila & Choi, 2005, p. 25-27).
The break-even pricing model may be cited as one that imposes the weaknesses onto the pricing exercise, because it bases its compilations on the assumption that sales volumes equal stock amounts (Sales = Stock), or that total revenues realized and the overall cost functions are related in a linear manner. Further, the model is static, thus cannot be used in accounting for variations within the market environment (Reid & Bojanic, 2010, p. 565).
The weakness that lies with using value-based pricing is that it requires extensive skills and knowledge from the revenue managers, as it centers its variations for pricing on the customer’s perception of the value of hotel services. This is especially the case, as the value creation and value perception channels involve the different principles within the hotel industry, including the hotel, distributors, and the customers of the hotel services.
This is the case, as the communication of value is effectively communicated to the customers through the intermediaries, who are all dynamic in unique ways (Lovelock et al., 2001). As a result, the channel of value communication should be reflected through management dynamics, carrying out extensive research of the changing consumer behavior, and the need to maintain the quality of services, which make it very difficult for revenue managers to attach an accurate value-based price.
Another weakness of using value-based pricing is that customer dynamics are often not reflected, including the increasing customer negotiating power and the high expectations they may link to the attached value (Hayes & Huffman, 1995; Richardson, 1996).
The core motivation for discounting in the hotel industry in the hope that the promotional strategies will make the customers repeat their purchases, due to the experience gained from the marketing strategy. However, discounting strategies are applied in a cautiously calculative way, to ensure that the reduction in revenues will be recovered from the increase in sales volumes.
Therefore, the usage of this strategy in creating more markets requires extensive market research in the area of customer dynamics and approach models (Nagle, 1987). Further, the discounting strategy of market creation works better for new products, which are perceived to present better value for the customers, as the customers are also interested in trying the new products and not only the discount deal, which may take the form of a price-reduction (Schwartz, 1981).
It should also be noted that discounting presents a threat to the business, in the form of cannibalizing the existing business and market, as revenue is foregone to existing customers, besides serving as a model of attracting new customers. Therefore, this shows that the usage of this strategy should be used carefully, towards ensuring that it does not affect the business negatively (Reid & Bojanic, 2010, p. 576).
References
Gu, Z. (1997). Proposing a room pricing model for optimizing profitability. International Journal of Hospitality Management, 16 (3), 44-46.
Hayes, K., & Huffman, M. (1995). Value Pricing: How Long Can You Go? Cornell Hotel and Restaurant Administration Quarterly, pp. 51-56.
Lovelock, C., Patterson, P., & Walker, R. (2001). Service Marketing: an Asia-Pacific Perspective. Singapore: Prentice Hall.
Mattila, A., & Choi, S. (2005). The impact of pricing information on guest satisfaction and fairness perceptions. Journal of Hospitality & Leisure Marketing, 13 (1), 25- 27.
Nagle, T.T. (1987). The Strategy and Tactics of Pricing. Upper Saddle River: Prentice Hall.
Richardson, J. (1996). Marketing Australian: Travel & Tourism Principles and Practice. Victoria: Hospitality Press.
Schwartz, D.J. (1981). Marketing Today: A Basic Approach. New York: Harcourt Brace Jovanovich.