Do Hotel Prices Really Need to End In 9?
By Bill Kotrba VP of Industry Strategy, Leisure, Travel & Hospitality, JDA Software | May 06, 2012
Is pricing ending in 9 an outdated 20th century carryover from the pre-e-commerce era? Does anyone care anymore what the last digit of a price is, when it's displayed on a mobile phone in a list of 25 competing rates? At least as far as hotels are concerned, the way room rates are distributed and displayed, as well as the revenue management tools for determining those rates, have both changed dramatically in the last decade. I have reason to think the hotels pricing in "9" may be leaving money on the table.
Long before I was born, someone decided there was something special about prices ending with the number nine. $99. $199. $999.99. The "Art and Science" of pricing evolved this way–conventional wisdom has always been that adding that "next digit" crosses some mental line and causes a disproportionate change in a person's willingness to buy the product or service. "Pretty" pricing has long been accepted as an effective technique, and also for what it really is-a way to obscure information from the customer about the true underlying value of whatever it is they are buying-while creating the perception that the price was Good Deal. It makes sense from personal experience, and I'm also sure that hundreds of scientific studies conducted over the years have verified that it is indeed effective.
I learned of one such study recently at a meeting with executives at a large retailer. The topic of our meeting was dynamic pricing and how a business can use price as a lever to manage demand. As a group we were standing around a large whiteboard, drawing supply and demand curves with sweeping smooth arcs. We talked about various quantitative approaches to identifying the pricing "sweet spot" that generates maximum revenue and profits for a business. The notion of the nice smooth demand curve was called into question though by studies the retailer had conducted in the preceding year.
The retail venue in this case was a gift shop, and the item was kids' watches. They studied price elasticity using real market response data testing a variety of price points over a period of months. The results demonstrated that there was a maximum revenue point at $19.99. In other words, at $20.00 there was more than sufficient decline in demand to offset the extra penny of revenue. Same was true at $21, $22, etc., each generating less total revenue compared to the $19.99 price point.
As they continued to increase the price, however, an interesting thing happened. It turns out the demand curve for this particular item is "lumpy". Total revenue from sales of this particular watch continued to decline until the price got into the mid-$30 range-and then it started to increase again. Revenue continued to increase until the price was $39.99. At $40.00, revenue began to decline again. The same thing happened as the price moved into the high $40's, increasing revenue again until the price was $49.99. Then declined above $50. Evidently customers have a particular reference price in mind when buying a gift-and in this case it appeared that the price took on almost greater importance than the gift itself.
In the 21st century world of mobile-enabled hyper-transparent pricing, is the "nines" approach outdated? The retail example of the kids' watch might make you think twice. But consider the lack of price transparency and price competition-gift shops sell to people browsing in person who are frequently buying something for someone else. Gift shops also don't typically have competing gift shops close by for easy comparison shopping, the products are often one-of-a-kind items, and prices don't change frequently. There are multiple levels of information conveyed by the price in this case. In this study, the customers' perception of value was clearly associated with the price.