Yield / revenue management and perceptions of fairness in the hotel business: empirical evidences

Yield/revenue management practices are now increasingly being employed by hotel firms on a global scale in order to improve hospitality structures’ profitability. Furthermore, the focus is progressively more centred on customer instead of room inventory. Fencing can be highly effective in improving this strategy of demand-based pricing even if it may cause risk of perceived unfairness. Up to now, some research has been developed at international level to investigate effects of these practices on relationships between hotels and their customers. The aim of this research paper is to examine the nature and various aspects of customer perceptions regarding yield management practices, focusing especially on fairness perceptions of application of different types of fences that may be employed to operationalise price discrimination. The paper comprises two main parts. In the first part, there is an exploration of the concept of perceived fairness, focusing also on implications for hotel decision making in application of yield management tools. Four hypotheses are formulated in this section. The second part presents the empirical research, the test of the formulated hypotheses and the main findings. In detail, the first part analyses application of revenue management tools, focusing on price discrimination, and exposes the risk of perceived unfairness by hotel guests. Further, possible drivers of perceptions are studied: price discrimination outcomes, familiarity and information. Referring to managerial implications, the criteria of designing price segments (rate fences) are described and analysed in their effectiveness. In the first part, based on comprehensive analysis of both, literature as well as hotel practices, the following four hypotheses are formulated: Hypothesis 1: Price discrimination is considered fairer in case the customer thinks of having obtained an advantage through it. Hypothesis 2: Offering customers preventive information on hotels’ pricing practices can enhance their perceptions of fairness. Hypothesis 3: As customers become more familiar with revenue management techniques, the unfairness perceptions of those practices are diminished over time. Hypothesis 4: Price discrimination is considered fairer if based on mutual perception of fairness as well as clear and logical fences. In the second part of the research paper, the empirical study conducted to test hypotheses is presented and the findings are discussed. Empirical research based on data from personal intercept survey of 2,257 respondents during the period 2006-2008 investigated customer fairness perceptions of revenue management practices. In the first part of the survey, respondents were asked to declare the following information (8 questions): age, gender, profession, type of typical hotel stays (hotel type and destination), hotel preference (staying mostly with international/national hotel chains or independent hotels), and frequency of hotel stays. This section was followed by 18 questions regarding use of revenue management tools and their acceptability with the last 9 questions regarding all different types of rate fences that may be used to apply price discrimination. The data was analysed using first and second generation quantitative methods. All four hypotheses are supported by our research findings, which also reflect noteworthy and relevant additional research results. For instance, our research suggests that fairness perceptions can be moderated by both – favourability of revenue management outcome as well as evaluation of price discrimination reasons. Thus, for example, customers may tolerate and accept some unfairness based on favourability/unfavourability of the outcome and do that especially in case they find the reasons behind price discrimination to be fair, which supports well the concepts of procedural and distributive justice. This all suggests that interpretation, perception and evaluation of fairness concept by customers are highly subjective and contextual by nature. In line with findings by Wirtz and Kimes (2007), our research results also support high influence of familiarity on fairness perceptions, suggesting that lack of information regarding price discrimination (i.e., unawareness of clear rules) may reduce perceived fairness, while sufficiency of information increases it. However, not only the amount of information on price fences, but also acceptance of these is important in increasing fairness perceptions. Our research findings also suggest high influence of fairness perceptions on reported behaviour of customers, including future patronage as well as internal and external complaints, which constitute valuable findings for academic researchers as well as business managers. Our study indicates, that over the last years consumers have started to pay more attention to hotel prices, comparing them more actively than before, which has also resulted in raising awareness and subsequently higher bargaining power of consumers, forcing hotels to be more flexible in setting prices than few years ago. This suggests also further shifts in fairness perceptions of consumers, especially in what they consider to be fair among price discrimination methods. Our findings also show that if a certain practice (e.g., price discrimination) spreads on the market, people adjust to it over time and have less negative evaluations as well as higher acceptance of this practice than at the moment of its market introduction. On the basis of our research results we also determined acceptability of different price fences by consumers and proposed a generalised model of price fence groupings based on fence types and consumer acceptability of various fences. In conclusion, our research has exposed the importance of employing price discrimination tools with care, due to risk of perceived unfairness by customers. It is crucial that revenue management tools are based on mutual perception of fairness as well as clear and logical fences. Finally, offering customers preventive information on hotels’ pricing practices can considerably enhance their fairness perceptions.