Cornell University School of Hotel Administration The Scholarly Commons

Articles and Chapters School of Hotel Administration Collection

2-1994

Perceived Fairness of Yield Management

Sheryl E. Kimes Cornell University, [email protected]

Follow this and additional works at: https://scholarship.sha.cornell.edu/articles

Part of the Hospitality Administration and Management Commons

Recommended Citation Kimes, S. E. (1994). Perceived fairness of yield management [Electronic version]. Cornell Hotel and Restaurant Administration Quarterly, 35(1), 22-29. Retrieved [insert date], from Cornell University, School of Hospitality Administration site: http://scholarship.sha.cornell.edu/articles/458/

This Article or Chapter is brought to you for free and open access by the School of Hotel Administration Collection at The Scholarly Commons. It has been accepted for inclusion in Articles and Chapters by an authorized administrator of The Scholarly Commons. For more information, please contact [email protected].

If you have a disability and are having trouble accessing information on this website or need materials in an alternate format, contact [email protected] for assistance. Perceived Fairness of Yield Management

Abstract Applying yield-management principles to rate structures is complicated by what consumers perceive as unfair practices.

Keywords service industries, revenue management, yield management, fairness, perception

Disciplines Hospitality Administration and Management

Comments Required Publisher Statement © Cornell University. Reprinted with permission. All rights reserved.

This article or chapter is available at The Scholarly Commons: https://scholarship.sha.cornell.edu/articles/458 H@feS €>p@rafi@ris

& f 0 X tl "~ %~ * *

Applying yield-management principles to rate structures is complicated by what consumers perceive as unfair practices by Sheryl E. Kimes they are charged different fares pay different prices depending on for the same flight and that they when they place their reserva­ AS YIELD MANAGEMENT gains will receive specific benefits if tions. A customer who pays more in popularity in many service in­ they accept certain restrictions. for a similar service and cannot dustries, the question of how In a sense, even though they are perceive a difference in the customers react to yield manage­ buying a similar seat, they are service may view the situation as ment remains unanswered. Con­ buying different products, because unfair. If customers view yield sumers seem to accept the appli­ of the associated restrictions. management as unfair, the cation of yield management in the In other industries, such as the increased revenues resulting from airline industry, but little is hotel and cruise-line industry, yield management may be short­ known about their acceptance of obvious restrictions may not be in term. On the other hand, nearly such a policy in other industries. place, although customers may all capacity-constrained service The airlines have been using yield management longer than Sheryl E. Kimes, Ph.D., an associate professor at the Cornell University other industries, and customers School of Hotel Administration, appreciates and acknowledges the valu­ seem to be used to the fact that able assistance of her colleagues and former students: assistant professor Michael Morgan, Ph. D.; associate professor Russell Bell, Ph.D.; Kathleen © 1994, Cornell University Dennison Contiguglia (MPS ’91); and Devin Kimble (MPS ’93).

22 THE CORNELL H.R.A. QUARTERLY firms should consider adopting Many airlines have solved the true in the hotel industry, where a yield-management system if problem with yield management. the cost of filling and then customers can be persuaded that They use a combination of seat- cleaning one more room is far yield-management measures are, inventory management and less than the revenue that is in fact, fair. pricing tools to achieve maximum generated by selling that addi­ In this paper I analyze the revenue. Since yield management tional room. So it makes a great perceived fairness of yield man­ can provide more revenue from a deal of sense for hoteliers to sell agement in the airline and hotel fixed capacity, it is an attractive some number of rooms at deeply industries by describing yield option. The airline industry was discounted rates (rooms that management, discussing the the first to address systematically otherwise would be vacant) so concept of perceived fairness, and the capacity-allocation problem long as the revenue is greater presenting the results of a survey with yield management and has than the cost of opening the on the perceived fairness of yield achieved a great deal of success.1 room. management in the airline and Other firms in the service Firms that institute yield- hotel industries. industries, such as lodging, car- management practices need to rental, cruise-line, and freight- be careful, however. Since yield Yield Management transport firms, have noticed the management concentrates on Yield management is a method success of yield management in maximizing yield, companies that can help a firm sell the right the airline industry and have using it may focus on short-term inventory unit to the right cus­ tried to adapt yield-management profits, ignoring the long-term tomer at the right time and for concepts to their industries. In profits that could result from the right price. It guides the each of those industries, yield is improving service or making decision of how to allocate undif­ the revenue per available inven­ other product adjustments. The ferentiated units of limited tory unit. For example, yield for a results can be disastrous.2 * Many capacity to available demand in cruise line is revenue per avail­ service organizations are suc­ a way that maximizes profit or able cabin. All those industries cessful because of the high- revenue. The question is, how have a fixed capacity, and all quality services they offer. much should one sell at what have easily segmented markets Focusing on efficient use of price and to which market and stochastic demand for each resources may take managerial segment? type of service. attention away from service, The concepts behind yield When service firms are con­ resulting in a loss of customers management can easily be seen strained by capacity, financial at considerable financial cost. in the airline industry. The yield success often depends on Consumers seem to accept the is either revenue per seat-mile management’s ability to use fact that airlines charge different or revenue per passenger-mile. capacity efficiently. Yield man­ prices depending on what restric­ Airlines typically offer several agement in capital-intensive tions are met, but how do cus­ price classes, such as full-fare, service industries such as the tomers of other types of services maxi-saver, and supersaver. airline industry is often equated react? In the airline and rental- Since the airlines cannot fill with revenue (or yield) maximiza­ car industries there are only a their planes with full-fare cus­ tion because of the high fixed-cost few major competitors, but in the tomers, they try to fill them by nature of the industry. The hotel industry there are many offering reduced fares. A tradeoff marginal cost of selling another competitors. A customer who develops between the desire for seat and transporting the passen­ discovers she or he is paying a filling all the seats and the desire ger in it is far less than the higher price for a room than a for selling seats at the highest marginal revenue. The same is customer who reserved a similar price. Owing to the perishable room a few weeks earlier may 1 Robert G. Cross, “Strategic Selling: Yield- nature of an airline’s inventory, Management Techniques to Enhance Revenue,” simply go elsewhere or not come an empty seat represents an presented to Airline Industry Seminar, back. That is simply not true of Shearson-Lehman Brothers, Key Largo, opportunity lost. The airlines Florida, February 1986; Peter Paul Belobaba, airline passengers, who once in must decide how many discount “Air-Travel Demand and Airline-Seat- the air cannot so easily change Inventory Management” (unpublished doctoral fares to sell while making sure dissertation, Massachusetts Institute of they have enough seats left to Technology, 1987); and Peter Paul Belobaba, 2 Robert H. Hayes and William J. “Application of a Probabilistic Decision Model Abernathy, “Managing Our Way to Economic sell to late-booking full-fare to Airline-Seat-Inventory Control,” Operations Decline,” Harvard Business Review, Vol. 58, passengers. Research, Vol. 37, No. 2 (1989), pp. 183-197. No. 4(1980), pp. 67-77.

FEBRUARY 1994 23 their reservations or the com­ view the transaction as unfair. reference profit and is behaving pany with which they’re doing Similarly, if a hotel imposes unfairly. business.3 substantial restrictions on cus­ How to increase prices. tomers in exchange for only a Several ways of increasing price Perceived Fairness somewhat lower price or without without incurring customer wrath The issue of fairness has been lowering the price at all, custom­ are available.8 One method is to studied extensively in the field of ers may view the transaction increase the reference price. marketing, and although most as unfair. Simply put, that means increas­ studies have involved nontravel The principle of dual entitle­ ing the rack, or full-fare, rate. products, we can learn from the ment holds that most customers Airline records show that 95 general issues presented. Several believe that they are entitled to a percent of the passengers receive researchers have shown that fair reasonable price and that firms some sort of discount. Most hotel behavior is instrumental to the are entitled to a reasonable customers also receive some maximization of long-run profits.4 profit.7 Three hypotheses emerge discount off the rack rate, and if Researchers use the concept of from that principle: (1) Custom­ informed of the discount, may a “reference transaction” when ers feel that raising the price to consider themselves lucky to discussing fairness.5 A reference maintain profits is fair. If costs have received it. transaction is how customers increase, customers consider it Another method of increasing think a transaction should be reasonable for the price of the price is to attach additional conducted and how much a given service to increase; (2) Customers services or products to the ser­ service should cost. Reference believe that raising the price to vices sold at the increased price. prices come from market prices, increase profits is unfair; and For example, additional ameni­ posted prices, and past experi­ (3) If costs decrease, customers ties, meal or drink discounts, ence with the company. For believe that it is reasonable for or incentives for future business example, customers of a particu­ the company to maintain the can be offered. The key is to lar hotel may know that they same price. That may be because increase the perceived value generally pay $80 for a standard the customers are paying what of the transaction. room, and so the reference price they think they should, or be­ Third, the service can be sold for a room at that hotel would cause they believe management as part of a package, obscuring be $80. should reap the rewards of its the price of the service. For Customers believe that the cost-cutting efforts. example, when a weekend hotel value to the firm should equal the If the principle of dual entitle­ special includes wine and meals, value to the customer.6 If that ment holds true, yield manage­ the customer may not know the relationship becomes unbalanced ment may be perceived to be price of the room. And when a by increasing the value to the unfair. Customers generally view cruise line includes the price of firm or decreasing the value to justified price differences (or air travel or ground transporta­ the customer, the customer may differences they perceive to be tion in the cruise package, the view subsequent transactions as justified) as fair, but they view customer only knows the total unfair. For example, if a hotel unjustified price increases to be price, not the cost of the indi­ increases the price for its rooms unfair. If customers believe that vidual components. for no apparent reason, it is the transaction is different from The fourth method is to attach increasing the firm value with­ the reference transaction only in restrictions to discounted prices out increasing the customer price, they may believe that the so that higher prices (with fewer value. The customer may then firm is receiving more than its restrictions) seem fair by com­ parison. Restrictions may include 3 It may be that the intrinsic differences between airlines’ and hotels’ market conditions are (1) booking a certain length integral to the successful way airlines use yield management, such that airlines’ yield-management practices are not all transferable to hotels. That is the long-debated and key issue of hotels’ limited ahead of time, (2) staying for success to date with yield management.—Ed. a minimum length of time, 4 Richard Thaler, “Mental Accounting and Consumer Choice,” Marketing Science, Vol. 4, No. 3 (1985), pp. 199-214; Daniel Kahneman, Jack L. Knetsch, and Richard Thaler, “Fairness as a (3) staying over a particular Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review, Vol. 76, night, (4) having a change No. 4 (1986), pp. 728-741 [and the box on page 25 of this issue of The Quarterly]; and Joel E. Urbany, Thomas E. Madden, and Peter R. Dickson, “All’s Not Fair in Pricing: An Initial Look or cancellation penalty, and at the Dual-Entitlement Principle,” Marketing Letters, Vol. 1, No. 1 (1989), pp. 17-25. (5) having a nonrefundable 5 Kahneman, Knetsch, and Thaler. 6 Kahneman, Knetsch, and Thaler. 7 Kahneman, Knetsch, and Thaler. 8 Thaler, p. 211-212.

24 THE CORNELL H.R.A. QUARTERLY 3*

Part of the economic theory of supply on Saturday night, even though it is as a means of optimizing their profit. and demand suggests that as an item generally their busiest time.” But a price that is high enough to becomes more scarce, its price should On the other hand, eliminating a clear the market during the peak go up. Like so many other economic discount is widely viewed as fair. season—setting demand equal to theories, however, this one fails when (Nearly 60 percent of the respondents supply—will probably be viewed as applied to many real-world situations. agreed with this proposition.) “What unfair, because scarcity is not a fair For the World Series, major-league this means,” Thaler suggested, “is reason for price increases.” baseball sets a ticket price too low to that you should always make your “On the other hand,” he continued, dampen demand for a relatively small stated price the highest price you “demand may also be relatively supply of tickets. Instead of raising the ever intend to charge for an item. Inelastic during off-peak times. It may price to cut down the demand, the Then you can offer discounts from not make any difference that, in April, baseball leagues allocate tickets that price as appropriate.” Vail’s or Aspen’s price is low and the among the various teams and allow He related the story of a ski-resort skiing is wonderful: people may just fans to line up. Restaurants and operator who wanted to charge higher not be able to get away then. More­ airlines often end up fully booked (with rates in February, when the snow was over, an appropriately low off-peak customers standing by for a table or ideal. Rather than add surcharges price—one that fills the resort—may seat), but rather than raise prices, when snow conditions were good, the make the peak prices seem just that they turn away business. operator set all rates at the February more unfair.” Three researchers contend that price, giving discounts when the So what? The real question, these pricing strategies, which do not skiing was poor. however, is one of punishment, Thaler reflect economic theory, are based on Another justification for raising explained. If individuals perceive a meeting a popular notion of fairness. prices is increased costs. “Passing on business as being unfair, will they In an article in American Economic cost increases is always perceived as punish that business, even at a cost to Review, Daniel Kahneman, Jack L. fair,” Thaler said, “although double- themselves? If a person thinks the Knetsch, and Richard Thaler suggest ticketing—marking up items that are laundry around the corner acted that fairness In pricing is, in fact, a already on the shelf—is considered unfairly, for instance, will that person constraint on profit-seeking.1 Working unfair.” If a restaurant simply in­ pay the cost of driving to a more in Canada, the three researchers creases its prices on Saturday night, distant laundry to punish the first one? presented thousands of respondents for example, people will think that’s “We set up two research studies to with hundreds of hypothetical situa­ unfair. But if the same restaurant test the premise that people would tions that involved the question of adds a small musical combo, and punish unfair sellers at a cost to when a price is fair, and when it isn’t. then raises prices with an entertain­ themselves,” Thaler said. “We asked In one of the situations, for instance, ment charge, that will be viewed as psychology students and business respondents were asked whether a properly passing on increased costs. students to play a game in which one store was justified in raising the price Inefficiency. Thaler argued that person was asked to be a ‘judge,’ who of snow shovels the day after a those results show an inverse could deprive other persons of money, blizzard. Such a price increase was correlation between fairness and if they were perceived as being unfair overwhelmingly condemned as unfair. economic efficiency. He noted that to a third person. But to take the “We concluded that scarcity was people view queues as more fair than money from the first person, the judge not a fair excuse for raising the price lotteries or “market-clearing” prices had to give up a certain amount of of an item,” Thaler told participants in for the sale of scarce goods. money as well. We found that people a seminar at Cornell University’s The perception of fairness prob­ would, for instance, pay $2 to deprive School of Hotel Administration. “The ably also interferes with the pricing of a person who was unfair of $8,” Thaler timing of a sale transaction is also not strongly seasonal items such as said. “We found support for our idea viewed as a fair reason to increase rooms in a seasonal resort. Thaler that people would incur expense to the price. We think this is why said: “In a market with strong periodic punish someone who had dealt restaurants do not raise their prices fluctuations in demand, a fixed unfairly with someone else.”—G.W. supply, and cost variability, price ' D. Kahneman, J.L. Knetsch, and R. Thaler, variations will be insufficient to clear [This item, adapted for use here, originally “Fairness as a Constraint on Profit Seeking: appeared in the November 1986 Cornell Hotel Entitlements in the Market,” American the market. Most resorts use in­ and Restaurant Administration Quarterly Economic Review, Vol. 76, No. 4 (1986). season pricing and off-season pricing (Vol. 27, No. 3), p. 7.—Ed.]

FEBRUARY 1994 25 reservation. If restrictions are Of the approximately 500 surveys two days before departure and is tied to different prices, customers that were left in guest rooms dur­ quoted a price 10 percent higher may view the transaction differ­ ing that time, 118 were returned. than that received by Lynn. ently and may view the different Half the distributed surveys dealt The practice was considered prices as fair. with pricing policies in the airline to be moderately acceptable (the Airlines have used that strat­ industry, and half dealt with mean was 3.67), but opinions egy effectively, associating vari­ pricing policies in the hotel in­ varied greatly (the standard ous restrictions with the sale of dustry. Of the 118 surveys re­ deviation was 2.32). The accept­ discounted seats. The more re­ turned, about half were airline ability differed significantly strictions the customer is willing surveys, and half were hotel (p = .0024) for the airline and to accept, the deeper the discount surveys. hotel industries. Respondents available. Customers are aware of The methodology was based rated the acceptability of the the restrictions and can choose to on surveys conducted by other practice as 3.0 for the airline take advantage of the discounts. researchers.9 The survey ques­ industry and 4.29 for the Restrictions and benefits. tions primarily presented differ­ hotel industry. If firms offer customers a benefit ent scenarios. Respondents were A similar survey question used such as a discount (a net gain to asked to rate the scenarios on a the same scenario except that not the customer), they may impose seven-point acceptability scale in all pricing information was made restrictions that will balance the which 1 was highly acceptable available to potential customers: discount. But if they go too far and 7 was highly unacceptable. An airline or hotel increases its price by 10 percent if a reservation and impose restrictions that are Of the 118 respondents, about is made three days or less before too strong, that will change the a third were women, about departure. It has not advertised balance of the transaction and be 60 percent did not pay for their this policy and does not inform perceived as unfair. That prin­ own business travel, and about customers that they can receive a ciple works in reverse, too. If a half traveled an average of one to lower rate if they book in advance. Lynn calls five days before depar­ firm wants to impose additional three days a month. How many ture and receives the lower price. restrictions on customers, it must of the respondents are “frequent Dana calls two days before depar­ give the customers something in flyers” is unknown. ture and is quoted a price 10 per­ return for this restriction—for cent higher than that received by example, a discount, additional Role of Information Lynn. amenities, or an upgrade. Again, Information plays a large part in This practice was rated fairly the question is twofold: How large determining what the customer unacceptable (mean, 5.72; stan­ a restriction is acceptable, and considers to be a reference trans­ dard deviation, 1.88). It was rated how large a benefit must be action. A firm can greatly influ­ equally unacceptable in both extended? ence the amount and type of industries. Two other questions also By imposing restrictions, the information its customers receive, firm takes away some of the value thereby influencing customers’ addressed the information issue: that customers gain from the notions of what is acceptable. An airline or hotel allows its reser­ vation agents to discount prices up transaction and increases the Several questions, therefore, were to 20 percent off the regular rate. value to the firm. To correct that asked so that I could examine the Customers who do not insist on a imbalance, the firm must offer the role of information. The first such lower rate receive no discount. If customer enough to counter the question dealt with respondents’ customers push for a lower rate, perceived value the firm receives. reactions when all pricing infor­ they receive a 10-percent discount, and if they threaten to use a com­ If the benefit to the customer is mation is made available: petitor, they receive a 20-percent not perceived as sufficient, cus­ An airline or hotel increases its discount. tomers will view the transaction price by 10 percent if a reservation That practice, common in the as unacceptable. is made three days or less before hotel industry, was rated ex­ departure. It has advertised this tremely unacceptable (mean,6.45; The Survey policy and always informs custom­ ers that they can receive a lower standard deviation, 1.28). Opin­ An eight-question survey was rate if they book in advance. Lynn ions on the issue did not vary administered to a convenience calls five days before departure and significantly between the airline sample of travelers at the Statler receives the lower price. Dana calls and hotel industries (p = .176). Hotel in Ithaca, New York, in 9 Thaler; and Kahneman, Knetsch, and One other question dealt November and December 1992. Thaler. with information availability

26 THE CORNELL H.R.A. QUARTERLY and its effect on the reference An airline or hotel charges a 50- deviation, 2.35), and it did not transaction: percent penalty for cancellations. vary significantly from the im­ In exchange for imposing this mediate 20 percent off. The rating An airline or hotel is advertising a policy, it may choose to extend no special rate reduction, but if cus­ benefit to its customers or it may did not vary by industry (airline tomers do not ask for the special offer a benefit. Please rate each of mean, 4.31; hotel mean, 4.20). rate, they are charged the normal the following: no benefit, rate re­ Benefits and no-refund price. duction of 20 percent, additional policies. Respondents were also In that situation the firm is 1,000 frequent-flyer miles or free asked to assess the same benefits breakfast, class or room upgrade, making the information known in return for a no-refund policy on but not taking the additional step rate reduction of 20 percent on next purchase. cancellations: of offering it directly to the Respondents rated the no­ An airline or hotel has a no-refund customer. That practice was benefit option as extremely un­ policy for cancellations. In exchange rated highly unacceptable (mean, for imposing this policy, it may acceptable (mean, 6.36; standard 6.36; standard deviation, 1.40). choose to extend no benefit to its deviation, 1.52). The firm ben­ Respondents felt more strongly customers or it may offer a benefit. about the use of the practice in efited from the transaction, but Please rate each of the following: the customers did not. The prac­ no benefit, rate reduction of 20 per­ the airline industry than in the tice was viewed as even less cent, additional 1,000 frequent- hotel industry (airline mean, flyer miles or free breakfast, class acceptable in the airline industry 6.72; hotel mean, 6.03; p = .0054). or room upgrade, rate reduction of than in the hotel industry (airline 20 percent on next purchase. Imposition of Restrictions mean, 6.72; hotel mean, 6.04). Again, respondents viewed the Respondents rated the option When a firm deviates from its provision of no benefit as highly of a 20-percent rate reduction as reference transaction it must unacceptable (mean, 6.46; stan­ moderately acceptable (mean, balance the perceived gains and dard deviation, 1.48), and it was 4.20; standard deviation, 2.30), losses to each party. If the even less acceptable for airlines with no significant difference balance seems to be tipped in than hotels (airline mean, 6.92; between industries (airline mean, favor of the firm, customers may hotel mean, 6.05). 4.28; hotel mean, 4.12). Custom­ view the transaction as unfair. If The option of a rate reduction ers received a benefit in return customers perceive the transac­ of 20 percent was viewed as mod­ for the restriction. tion as balanced, they will view erately unacceptable (mean, 4.75; The benefit of additional fre­ it as fair. Finally, if customers standard deviation, 2.24), indicat­ quent-flyer miles or a free break­ ing that the respondents did not perceive that the balance is in fast was not a hard-cash benefit, see it as quite enough in return their favor, they will view the but it did offer customers some­ for the no-refund policy. The situation as highly acceptable. thing in return for the restriction. benefit was viewed similarly for In a yield-management system It was rated moderately unaccept­ both industries (airline mean, the firm can choose to give able (mean, 4.94; standard 4.89; hotel mean, 4.63). customers a benefit, but in return deviation, 2.07), indicating that The benefit of additional for that benefit, it may apply respondents did not view it as frequent-flyer miles or a free restrictions. How large a benefit sufficient. The rating did not vary breakfast was viewed as unaccept­ should the firm give, and what significantly by industry (airline able (mean, 5.29; standard devia­ restrictions are acceptable? mean, 5.10; hotel mean, 4.80). tion, 2.11), indicating that the Three questions dealt with the Similarly, respondents did not respondents wanted more in issues of restrictions and ben­ view the provision of a class return. Attitudes did not vary by efits. Two of the questions tested upgrade or room upgrade as an industry (airline mean, 5.57; the impact of different restric­ acceptable tradeoff for the hotel mean, 5.03). tions, and one question tested the 50-percent cancellation penalty The benefit of a class or room value of one type of benefit. (mean, 4.95; standard deviation, upgrade was rated almost the Respondents were asked to rate 2.09). The rating did not vary same as the previous benefit the acceptability. significantly by industry (airline (mean, 5.29; standard deviation, Benefits and penalties. Two mean, 4.91; hotel mean, 4.98). 2.07). The rating did not vary questions covered the imposition The benefit of a rate reduction by industry (airline mean, 5.49; of cancellation penalties. One of 20 percent on the next purchase hotel mean, 5.10). question dealt with a 50-percent was viewed as moderately accept­ The benefit of a rate reduction penalty: able (mean, 4.25; standard of 20 percent on the next purchase

FEBRUARY 1994 27 was viewed as moderately unac­ The restriction of a required example, if the associated benefits ceptable (mean, 4.86; standard stay over a weekend day, a com­ or restrictions change, or if cus­ deviation, 2.21). It was rated the mon airline practice, was rated tomer knowledge of the transac­ same as the immediate 20-percent moderately unacceptable (mean, tion is altered, the opinion on the off. The attitude was similar for 4.75; standard deviation, 2.08). It acceptability of a transaction both industries (airline mean, was more acceptable in the airline may change. 4.98; hotel mean, 4.75). industry than in the hotel indus­ Customers view deviations Benefits and restrictions. We try (airline mean, 4.10; hotel from the reference transactions then turned the question around mean, 5.33). in the airline and hotel industries and asked about restrictions in The restriction of a minimum differently. One reason for the return for a 30-percent-off benefit: stay of three days was rated difference may be the level of An airline or hotel charges 30 per­ moderately unacceptable (mean, customer experience. Customers cent less for reservations made 28 4.70; standard deviation, 2.26), accept yield-management prac­ days in advance. In exchange for and it was more acceptable for tices when dealing with airlines this discount, it may impose a pen­ airlines than hotels (airline alty. Please rate each of the follow­ because they have been exposed ing: no refund, 50-percent refund, mean, 4.17; hotel mean, 5.17). to them. They may not view the no refund but can reserve for an­ The restriction of a maximum practices as just, but they view other date, and no refund but can stay of seven days was rated un­ them as usual. reserve for another date subject to acceptable (mean, 5.49; standard In particular, practices such as one of these restrictions: required deviation, 1.999). The opinion did advertising and charging different stay over a weekend day, minimum stay of three days, maximum stay not vary by industry (airline prices or imposing certain restric­ of seven days. mean, 5.31; hotel mean, 5.66). tions on discounted reservations Respondents rated the no­ are not viewed as particularly refund, option as unacceptable Perceived Differences unfair in the airline industry, but (mean, 5.98; standard deviation, The final question asked the may be seen as unfair in the hotel 1.75). It was seen as too large a respondents to evaluate one of industry. restriction for the 30-percent off. these scenarios: Some of the differences may be The rating did not vary signifi­ (1) Two airline passengers who are due to the differences between the cantly by industry (airline mean, sitting next to one another have a two industries. The airline indus­ 5.94; hotel mean, 6.02). conversation on board their flight. try has a small number of com­ It seems that Glen’s ticket cost petitors, while the hotel industry The 50-percent refund was $500, but Pat paid only $400. Pat viewed as a fairly acceptable made a reservation 30 days before is very competitive. Also, the restriction in exchange for the arrival, and Glen made a reserva­ typical price paid for an airline 30-percent-off benefit (mean, 4.36; tion the day before. (2) Two hotel seat is much higher than that standard deviation, 2.00) and did guests have a conversation in the paid for a hotel room (although not vary by industry (airline restaurant. Their rooms are identi­ not necessarily so for an entire cal and next to one another. It seems hotel stay) and you can’t change mean, 4.55; hotel mean, 4.20). that Glen paid $100 for a room, but The option of no refund but can Pat paid only $80. Pat made a res­ seats from one airline to another reserve for another date was rated ervation 30 days before arrival, and mid-flight. moderately acceptable (mean, Glen made a reservation the day 3.36; standard deviation, 2.23). It before. Advice to the Hotel Industry was significantly more acceptable The situation was rated moder­ Certain yield-management in the airline industry than in the ately acceptable (mean, 3.30; practices are more acceptable hotel industry (airline mean, 2.32; standard deviation, 2.23). Respon­ than others. To succeed with hotel mean, 4.29). dents considered it more accept­ yield management, a hotel has The additional restriction in the able in the airline industry than to concentrate on the acceptable scenario of no refund but can in the hotel industry (airline practices and avoid the unaccept­ reserve for another date subject to mean, 2.78; hotel mean, 3.66). able ones. restrictions was associated with a Acceptable practices. Sce­ reduction in acceptability (mean, Discussion narios that were rated fairly 4.27; standard deviation, 2.19). When the terms of the actual acceptable had one or more of Again, it was more acceptable in transaction deviate from the these characteristics: (1) informa­ the airline industry than in the reference transaction, customer tion on the different pricing hotel industry (airline mean, 3.44; opinion on the acceptability of the options was made available, (2) a hotel mean, 5.02). transaction may change. For substantial discount was given in

28 THE CORNELL H.R.A. QUARTERLY return for cancellation restric­ discount. Restrictions that are too customers may feel they are tions, (3) reasonable restrictions strong will upset the balance of being taken advantage of. were imposed in exchange for a the transaction, but acceptable If firms change the basis of the discounted rate, and (4) different restrictions will create a balance. reference transaction without prices were charged for products For example, in this study respon­ informing customers, customers perceived to be different. In all dents viewed a broad restriction have no way in which to assess the cases, there was a deviation from on the length of stay as unaccept­ fair-market price. For example, the reference transaction, but able (e.g., seven days) but a mod­ many hotels will offer any cus­ respondents viewed the change erate restriction on the mini­ tomer a lower rate if the customer as acceptable. mum length of stay acceptable asks for it. If customers do not First, when a hotel advertises (e.g., three days). know that they can ask for and that different prices will be Fourth, if a firm differentiates receive a lower price, they may charged based on when people its products so that customers later view the transaction as make their reservations, custom­ view them as different, it can unacceptable (should they dis­ ers view the resulting reference charge different prices for those cover the truth after the fact). transaction as moderately accept­ products. As opposed to the three able, including the reference price. previous practices, this practice Fairness is Key For example, a hotel can advertise represents a change in the actual The intent of this research was to the various rates available and reference transaction instead of a discover how customers view the restrictions or benefits associ­ change in the balance of the yield-management practices in the ated with each of the rates. transaction. The entire way in hotel and airline industries. Many The terms of the reference which customers view the trans­ common practices used in the transaction have been deviated action is altered because the hotel industry were viewed as from in that the rules for conduct­ product they are purchasing is highly unacceptable by the ing the transaction have changed, altered. For example, a hotel may survey respondents. but customers have been informed charge higher prices for rooms If a hotel is to be successful of the change. Moreover, custom­ with a view or for rooms on an with yield management, it must ers have the option of receiving a upgraded floor. practice it in such a way that benefit: a lower price. Unacceptable practices. customers view the transactions The second acceptable practice Yield-management practices as fair. If a hotel operates in a is giving a substantial discount in viewed as unacceptable included manner considered unfair, it risks return for cancellation restric­ (1) offering insufficient benefits alienating its customers. While tions. By imposing restrictions, in exchange for restrictions, the hotel may receive short-term the hotel takes away some of the (2) imposing too severe a restric­ benefits from yield management, value that customers gain from tion on discounts, and (3) not it may find the practice to be the transaction and increases the informing customers of changes in unprofitable in the long run. value to the firm. To correct that the reference transaction. Hotels Hotel managers should concen­ imbalance, the hotel must offer should avoid those practices. trate on maintaining the balance the guest enough to counter the First, if hotels do not offer of the reference transaction. By customer’s loss. For example, sufficient incentives to customers using the yield-management Marriott offers a substantially in exchange for the imposition of practices that consumers find lower price for advance pur­ restrictions, customers are likely acceptable, managers will increase chases.10 If the benefit to the to view the practice as unaccept­ the probability of a successful customer is perceived as suffi­ able. For example, in this study yield-management system. cient, customers will view the respondents did not view a free If the hotel industry is to pur­ transaction as acceptable. breakfast or a room upgrade as sue yield-management practices Third, if a hotel offers custom­ an acceptable tradeoff for cancel­ commonly used in the airline ers a discount (a net gain to the lation penalties. industry that are viewed as fairly customer), it may impose restric­ Second, if there is too severe a acceptable, hotel managers need tions that will counterbalance the restriction on discounts, custom­ to educate their customers about ers will perceive that the firm has the practice of yield management

10 Richard D. Hanks, Robert G. Cross, and tilted the transaction in its favor. in the hotel industry. As cus­ R. Paul Noland, “Discounting in the Hotel For example, if a hotel imposes a tomers come to view it as usual, Industry: A New Approach,” The Cornell Hotel nonrefundable, nonchangeable they may become more amenable and Restaurant Administration Quarterly, Vol. 33, No. 1 (February 1992), p. 22. restriction on a discounted room, to its use. CO

FEBRUARY 1994 29