As many readers will already know,
when I’m not editing The Customer Service Blog, I also do university lecturing in
the disciplines of Marketing, Management and Business Studies. One of my areas of expertise is pricing
strategy, and how this can be used within marketing to maximise profitability.
So I was very interested to read a recent
media story about how the ‘Slug & Lettuce’ chain of pubs is going to charge
different prices at different times, depending on how busy the pub
is.
The technical name for this strategy
is ‘dynamic pricing’, and although the story has gained a lot of media publicity,
it’s really nothing new at all. In fact, this pricing strategy has been used in
pubs throughout the UK for many years, but under a different name. That name is
‘Happy Hour’.
Put very simply, a ‘Happy Hour’ (which
is often several hours) is when a pub charges less for certain drinks at quiet
times (usually early evening). This is done in order to encourage people to
visit the pub when it is less busy.
So when the Stonegate Group (which
owns the Slug & Lettuce chain) announced this new pricing strategy, it was
really just giving a fancy name to something that is not new at all.
I recently found a very interesting article
relating to ‘dynamic pricing’ by an academic at Anglia Ruskin University, and I
have reproduced it here under Creative Commons licence.
Darren Bugg
Editor, The Customer Service Blog
You may be used to paying more for a
plane ticket or a train journey during peak times. But now a major British
hospitality company has announced a similar approach to how much it costs to
drink beer.
Stonegate Group, which owns chains
including the Slug & Lettuce, has announced plans to increase drinks prices
by 20p when their pubs are at their busiest.
At a difficult time for the
hospitality industry, some might consider this a bit of a gamble. Certainly
there has been something of a backlash on social media with, one person
commenting: “If they push on with this there will be no such thing as a busy
Stonegate pub.”
A spokesman for Stonegate told the
Daily Telegraph that they are introducing the measure - known as ‘dynamic
pricing’ - to deal with rising staffing costs, and that customers would be kept
informed of any fluctuations in price.
The success of dynamic pricing -
especially common (but not popular) in travel - relies on whether or not a
company or event can guarantee demand from potential customers. If they have
other options, or feel that a price is simply too high, they may simply look
elsewhere.
That said, research has shown (perhaps
surprisingly) that consumers are generally fairly forgiving of price increases
if they consider the increase to be fair - perhaps if they know it’s down to
increased supply costs for example.
But if a price hike is specifically
related to a certain day or time of the day, it is quite possible that
customers will perceive the increase as unfair. This could then lead to a
negative perception of an establishment, and a loss of business.
Before that change even happens,
consumers tend to use their own reference points when making a judgement about
what a product ought to cost. These may derive from a menu or advertisement
(external reference points) or recalled from memory or personal knowledge about
what other people have paid (internal reference points).
For example, customers may know that
they generally pay £5 for a pint of beer at a particular pub, and they will use
that price as their starting reference for what an acceptable price might be.
They are using their reference points to assess price fairness. For a price
increase to be perceived as fair, the reference point needs to shift in
accordance with the new cost.
This is no simple task for any
business. In the case of dynamic pricing in a pub, a potential problem is that
the low price used during the less busy periods may become the customers’
reference point. The peak rate price then stands out as unjust.
Beer today, gone tomorrow?
So how can the problem of reference
points be overcome so that the price is not perceived negatively? Research
suggests that the way in which alternative pricing is presented is key to how
customer respond.
For example, one study showed that
golfers tended to think it was fair for a golf club to charge a regular price
for “prime time” slots and offer a 20% discount for other times. But they
thought it was unfair if the course charged 20% more for a prime slot compared
to a regular price at other times.
The response to the two scenarios was
different, even though the economic impact was the same. By changing the point
of reference, it is possible to change consumers preferences.
Pub landlords seeking to introduce
dynamic pricing may get a better response if they try and alter the drinkers’s
perception in a similar way. Presenting price changes as being cheaper during
off-peak times are likely to be viewed as a gain from the drinkers’
perspective.
When information is presented in a way
that make it seem like a gain for the customer, the evaluation is more positive
than in a scenario where there is predominantly a sense of loss or increased
cost.
Of course, it’s also important not to
lie to your customers. But research suggests that adjusting the presentation
and framing of new price structure may lead to a change that drinkers are more
willing to swallow.
Cathrine Jansson-Boyd
Reader in Consumer Psychology
Anglia Ruskin University
This article is republished from The Conversation under a Creative Commons licence
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