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Pricing Psychology -Increasing Profits and Satisfying Hotel Guests

In collaboration with RateBoard, the renowned neuroscientist, award-winning author, and Professor of Consumer Behavior, Dr. Kai-Markus Müller, provided fascinating insights into the world of pricing psychology during our webinar highlight in December.

Experiences are valued more than products

Research indicates that people assign a much higher value to experiences than to products, as highlighted by Prof. Dr. Kai-Markus Müller. In the eyes of consumers, experiences are therefore considered much more valuable than purchased products. This perception intensifies even further as the consumer's annual income increases. However, the question remains: how much can I charge for my product? Price increases often come with the fear of losing customers. Nevertheless, the willingness to pay is often higher than one might expect. Prof. Dr. Kai-Markus Müller illustrates this with an example:

In Germany, tap water costs 0.2 cents per liter. If you put it in a bottle, you can charge 300 times more for the same product. If this bottle has a brand, the value increases by 800 times. The value can be increased even by 10,000 times if the bottle is designed by a well-known designer and served in a rooftop bar in New York. The brand Evian was able to extract even a 15,000-fold value from the product water with its Brumisateur.
Giving a product a brand and presenting it exceptionally can lead to a very high willingness to pay. 

 

Influenced perception

"What we perceive first changes the perception of what we perceive next." This effect also applies to pricing, as highlighted byProf. Dr. Kai-Markus Müller. The first price we see sets an anchor in our minds and serves as a reference point for evaluating  all subsequent prices. For instance, fashion sellers strategically present a very expensive product initially, making other items seem more affordable. In the hotel industry, this effect can be employed by offering a much more expensive King Suite alongside a suite that is actually for sale. This makes the suite appear significantly cheaper, and consumers feel like they are getting a better deal.

Another effective strategy is to list the most expensive items at the beginning of a drink or food menu. An experiment has shown that people then perceive the mid-priced products as more economical. In total, a higher sales value was achieved than when listing the cheap drinks first, as customers also anchor with the first product. 

Anchors emerge as one of the most effective ways to shape perceptions of prices. Regarding whether prices should end with '...99' or be rounded up, Prof. Dr. Kai-Markus Müller suggests making this decision based on the perceived value of the product or service. If it should appear high-quality, rounding up the price is recommended.

 

The price makes the wine taste better

Various studies have shown that the price also affects the perception of product quality. For example, a customer may find a wine to taste better simply because it is more expensive.

Finding the right price is not always easy because it determines demand and profit. It is often assumed that customers have a certain price threshold beyond which they are unwillingto go. However, this price threshold is often more aligned with the hotelier’s perspective rather than the customer’s. Customers are often willing to pay more than one might think, Müller notes. For hotel businesses, there is the opportunity to offer different products to test the price threshold of customers. If a supposedly higher-value product is offered and well-received by customers, in many cases, there is no price threshold.

 

Less-is-better-effekt

Prof. Dr. Kai-Markus Müller shared  another intriguing study by Christopher Hsee of the University of Chicago. One group was shown an ice cream cup with a capacity of 10 ounces and 8 ounces of ice, while the other group saw a 5-ounce cup with 7 ounces of ice. The second cup seemed like a great deal to the participants, and their willingness to pay was higher than for the first cup, even though the second cup offered less ice.
However, this effect no longer works once customers see both cups. Then,they prefer the first cup due to the amount of ice. The individual product therefore always has the highest willingness to pay.
Hence, here is our tip for hoteliers: always offer a spectacular individual product.

This effect works similarly in the hotel industry, as seen in this example: The Hotel Krone and the Hotel Sonne have similar characteristics, such as the number of stars and a half-board offer. Hotel Sonne has additional wellness offerings, but some of the saunas are out of service and some equipment in the fitness room is broken. Despite having fewer amenities to offer, Hotel Krone received better ratings by customers in a survey. Therefore, it is important to offer flawless products.

In communication with customers, it is recommended to highlight additional free services rather than focusing on"instead-of" prices, such as free E-bike rental, complimentary welcome drinks, and the like.

 

Case study: Northern Germany

In a large study conducted for a hotel resort in Northern Germany, Müller measured the optimal price for a specific apartment per participant subconsciously by analyzing response times. The participants’ personalities were also examined. The results of these tests led to the categorization of two distinct groups: one group wanted to pay very little for the apartment, rendering them of minimal relevance to the resort. The other group was willing to pay a very good price. Upon closer examination of their personalities, it became evident that individuals in this group were less open to new experiences and more closed. In response, the resort adjusted its marketing strategy to specifically target this group, leading to remarkable success.
This case underscores the close interplay between pricing and marketing, illustrating how they can mutually influence each other.

At the end of his presentation, Prof. Dr. Kai-Markus Müller emphasizes how important it is to focus on unique selling propositions (USPs). This approach naturally diminishes  the fear of competition.

 

Summary

  • The tourism industry has significant potential for price psychological developments because experiences are unconsciously weighted higher than objects. People are willing to spend money on vacations.
  • Price perception can be easily influenced, with factors such as brand, environment and anchors playing significant roles.
  • Prices influence the perception of quality.
  • Neuroscience shows that price thresholds are often in the brains of sellers, not buyers. 
  • Additional offerings must be flawless.

Prof. Dr. Kai-Markus Müller has shown in his webinar that insights into pricing psychology provide significant added value for hotel businesses in determining prices. Knowing the right base price for a product and psychological pricing tricks are also important when using dynamic pricing. Only then can revenue management software define the best daily price based on it and generate maximum revenue for the company.

Speak to one of our hotel experts without obligation about the psychological impact of dynamic pricing and the latest innovations in revenue management: 

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