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14 Revenue management and price negotiation.

Revenue management is a concept concerned with selling the right product to the right customer for the right price at the right time, thereby maximizing the firm's revenue. (1) In other words, revenue management refers to a technique used to maximize the revenue, or yield, obtained from a services operation, given limited capacity and uneven demand. In fact, yield management is the term often used by airlines and hotels to describe the revenue management process. Within the hospitality and tourism industry, yield management has come into more widespread use with the expansion of computerized property management systems. In its most basic form, yield management utilizes a firm's historical data to predict the demand for future sales, with the goal of setting prices that will maximize the firm's revenue and profit.

Revenue Management

Revenue management is a valuable tool within the hospitality and travel industry for several reasons: (2)

* Perishable inventory. Most hospitality and travel services are perishable. If a hotel room is not occupied one evening, or an airline flies with empty seats, the potential revenue for those services cannot be captured at a later date. Similarly, catering facilities and meeting space represent perishable inventory for a lodging, meeting, or food service facility.

* Fluctuating demand. Most hospitality and travel firms experience demand that rises and falls within a day, week, month, or year. During high demand periods, services are sold at or near full price. During the low demand, or non-peak periods, capacity is left unused.

* Ability to segment customers. Firms must be able to segment customers based on price and offer a discounted price to a selective group of customers. In other words, the various customer segments must have different price sensitivities and economic values for the same type of product or service.

* Low variable costs. Hospitality and travel firms often have a large ratio of fixed to variable costs, which would favor a high volume strategy. The marginal cost of serving an additional customer is minimal as long as there is excess capacity.

If consumers could not be segmented based on price and economic value, then firms could employ a mass marketing strategy with one basic marketing program for all consumers.

Selective Discounting

One of the cornerstones of yield management is the ability to offer discounts to only a select group of customers. Rather than offer one price for a given time period, either peak or non-peak, firms are able to discriminate between consumers. This minimizes the effect of lost revenue resulting from consumers paying a discounted price when they would have willingly paid full price. In order to accomplish this, service firms normally place restrictions on the discounted price so that consumers must sacrifice something in return for the discount. For example, catering facilities and hotels can require a minimum amount of revenue or volume, or require guests to book during off-peak times.

Historical Analysis

One of the major problems facing service firms using revenue management systems is the determination of the amount of capacity to make available at the discounted rate. As mentioned earlier, yield management makes use of historical data in predicting future trends. The historical booking curve can be constructed using data from the same period in the previous year, and adjusting for recent trends seen in the most recent periods. The curve can be used to compare current reservations with historical patterns in an effort to monitor room rates and pricing strategies. The curve in Figure 14-1 illustrates a typical pattern for a large conference hotel.


The solid line in the graph represents the historical pattern for room sales prior to the date in question. In general, the hotel would determine a comfort zone and construct a confidence interval around the actual occupancy rate. If prior sales are within this interval, then the hotel continues using its current discounting policy. If the occupancy rate exceeds the upper level, then the hotel will temporarily reduce the number of discounted rooms and rates. If the occupancy rate falls below the lower level, then the hotel will offer more discounted rooms and rates until the occupancy rate is brought back within the predicted interval.

Hotel sales departments are given room allotments based on past history. Within these allotments, the sales staff must determine the allowable price range for each group based on the total potential revenue from all sources such as guest rooms, meeting room rental, and food and beverage. Rental car companies and airlines perform a similar analysis and set rates based on the relationship between current demand and historical demand. Finally, catering facilities must also manage the ratio of actual revenue to potential revenue when they sell their services in advance. It may be prudent to turn down a piece of business if history would suggest that you might have other opportunities at a higher rate or overall potential revenue.

Revenue Management Equation

As stated earlier, the goal of revenue management is to maximize the revenue, or yield, from a service operation. The following equation is a simplified version of the calculation used in actual programs.

Maximize (Actual Revenue/Potential Revenue)

The potential revenue for a hotel would be the number of total rooms available for sale multiplied by the rack rate for those rooms. For instance, if a hotel had 200 rooms that all had a rack rate of $100, the potential room revenue for that hotel would be $20,000 per night. However, if the hotel had an occupancy rate of 70 percent and an average room rate of $80, then the actual revenue would be $11,200 [(0.7 x 200) x $80]. The yield in this case would be 0.56 ($11,200/$20,000). The goal is to maximize this figure, or get as close to 1.0 as possible. What if this hotel would have offered more discounts and had an occupancy rate of 80 percent and an average room rate of $75? The actual revenue would have been $12,000 [(0.8 x 200) x $75], or a yield of .60 ($12,000/$20,000). As you can see, the potential revenue remains the same, but the actual revenue will change depending on the level of discounts and the price sensitivity of consumers.

This example is overly simplified in order to demonstrate the basic use of yield management. In reality, hotels have different rooms with different rack rates, and many different market segments, including business and pleasure transients, and various group markets. Each of these major segments can be divided into smaller subsets. For instance, the group market can be segmented into association, corporate, and incentive travel. Hotels have created positions and, in some cases, departments that are responsible for revenue management. These individuals perform historical booking analysis and confer with the hotel's executive committee to determine discounting policies.

Another area that needs to be considered in determining a hotel's discounting policy is the additional revenue that is generated from guests other than the room revenue. For example, hotels can earn additional revenue from guests in the restaurant, the bar, fitness centers, parking, laundry services, room service, corporate services such as faxing and shipping, and by catering for groups. Rather than analyze each individual guest, hotels look at the major market segments and calculate a "multiplier" that can be used to adjust room revenue for additional revenue potential. This is important because hotels must maximize the revenue they receive from all sources. For instance, it would be a mistake to take a transient guest who paid $10 more a night than a business traveler, if the business traveler is likely to spend more than $10 a day for additional services. Similarly, turning down a group because of high demand among transient customers may result in a loss of revenue from catering services that would have been purchased by the group. However, in high peak demand seasons, such as fall in New England, hotels can charge considerably more to transient customers than groups and it would be a mistake to book a group well in advance and forego this additional revenue.

Revenue management has had a major impact on the hospitality and travel industry. The advances in computer technology have improved the ability to estimate demand and revenue. In addition, it has become easier to segment markets and employ selective discounting through vehicles such as the Internet. In the future, revenue management programs will become more affordable to smaller operations. In fact, simple yield management models can be developed using a common spreadsheet program.

Revenue Management and Group Displacement

Probably the most difficult decision that a hotel needs to make is when to turn away business. With a limited amount of capacity, salespeople may need to choose between two different accounts, or turn down an account because there is a good probability that the hotel will be able to obtain a more profitable account for the same time period. This is the major challenge of revenue management--group displacement. Who do you accept and at what rate? It is easy to take the safe approach and book the first group that meets your minimum standards ("a bird in the hand is worth two in the bush"). However, the hotel may have been able to make more money had it waited.

As an illustration of this point, one of the authors waited until the last minute to make plans for the New York Hotel Show during a year in which the New York Marathon was being held at the same time. Needless to say, many of the city's hotels were "sold out" of rooms. After calling around, it was interesting that most of the area properties of the Marriott chain still had rooms available. At first glance, one might assume that the chain had obtained its fair share. However, upon further examination, it is clear that the Marriott utilizes an effective revenue management program. The other hotels booked their rooms as early as possible at a target rate. In contrast, Marriott based its decision on demand and was able to sell its remaining rooms at the highest rate possible, thereby increasing its revenue per available room (REVPAR) and average daily rate.

Assume for example that you have a 500-room hotel with a corporate rate of $150 and a potential group willing to pay $100. Given the following occupancy and group pattern, calculate the revenue gain (loss) per day and the overall effect of displacement (note: displacement = revenue gained revenue lost).

What is your decision? Do you turn down the group or displace the corporate travelers?

What other factors should be considered when making this kind of decision?

Setting Prices

Once a firm's pricing objectives are set, it is necessary to identify the role that price will serve in the product's overall marketing strategy. Price can be set high to restrict the firm's market to a limited segment of buyers (such as luxury hotels and their upscale catering departments), set low to attract buyers (such as economy hotels), or kept neutral to emphasize other aspects of marketing (e.g., midscale hotels and large contract food service firms). Economic value can be defined as the sum of a product's reference value, or the cost of the competing product that the consumer perceives as the closest substitute, and a product's differentiation value, or the value to the consumer (both positive and negative) of any differences between a firm's offering and the reference product.

When management establishes prices, three approaches can be used either individually or in combination with one another. The three approaches are: (1) cost-oriented pricing, (2) demand-oriented pricing, and (3) competitive pricing.

Cost-Oriented Pricing

As the name implies, cost-oriented pricing uses a firm's cost to provide a product or service as a basis for pricing. In general, firms want to set a price high enough to cover costs and make a profit. There are two types of costs that can be considered: (1) fixed costs and (2) variable costs. Fixed costs are incurred by a company when it goes into business and they do not vary with changes in sales volume. For example, food service providers must invest in a building, kitchen equipment, and tables before they even begin to serve customers. Variable costs are associated with doing business, and they vary with changes in sales volume. For example, food service operations incur costs for food, labor, and cleaning that are directly related to the level of sales.

Breakeven analysis can be used to examine the relationships between costs, sales, and profits. The breakeven point (BEP) is the point where total revenue and total cost are equal. In other words, the BEP in units would be the number of units that must be sold at a given contribution margin (price-variable cost) to cover the firm's total fixed costs:

[BEP.sub.units] = Total fixed costs/(Selling price - Variable cost)

The BEP in dollars can be calculated by multiplying the BEP in units by the selling price per unit. Breakeven analysis is a seemingly easy method for analyzing potential pricing strategies, however, one must be careful to use only costs that are relevant to the decision so that the results are accurate.

Figure 14-2 illustrates the relationships between costs, sales, and profits. As mentioned above, fixed costs are those costs that are incurred regardless of sales. Therefore, they remain constant with changes in sales volume and are represented by a horizontal line. The total cost line intersects the fixed cost line where it begins on the vertical axis and increases with volume to account for variable costs. The total revenue line begins at the origin and increases with volume. The BEP in units is the point where the total revenue line intersects with the total cost line. When firms operate at volumes less than the BEP, losses are incurred because total revenue is not enough to cover the total cost of producing and marketing the product. When volume exceeds the BEP, firms will make a profit because total revenue exceeds total cost.


However, breakeven analysis does not account for the price sensitivity of consumers or the competition. In addition, it is very important that the costs used in the analysis are accurate. Any changes in the contribution margin or fixed costs can have a significant impact on the BEP. Finally, the breakeven formula can be easily adjusted to account for a desired amount of profit. The desired amount of profit would be added to the numerator (total fixed costs) and would represent the additional number of units that would need to be sold at the current contribution margin to cover the desired amount.

Cost-plus pricing is the most basic approach to pricing in the industry. The price for a product or service is determined by adding a desired mark-up to the cost of producing and marketing the item. The mark-up is in the form of a percentage and price is set using the following equation:

Price = ATC + m(ATC)

where: ATC = the average total cost per unit m = the mark-up percentage/100%

The average total cost per unit is calculated by adding the variable cost per unit to the fixed cost per unit. The fixed cost per unit is simply the total fixed costs divided by the number of units sold.

The cost-plus pricing approach is popular because it is simple to use and it focuses on covering costs and making a profit. However, management must have a good understanding of the firm's costs in order to price effectively. Some costs are truly fixed, while other costs may be semi-fixed. Semifixed costs are fixed over a certain range of sales, but vary when sales go outside that range. In addition to the problem of determining the relevant costs, the cost-plus approach ignores consumer demand and the competition. This may cause a firm to charge too high, or too low, of a price.

Target-return pricing is another form of cost-oriented pricing that sets price to yield a target rate of return on a firm's investment. This approach is more sophisticated than the cost-plus approach because it focuses on an overall rate of return for the business rather than a desired profit per unit. The target-return price can be calculated using the following equation:

Price = ATC + (desired dollar return/unit sales)

The average total cost per unit is determined the same way as in the cost-plus approach, and it is increased by the dollar return per unit necessary to provide the target rate of return. Hotels can use target return pricing to determine a target revenue per available room (REVPAR) for guest rooms. It is also common to want to generate a certain return per square foot of meeting space. This approach is also relatively simple, but it still ignores competitors' prices and consumer demand.

Demand-Oriented Pricing

Demand-oriented pricing makes use of consumer perceptions of value as a basis for setting prices. The goal of this pricing approach is to set prices to capture more value, not to maximize volume. A price is charged that will allow the firm to extract the most consumer surplus from the market based on the reservation price, which is the maximum price that a consumer is willing to pay for a product or service. This price can be difficult to determine unless management has a firm grasp of the price sensitivity of consumers. Economists measure price sensitivity using the price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price. Assuming an initial price of [P.sub.1] and an initial quantity of [Q.sub.1], the price elasticity of demand ([[epsilon].sub.p]) for a change in price from [P.sub.1] to [P.sub.2] can be calculated by:

[[epsilon].sub.p] = ([Q.sub.2] - [Q.sub.1])/[Q.sub.1]/[P.sub.2] - [P.sub.1])/[P.sub.1]

The price elasticity of demand is usually negative because price increases tend to result in decreases in quantity demanded. This inverse relationship between price and quantity demanded, referred to as the law of demand, is representative of most products and services. However, the demand for products and services can demonstrate varying degrees of elasticity. The demand for products is said to be elastic if a percentage change in price results in a greater percentage change in quantity demanded. Conversely, the demand for products is said to be inelastic if a percentage change in price results in a smaller percentage change in quantity demanded. Unitary elasticity occurs when a percentage change in price results in an equal percentage change in quantity demanded. Figure 14-3 illustrates the relationships between price and quantity demanded under the three types of market structure.

Price Elasticity of Demand

In a market with elastic demand, consumers are price sensitive and any changes in price will cause total revenue to change in the opposite direction. Therefore, firms will tend to focus on ways to decrease price in an attempt to increase the quantity demanded and total revenue. In a market with inelastic demand, consumers are not sensitive to price changes and total revenue will change in the same direction. In this situation, firms will tend to focus on raising prices and total revenues, even with a decrease in quantity demanded. In markets with unitary demand, price changes have no effect on total revenue and firms should base pricing decisions on other factors such as cost.


Competitive Pricing

As the name implies, competitive pricing places the emphasis on price in relation to direct competition. Some firms allow others to establish prices and then position themselves accordingly (such as at, below, or above the competition). This method assures that the price charged for products and services will be within the same range as prices for competitive products in the immediate geographic area. This method does, however, have several drawbacks. First, consider the case of two similar firms, one is new and the other has been operating for several years. The new establishment is likely to have high fixed costs such as a mortgage with a high interest rate that must be paid each month. In contrast, the established firm might have a much lower mortgage payment each month and fewer costs than a firm starting a new business. Because of these differences, the established firm would have lower fixed operating expenses and could charge lower prices, even if all other expenses were equal. Second, other expenses might also vary among firms. Labor costs might be higher or lower depending on the skill level of the personnel, their length of service in the operation, and numerous other factors that may come into play. For this reason, it is extremely risky for managers to rely on the prices of a direct competitor when setting their own prices. Each operation is unique and has its own unique cost and profit structure. While management does need to monitor the competition, prices should never be based solely on prices charged by a competitor.

Price Segmentation

The importance of price varies among consumers, and firms often use this variation as a means for segmenting markets. Consequently, a firm can choose to target one or more of these markets with specific marketing strategies tailored to each market. The appropriate strategy will depend on the firm's costs, consumers' price sensitivities, and the competition. There are several tactics that can be used for segmenting markets on the basis of price.

Segmenting by Buyer Identification

One of the methods that can be used to segment by price is to base price on some form of buyer identification. That is, in order to obtain a discounted price, a buyer must belong to a certain group that shares similar characteristics. For example, hotels normally offer contract rates at a discount to corporations and government agencies. Government travelers are constrained by the per diem rates that are fixed by the government and many hotels price according to these rates, often at a significant discount relative to other groups. Similarly, contract food service providers may offer lower prices for nonprofit accounts (such as public schools) than for corporate accounts.

Segmenting by Purchase Location

It is possible to segment consumers based on where they purchase a product or service. Some restaurant chains will vary their prices in different geographic locations to account for differences in purchasing power and standard of living. For example, contract food service firms may charge more for accounts in large cities than for those in smaller cities. Similarly, prices may change by geographic location--accounts in the southern or midwestern United States have lower prices than accounts in the Northeast. Some of this is due to the demand, but there may be cost differences in the form of real estate and labor as well. Finally, most hotel, food service, and car rental firms charge different prices in international markets based on a country's standard of living.

Segmenting by Time of Purchase

Service firms tend to notice certain purchasing patterns based on the time of day, week, month, or year. Unfortunately, it is not always possible to meet the demand during these peak periods. One way to smooth the demand is to offer discounted prices at off-peak times. For example, large conference hotels are often willing to take SMERF groups, or other price sensitive associations, at significantly lower prices during off-peak seasons. This results in a shift in demand from peak times to off-peak times by the most price sensitive consumers.

Segmenting by Purchase Quantity

One of the most common forms of price segmentation is to vary price based on the quantity purchased, offering discounts for larger orders. The majority of firms, both small and large, will negotiate price discounts for larger volume orders. In particular, hotel salespeople are responsible for filling the hotel with groups by offering discounts that tend to increase with the size of the group. These discounts can be in the form of lower prices or concessions such as complimentary meeting space. Hotels and restaurants also use the same tactics to sell catering functions such as weddings and banquets.

Segmenting by Product Design

Another form of price segmentation is based on the actual product or service. It may be possible to segment consumers by offering simple variations of a firm's product or service that appeal to the different segments. For example, one hotel in Boston has different room categories based on the size and location of the room. There are traditional, deluxe, and executive rooms that can be offered to meeting planners at different rates. This allows the hotel to market to meeting segments with varying levels of price sensitivity such as corporate, government, and association. None of these variations have a significant impact on the cost of providing the service, but the hotel is able to charge significantly higher prices to a small segment of the market that values the additional amenities and services.

Segmenting by Product Bundling

The last form of price segmentation involves "packaging" products and services into price bundles. Offering several products at a packaged price can provide consumers with a better deal than if they were to purchase the bundle components separately. For example, tour operators combine the components of a vacation or trip (airfare, hotel, and tourist attractions) into a "package" that is sold to groups or individuals either directly, or through travel agents. An alternative form of product bundling is to offer premiums, or free merchandise, with the purchase. For example, many hotel chains offer meeting planners bonus points toward frequent guest or frequent flier programs if they book a meeting with one of the hotels in the chain.

These are some of the basic tactics that can be used to segment markets on the basis of price. The various tactics can be used alone, or in combination with one another, to achieve a firm's desired goals. Today's consumers can easily obtain information about competitive products and services, resulting in a large, value-conscious market. Firms will need to find ways to segment the price sensitive consumers from the quality-oriented consumers so that they can extract the most consumer surplus, and revenue, from the marketplace.

Price Negotiation

It is helpful to understand the role of price for each market segment when negotiating. Not all customers place the same importance on price, or have the same level of price sensitivity. Richard Harmer developed a Price-Segmentation Model that divided customers into four main price segments.3 The segments are based on the relationship between the consumers' perceived pain of expenditure and perceived value of differentiation. The perceived pain of expenditure refers to both monetary and nonmonetary costs associated with making a purchase. The monetary cost is self-explanatory, and the nonmonetary costs consist of factors such as convenience and time, which also affect the pain of expenditure. The perceived value of differentiation refers to the extent to which consumers feel there are differences between the various brands or products competing in the marketplace. The four price segments appear in the table in Figure 14-4.

The price segment consists of buyers who choose to purchase products that have the lowest price consistent with some minimum level of acceptable quality. This segment is composed of large companies, government agencies, and price-conscious consumers. The larger entities normally qualify buyers based on minimum specifications and then proceed with a competitive bidding process. For example, contract food service firms normally bid for large institutional accounts, such as campus dining and employee cafeterias. The buyer is normally not willing to pay for incremental value. The following tactics may be useful in negotiating with this market segment.

* Refocus attention on product value and attempt to raise buyer's willingness to pay by justifying higher cost with added value.

* Participate selectively when the account will provide some incremental contribution and it does not undermine more profitable business.

* Use the "loss close" described in Chapter 9. Offer a low price (not in writing) and give a limited time frame for a response, after which the price is no longer valid.

It is important to remember that a firm can always return to this market segment, even if it chooses not to do business with them in the present. There is no loyalty and price is the main criterion.

The value segment consists of buyers who have limited resources and may be somewhat price sensitive, especially when making large expenditures. These buyers perceive some differences between brands and will shop for the best value (the price-quality trade-off). This is the fastest growing segment in the marketplace and it offers good profit potential for firms that can differentiate their products from the competition. The following strategies can be used.

* Negotiate with each buyer individually and try to maximize the value of your differentiation; extract the most consumer surplus possible.

* Salespeople need to distinguish between buyers who require a lower price to increase value, and those that require more quality through differentiation to increase value.

* Make sure that both parties understand which items are negotiable.

It is important to remember that this segment is much like the price segment because buyers have no predetermined loyalty or alliance with brands. They are looking for good deals (values) and tend to be somewhat price sensitive.

The loyal segment consists of buyers who have a strong preference for a particular brand because of its uniqueness and/or past experiences with the brand. This segment is not price sensitive as long as the price is below the buyer's reservation price (the maximum price the buyer is willing to pay). The loyal buyers tend to be risk averse and like to reduce the uncertainty surrounding the decision. The following negotiation tactics can prove useful with this segment.

* Maintain strong relationships by focusing on past performance.

* Stress the downside of purchasing an inferior product or service.

* Make it difficult to compare price and quality between suppliers; use price bundling.

This segment tends to thrive during the growth stage in the product life cycle, but it tends to gravitate toward the value segment as the market matures. In mature markets, there are more sellers with similar products and it is more difficult to differentiate.

The convenience segment consists of buyers who are not concerned with prices (as long as they are below the reservation price) and do not place great value on differentiation as long as the brand meets their minimum standards. There are not many tactics for negotiating with this segment because availability outweighs both price and value. For example, they feel that all hotels have beds and showers, food is food, and all airlines use the same planes. The seller's goal is to demonstrate that his or her product is the most convenient based on location and effort.

Finally, there are a few tactics that can be used for segments that show some price sensitivity. First, the "subtraction technique" involves decreasing the levels of some attributes to lower the cost of providing the product. This results in a lower priced version that can be justified because the buyer is sacrificing something in return. For example, hospitality and travel firms could require buyers to travel during non-peak periods to secure lower prices. Second, the "division technique" involves breaking down the overall cost of the item to a cost per unit. For example, a meeting planner could be shown that the cost of renting a meeting room is minimal per person and could easily be recouped in the registration fee.

Key Concepts

Chapter 14 discusses the concept of revenue management and the use of price negotiation in personal selling.

Revenue management is a form of selective discounting and is a valuable sales tool in services for several reasons:

* perishable inventory

* fluctuating demand

* ability to segment customers

* low variable costs

The goal of revenue management is to maximize a firm's actual revenue in relation to its potential revenue. Revenue per available room (REVPAR) and average daily rate (ADR) are used to measure a hotel's performance in regard to pricing. The following three approaches can be used by firms to set prices:

* cost-oriented pricing

* demand-oriented pricing

* competitive pricing

The importance of price varies among consumers, and firms often use this variation as a means for segmenting markets. There are several tactics that can be used for segmenting markets on the basis of price.

* segmenting by buyer identification

* segmenting by purchase location

* segmenting by time of purchase

* segmenting by purchase quantity

* segmenting by product design

* segmenting by product bundling

Finally, it is helpful to understand the role of price for each market segment when negotiating. Customers can be divided into four segments based on their perceived pain of expenditure and perceived value of differentiation.

* price segment

* value segment

* convenience segment

* loyal segment


(1) Smith, Barry C., John F. Leimkuler, and Ross M. Darrow (1992), "Yield Management at American Airlines," Interfaces 22 (1), 8-31.

(2) To further investigate these factors, see Cross, Robert G. (1997a), Revenue Management. New York: Broadway Books; Cross, Robert G. (1997b), "Launching the Revenue Rocket: How Revenue Management Can Work for Your Business," Cornell Hotel and Restaurant Administration Quarterly 38 (April), 32-43; Kimes, Sheryl E. (1989a), "Yield Management: A Tool for Capacity-Constrained Service Firms," Journal of Operations Management 8 (4), 348-363.

(3) Nagle, Thomas T. and Reed K. Holden (1995), The Strategy and Tactics of Pricing, 2nd edition, Englewood Cliffs, NJ: Prentice Hall, 163.


Chapter 3

Social Styles Exercise 1--Raymark Conference Center

a. Ms. Smith is timely, conservatively dressed, and not over friendly. Her office is "decorated" with number-oriented material and an Excel spreadsheet is visible on her computer screen. She studies the letters of testimony. The factors would indicate that Ms. Smith is likely an analytical style.

b. Your presentation should focus on facts, not small talk; maintain a sense of formality in your presentation. You should provide Ms. Smith with substantial amounts of data in writing, including advantages and disadvantages of your proposal, that she can examine. You must allow her adequate time for decision-making. Consequently, you should outline the steps of your proposal and detail the action plan, including dates. When the appointed date arrives, follow up with her and use a direct close.

c. This response will vary depending on your own social style.

Social Styles Exercise 2--USA Airlines

a. Mr. Larsen is somewhat late, and is casually dressed. His office has stacks of papers all around it, likely indicating numerous projects underway. He is very action-oriented as indicated by the photos in his office and his comment to the party on the phone. Finally, Mr. Larsen interrupts and asks a bottom-line question. All of these factors point to the fact that Mr. Larsen is likely a driver style.

b. Your presentation should provide the bottom-line first, then you should work backwards through your proposal to illustrate how the bottom-line was derived. You should focus on facts, but not be overly detailed; avoid chit-chat. Work to demonstrate that you are organized and that you value Mr. Larsen's time. Because Mr. Larsen is a driver, you should be prepared to gain commitment on the first call. Use a direct close.

c. This response will vary depending on your own social style.
Chapter 5
Identifying SPIN Questions Exercise


Seller:   As I understand it, you are doing all of          Situation
          your preventive maintenance projects on the
          plant equipment during the summer months,
          so that you are prepared for going on-stream
          by the fall season. Is that correct?

Seller:   How often do you have plant get-togethers,        Situation
          like picnics, parties, and banquets?

Seller:   How many people usually attend these events?      Situation

Seller:   Who usually organizes and caters your             Situation

Seller:   Are you happy with the arrangement?                Problem

Seller:   Do your guests that are staying in the hotel       Problem
          ever have trouble finding the location of the
          restaurant in town? For example, do some of
          the executives get lost and arrive late to the

Seller:   Does this lead to anxiety for your staff?        Implication

Seller:   If I can show you a way to reduce that           Need-payoff
          stress would you be interested?

Seller:   I'm sure your staff is outstanding in the          Problem
          way it executes day-to-day operations here at
          the plant, but, you indicated that you thought
          your staff was lacking in creativity for your
          Annual Safety Banquet. Is that right?

Seller:   As a result, Do you think that you are able        Problem
          to produce the full benefits of your banquets
          when they lack the creativity you are seeking?

Seller:   Well, does the theme for your banquet arouse     Implication
          excitement and motivation? Do your employees
          get pumped up about attending the banquet?
          Do they act in a more positive manner after
          the get-together?

Seller:   So, if I understand correctly, you are           Implication
          saying is that the Annual Safety Banquet may
          not generate all of the long-term effects
          you've been seeking. Is that right?

Seller:   If I can show you a way to maximize the          Need-payoff
          utility from your get- togethers and to
          facilitate an increase in employee
          productivity afterward, would you be

Chapter 7

Owner Benefits/Product Characteristics Exercise

1. Owner benefit: ensure rave reviews Product characteristic: 'Hall of Mirrors' Ballroom

2. Owner benefit: increase traffic at your booth Product characteristic: provide complimentary coffee

3. Owner benefit: eliminate participant confusion and increase session participation Product characteristic: televising the session agenda

4. Owner benefit: reduce your company's business travel expenses Product characteristic: complimentary breakfast

5. Owner benefit: won't be embarrassed Product characteristic: automatic refill service

6. Owner benefit: reduce out-of-stocks and speed buffet service Product characteristic: increasing the entree table

7. Owner benefit: company will save money and employees will be more comfortable Product characteristic: furnished corporate apartments

Some of the other factors that should be considered are:

* the group room allotment set by the hotel

* additional revenues generated by the group or individuals (e.g., F&B, meeting room rental, etc.)

* potential for future revenues from the group or individuals

* current annual revenue generated by the group or individuals
Chapter 14
Revenue Management Exercise

                        Monday    Tuesday    Wednesday   Thursday

Occupancy rate            80%       100%        95%        85%
Group pattern (rooms)     50        100         100        100
Available rooms           100        0          25          75
Displaced rooms            0        100         75          25
Revenue from group      $5,000    $10,000    $10,000     $10,000
Displaced revenue         $0      $15,000    $11,250     $3,750
Net gain (loss)         $5,000    ($5,000)   ($1,250)    $6,250

Displacement effect = 5,000 - 5,000 - 1,250 + 6,250 = $5,000


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                        Monday   Tuesday   Wednesday   Thursday

Occupancy rate           80%      100%        95%        85%
Group pattern (rooms)     50       100        100        100
Revenue gain (loss)      $--       --         --          --
Displacement             $--       --         --          --

Figure 14-4 Price Segmentation Model

                      Perceived Pain of Differentiation

                                 Low              High
Perceived Pain
of Expenditure     High     Price segment     Value segment

                   Low       Convenience      Loyal segment
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