Activity‐based pricing: can it be applied in restaurants?

Abstract

Purpose -This paper aims to demonstrate how activity-based pricing can be applied in a restaurant setting by combining the use of price sensitivity measurement with activity-based costing. Design/methodology/approach -Data are collected at a Hong Kong buffet restaurant, based on guests' price perceptions and the establishment's detailed cost structure. These data are analyzed by using price sensitivity measurement techniques and activity-based costing methods, separately, and then combined to create an activity-based pricing analysis of the restaurant's menu. Findings -The use of activity-based pricing techniques reveals that, although the guests are relatively price-insensitive, drastic measures were needed to reduce costs for the restaurant to become profitable. Without the benefit of this study, the restaurant's management would not have been able to see clearly the nature of the challenges that they faced, since a single pricing study, or cost study, would have missed the combined cost and pricing effects that were captured by activity-based pricing.Research limitations/implications -Activity-based pricing is shown to be a powerful technique that can be applied effectively in a restaurant. Utilizing this method allows a restaurant truly to understand both its operating cost structure and the price perceptions of it guests. Since this study involved only a single buffet restaurant, further research should be conducted to confirm that activity-based pricing can also be applied in other restaurant and hospitality industry settings. Practical implications -The findings from this study suggest that activity-based pricing may be a viable way for restaurant managers to gain a better understanding of both their guests' price perceptions and the true cost structure of their restaurants. Use of activity-based pricing allows restaurant managers to set price levels that cover all operating costs and profits, while still meeting guests' expectations of value. Originality/value -This study is the first of its kind in the hospitality literature, since no prior research has applied activity-based pricing in a hospitality research setting. This study represents an important new addition to the existing body of hospitality cost and pricing literature.

Price Sensitivity Measurement: A Yield Management Approach

“…Similarly, Ceylana et al ( 2014) used the PSM method as a value-based pricing tool to examine university students' price perceptions about private dormitories. Also, there are studies by Raab et al (2009a) and(2009b) in the pricing of an evening buffet meal in a restaurant in Hong Kong. Moreover, Hidalgo (2017) used the PSM method to determine the ideal price for Pasteurized Coconut Water according to consumer price expectations and threshold perceptions.…”

“…With the PSM method, the acceptable price range, between the highest and the lowest price range, is determined, and the percentage of customers who want to purchase can be seen within this range. Since the relationship between price, quality and the value perceived by customers is also taken into account while determining the price with PSM, it can be utilized for demand forecasting and product development decisions (Harmon et al, 2007;Lewis & Shoemaker, 1997;Raab et al, 2009a;Raab et al, 2009b). In the hospitality industry, price research is mostly used in the economic benefits (yield management) of pricing decisions, choosing pricing strategy, reference pricing (Parsa and Njite, 2004).…”

Service Value Assessment in Emerging Chain Restaurants in Nairobi Kenya

“…It is thus agreeable that establishing effective pricing strategies is critical to restaurant competitiveness. The pervasive influence of price is due, in part, to the fact that the price cue is present in all purchase situations, especially in services (Raab et al, 2009) [23]. Price has also been identified as the only element in marketing that holds a direct influence on revenue while all the other elements of the marketing mix are cost based (Shoemaker et al, 2006[27]; Kotler et al 2005[16]; O"Connor, 2003;) [20].…”

“…The most commonly employed methods of setting menu prices have been identified by Kotler et al, (2005) as including; cost based pricing, volume-based, going rates, time-of-purchase discounting and discriminatory pricing. In a more recent development, Raab et al (2009) proposed the use of Activity Based Pricing (ABP) in the restaurant industry. They defined ABP as a pricing method that combines market research data with cost accounting information to establish prices for products and services that result in "designed" profit levels.…”

An Efficiency-Based Metafrontier Approach To Menu Analysis

“…Raab, Mayer, Ramdeen, and Ng (2005) examined dinner buffet cost in a buffet style restaurant in Hong Kong. Raab and Mayer (2009) further applied activity-based pricing in a Hong Kong buffet restaurant based on guests’ price perceptions. Both studies traced the undistributed operating costs, or LCs, to individual menu items (Annaraud, Raab, & Schrock, 2008).…”