Changes in Hotel Guests’ Willingness to Pay as the Date of Stay Draws Closer

Abstract

The literature on optimal room rate policies and the experience of many hoteliers suggest that guests'willingness to pay increases as time draws closer to the date of stay. Traditionally, this phenomenon is explained through changes in market segmentation: Business travelers who tend to book closer to the date of stay are willing to pay more. It is argued in this study that the same customers are willing to pay more as the date of stay nears. A simple consumer decision model that explains this phenomenon is provided. The article examines the conditions that affect the increasing demand, and the relation between time and the increase. In a controlled experiment, subjects were asked to book a room and get the best deal they could find using a simulated Internet site that specialized in discount hotel reservations. The results indicate that although willingness to pay indeed increases as time nears the date of stay, the extent of the change depends on the customers' search cost.The literature on hotel room rate optimization suggests that customers' willingness to pay changes over time. Weatherford and Bodily (1992) state that, for perishable products, willingness to pay is expected to either build or diminish as the availability date draws closer. The authors believe that one should assume a growing willingness to pay for one type of product or service (e.g., flights and room nights) and a decreasing willingness to pay for a second type (e.g., fashion items and high technology goods). According to their taxonomy of Yield Management, most of the surveyed algorithms assume a rising willingness to pay. Clear examples can be found in Belobaba (1989), Bodily and Weatherford (1995), Brumelle, McGill, Oum, Sawaki, and Tretheway (1990), and Pfeifer (1989. Discount customers, in these stochastic demand models, are assumed to arrive first, followed by full-fare customers. In line with the theoretical models, airlines tie early booking to discounts (e.g.Downloaded fromThe same approach is echoed in the lodging industry. For example, Greenberg (1985) and Relihan (1989) discuss the typical hotel booking pattern where customers with a lower willingness to pay book earlier. Hanks, Cross, and Noland (1992) report on Marriott's discounting policy for early bookings, and Raeside (1997) argues that as customers'willingness to pay full price rises, the hotelier can use a threshold curve to reduce the number of discounts available as the availability date approaches.What drives this change in guests' willingness to pay over time? Hoteliers and academics argue that, as time nears the date of stay, the hotel simply faces different people (or market segments). According to this argument, customer segments that typically book their rooms closer to the date of stay (e.g., business travelers) are characterized by a higher willingness to pay (Orkin, 1990;Relihan, 1989).There is, however, a second logical explanation to the observed increase in willingness to pay. A guest is likely to agree to pay more for a room if his or her reservation decis...

Advanced booking and revenue management: Room rates and the consumers’ strategic zones

“…That is 6 The formulation of the customer utility when staying with the second best hotel is somewhat different from the one in Schwartz (2000). In this study the difference between the two brands is in terms of utility rather than in terms of cost.…”

“…Hence, for a price-sensitive traveler, the process is not necessarily completed even after the consideration set has been narrowed down ARTICLE IN PRESS to a single item. As first suggested by Schwartz (2000), the traveler faces three basic options:…”

“…Since many of the estimated components are probabilistic in nature, the preferred option is better described as the one that is likely to be most beneficial. Note that the model suggested by Schwartz (2000) assumes that the customer minimizes his/her expected costs (i.e., the costs associated with each option). This study adds a utility element to the equation so that the traveler decision rule is more compatible with the traditional marketing modeling approach to purchase decisions.…”

“…The hotel customer's four generic strategies model suggested by Schwartz (2000) served as the conceptual framework for this study. The basic model was further developed to include consumers' utilities.…”

Do you really know who your customers are?: A study of US retail hotel demand

“…The expectation that late booking customers are willing to pay higher rates is shared across the airline, hotel and car rental industries (for example, see Belobaba, 1989 andAlstrup et al, 1986 for airline applications; Ben Ghalia and Wang, 2000;Baker andCollier, 2003 andSchwartz, 2000 for hotel applications and Carroll and Grimes, 1995 for car rental applications).…”