RPP is our code for the weekly blog post, op-ed by the School’s celebrity economist / pundit / opinionista, but he will probably only start writing later in the year, so in the meantime we are filling in with some guest posts.
This month our focus is on research related to #TourismMonth and this week’s post is by Lindie du Plessis on Pricing guidelines for hotels and guesthouses in South Africa:
South Africa has experienced an increase in tourist arrivals since the early 1990s, and specifically for accommodation for the 2010 FIFA World Cup. Even with an increase in the supply of accommodation, the market responded with price increases of on average 15% per annum from 2006–2007 (Statistics SA, 2007). This is a surprisingly high increase, considering that this is just for accommodation, and food, transport and entertainment are not yet included in the package. Significant price increases could cause a country to lose its competitive advantage. A former CEO of Tourism South Africa, Cheryl Carolus, explains that with an increase of just 10% (which is set about 18 months in advance) and the relatively strong rand (which is an external, uncontrollable factor), the South African tourism product became 40 to 50% more expensive than it had been 12 to 18 months before – a factor that can threaten the growth, sustainability and competitiveness of the industry.
This situation has resulted in two problems. Firstly, the local tourist cannot afford these prices (Saayman, 2001:5), and secondly the bulk of these accommodation establishments are managed by owners or entrepreneurs (DEAT, 2004:24) and those entrepreneurs who are just entering the accommodation market are finding it hard to survive. The reason for these problems, is that pricing is the least understood aspect of the management task and this is exacerbated by the absence of pricing guidelines.
Many managers choose to take the easy way out by adopting prices set by large accommodation groups, creating a pricing method that is known as “price following”. This method, as described by Rogers, is a means of coping with the complexity of price decision making, whereby the price set by the market leaders becomes the ceiling under which smaller establishments are forced to operate. The latter could jeopardize the domestic market, which, according to Porter, is the building block for a country’s competitiveness.
The challenge lies in converting a complex issue such as price into guidelines that could help entrepreneurs to determine competitive prices for accommodation establishments in South Africa. These guidelines could ensure a competitive advantage for establishments and contribute to the sustainable development of South Africa as a tourist destination.
Economists argue that pricing is regulated by the widely accepted principle of elasticity of demand. In normative approaches, pricing usually focuses on physical products and is often presented by textbook writers as a set of alternative principles or techniques. Approaches to pricing: cost-based, customer-driven, competition-driven and time is acknowledged Price strategies include price-ending and all-inclusive pricing just to mention the familiar strategies.
Several studies of pricing in tourism have used models such as the Almost Ideal Demand System and the hedonic pricing model to analyze the extent to which the provision of different tourism product characteristics can contribute to an increase in prices for a particular accommodation type.
In spite of the latter, the absence of guidelines for pricing policies and approaches adds to the difficulties South African managers and entrepreneurs experience in determining prices for different accommodation types with similar grading status. Setting prices too high or too low can destroy the business. The accommodation types in SA include self catering, camping chalets, lodges, bed & breakfasts and hotels, just to name a few. Differentiating between these, as well as between the different grading standards and the different facilities, adds to the complexity of pricing.
A pricing strategy that managers use to increase the demand for their product is price discrimination. This strategy is often used in the airline industry and by national parks, which distinguish between the entrance fees for international and domestic tourists (SANParks).
Price discrimination, which means charging different prices to different consumers, has a positive impact on tourism demand, as shown by the results of studies by Stavins (1996), Leslie (2002), Giaume & Guillou (2004), Howard and Crompton (2004) Fouché (2006) and Alpizar (2006).
However, few price discrimination studies have focused on the accommodation sector. Although some literature is available on tourism related price strategies, little attention has been paid to building links between theoretical and empirical findings from tourism pricing models and their relevance to managers’ decision-making processes for determining prices.
The results of my research suggest significant price disparities, with a spread of 95% between the grading levels of 2-star, 3-star, 4-star and 5-star Hotel establishments.
The results further indicate a more acceptable price difference of 20% ceteris paribus, between 2-star and 3-star, 3-star and 4-star, and 4-star and 5-star Guest House establishments.
My study has shown that pricing is a complicated management tool. Managers in the accommodation market will need understanding and skill in order to choose the right factors, grading status and approach to set prices that promote profitability and sustain competitiveness. The combination of factors and the effectiveness and credibility of grading systems should be tested and adapted to suit the unique characteristics of each establishment and its manager or owner.
Based on the findings the following recommendations are made:
Firstly, all accommodation establishments should be graded to remain competitive and sustain that advantage.
Secondly, guidelines for South Africa should suggest a 50 to 60% increase from one grading (star) level to the next for hotels and 15 to 25% for guesthouses. These price increases must be regularly tested against those of the competitors.
With regard to future research, it is recommended that different pricing policies and models could be tested in the South African accommodation scenario.
The guidelines provided in my study could also be evaluated from the demand side, since tourists’ views on prices for graded establishments could provide insights that would help make pricing guidelines more effective.