Some women will happily work out in a gym that welcomes both genders. Others would rather attend a ladies-only club, a factor that will lead to dissatisfaction if their expectations aren’t met. The same principle applies to bars. Many men like venues with more members of the opposite sex, but women prefer places that attract similar numbers of males and females.
“While the venue and facilities may be the same, people’s perception of the service quality is unique and often influenced by other customers”
While the venue and facilities may be the same, people’s perception of the service quality is unique and often influenced by other customers. Issues such as the age, socioeconomic status and perceived intelligence of other people – be they gym members, club-goers or holidaymakers – can also affect someone’s level of satisfaction in a positive or negative way.
So how do service providers go about establishing their customers’ specific preferences and understanding which patrons are willing to pay more to get what they want? Vasiliki Kostami, Assistant Professor of Management Science and Operations, explores this issue in her research paper ‘Pricing and Capacity Allocation for Shared Services’.
The study looks at how businesses facing this challenge can use pricing and capacity allocation, such as restricting access to certain people, to appeal to specific customers. “Nightclubs may introduce pricing promotions, giving women free or cheaper drinks in order to attract more of them,” Dr Kostami says. She adds that a cruise ship operator could choose to restrict access by catering to just singles, couples or more mature holidaymakers, while gym membership might be open to women only.
Restricted access sounds like a simple way to satisfy certain customers, but it can create a huge headache for businesses. Fitness USA angered some customers – mostly male – when the management decided to make two of its gyms in Michigan women-only. The new policy also disappointed one female who was unhappy about her monthly membership fee increasing from US$19 (£14.75) to $24 (£18.6). Despite the criticism, Fitness USA held firm.
Introducing new pricing or restricted access is less problematic for other sectors, according to Dr Kostami. “The cruise industry can organise trips for church groups, Star Trek fans or singles without being accused of excluding others,” she says. “Such cruises target a homogenous group of people who share a common interest, helping to spark conversation and develop bonds among passengers. In these cases, the service experience and pricing strategy is designed to appeal to a particular customer segment. This can only happen once a distinction is made between those who want the service and the people who aren’t interested.”
These examples show that the reaction to charging different types of people varying prices or limiting their access to certain services depends on the industry.
“The challenge for businesses is how to maximise profits when making decisions that could potentially anger customers or create legal issues”
The challenge for businesses is how to maximise profits when making decisions that could potentially anger customers or create legal issues. With their venues’ capacity in mind, companies have to ask themselves: which customers should we target, without necessarily trying to cater to as many people as possible, and charge them based on how much they are willing to pay. They also need to establish whether:
Dr Kostami’s research suggests that businesses may be better off if they target just one customer segment rather than several – especially if price discrimination isn’t an option. This could be for legal reasons or because different types of customers aren’t happy about sharing the same venue.
Take Fitness USA’s decision to convert two venues to women-only gyms. Restricting access to females means that most women are willing to pay more for the overall service. Moreover, the company doesn’t have to worry about what to charge men, so there’s no danger of price discrimination. This problem could arise if, for example, women were charged less to share the gym with men.
Another option to restricting access is for service providers to introduce a ‘time allocation’ policy, where they offer exclusive use of their venue to different customers at varying times.
For a service provider that relies on price, the choice between giving certain people exclusive access and making the whole venue available to all depends on net appreciation between customer segments. Net appreciation refers to the average level of satisfaction based on how negative or positive people feel about other customers who receive the same service.
“If the net mutual appreciation is positive, businesses will more likely hold events or provide services where customers from different segments can interact. If negative, it might be better to give each customer class exclusive access at the venue or let them use it but at different times,” Dr Kostami says.
But how does net appreciation relate to price? In a bar with no gender restrictions, males may pay more. This is to compensate women who have to share the same venue with men. The prices change when restricting access to one or several customer segments. Businesses that introduce capacity allocation have two options: they can charge wealthier patrons a higher fee for not having to rub shoulders with people from other customer segments. Or they can make less wealthy patrons pay more.
For the second option, businesses understand that some customers will pay more to mingle with wealthy or famous patrons. Nightclubs can spend huge sums on celebrities or models to attract the more regular customers, as most revellers enjoy being near good-looking people.
“Nightclubs can use price discrimination to make money when the net appreciation across customer segments varies greatly,” Dr Kostami says. “In this instance, the net appreciation differs as celebrities will likely be less enthusiastic about spending time with normal customers than vice versa.”
She adds that to introduce an effective single-price policy, firms need a deep understanding of customer segments and the factors that influence how they feel about a particular service. With this knowledge, they can set the right pricing and capacity allocation policies for their venue.
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