Issues in Pricing in Hospitality Operations
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Part 1. Evaluate cost-based pricing and market-based pricing and explain why one approach is better than the other.
Cost-based pricing is the simplest pricing method which usually used by companies to maximize profit. In this process, a desired mark-up is added to the actual cost of the product to give the selling price. This method sets a price that covers the cost of production and to provide enough profit margin to the company to earn its target rate of return. (Boundless, cost based pricing, 2014)
“It is used by most organizations today because it is easy to calculate and that it needs less info” (Boundless, cost based pricing, 2014). However, when applying this method, it is impossible for a company to control if a potential customer purchases the product at the calculated price. (Atul Patel, 2009)
In market-based pricing, the company will evaluate the costs of a similar product that are on the market. If the competition’s product has more or fewer features than Hotel X’s, Hotel X will then adjust the price lower or higher than a competitor’s pricing. The hotel may also decide for their product cost to be of the same as a competitor, but it has to be of a better value. It may also be set to be slightly higher to account it for the additional feature. (Leigh Anthony, 2014)
One of the flaws of market-based pricing is that Hotel X may need to engage in other tactics in order to gain more customers should the price is not enough to be an incentive. (Boundless, 2014) With this approach applied to Hotel X, it would be able to pull more guests by enforcing the market-based pricing method. This is because Hotel X is surrounded by many other restaurants within the area, so it keeps the hotel competitive with direct competitors. The competitor’s price is at hand, so it is relatively fast to produce in terms of pricing.
It is a fixed fee a customer has to pay regardless the service consumed. (Dictionary) For example, if a guest booked a table for ten persons and confirmed it, the guest will have to pay for all 10 persons even if one person did not show up. The cover charge, usually occurs during peak seasons such as Ramadhan, Christmas or Chinese New Year where restaurants will have a buffet dinner or lunch promotion. There are cases when this happens; the guest will be offered a 10% discount on their next visit.
Price elasticity of demand (PEoD) can be calculated as:
Percentage change in quantity demanded
Percentage change in price
If PEoD is more than 1, consumers are sensitive to change in price and this is called elastic. If it is less than 1, PEoD is inelastic where consumers are insensitive to the price change. Hence, with the cost of demand is being inelastic, Hotel X may want to raise its price because it knows it can sell its product at a higher price without losing any sales. Otherwise, they are to lower the price but still attracting customers. (Boundless)
The two factors affecting revenue generation and profitability of the restaurant in Hotel X are shelf life and labeling and food rotating.
Shelf life is the period of during which a stored food product remains valid, useful or suitable for consumption. (The Free Dictionary by Farlex, 2014) Shelf life can be done by managing inventory of perishable goods to prevent wastage such as vegetables or raw meat. With a record in hand, the restaurant can then apply the FIFO rule (first in, first out), that is to use the old items first. Besides that, preserving food in the refrigerator by using plastic wraps can help the food from drying and also to avoid the transferal of food odors from one to another. (Adib, 2014)
Appraisals are conducted annually for all employees in an organization, and this will help them as a working individual as well as to improve the organizational performance and to feed into business planning. It is also essential for career and succession planning for a person or the organization as a whole. It reviews each employee’s performance against the agreed objectives and standards for the trading, which was done during the previous appraisal meeting. Appraisals are important as it motivates staff and improves attitude and behavioral development. Moreover, it also increases communication skills and aligning individual and organizational goals and develop positive relationships between management and employees. (Chapman, 2014)
To make sure that the appraisers are doing an effective appraisal for the employees, they are to ensure that the management is fully committed to the whole idea of appraisals. They are to provide training to those who are carrying out appraisals to ensure that they are fair. However, when appraisals are managed without training, explanation and are conducted poorly will be counterproductive and a waste of everyone’s time. When doing appraisal, everything positive or negative should be shown to the employees. Appraisers are to be imaginative and creative when discussing, discovering and agreeing ‘whole-person’ development that people will respond to and incorporate this development into the appraisal process. (Chapman, 2014)
- Quantitative Appraisal Technique
Hotel X can consider in using metric for absenteeism as its quantitative appraisal technique. It can be calculated as:
No. of days absent
(Average no. of employees) x (No. of workdays)
(The Employers Association, 2014)
It is calculated monthly by either using an automated time clock or time recording system as reference. (Haines, 2010) This method can be an indicator whether the hotel productivity levels or not. (The Metrics Man, 2012)
- Qualitative Appraisal Technique
One of the qualitative appraisal technique that will be used in Hotel X is by doing an open ended question. This method gathers information by conducting a structured interview where the interviewer can only ask questions on the same topics for each interview that are carefully worded to avoid ambiguity or particular undesired connotations. The question focuses more on the participant’s thoughts, experiences, knowledge, and skills. By applying open ended to Hotel X, it lets the interviewer see perspectives and opportunities for themselves and also it is an effective research where the interviewer wants more control over the result. (Thibodeaux, 2014)
“How long does it take for Hotel X customers to receive their food once they have placed an order?” This can be resolved by creating a customer comment card for restaurants (Refer to Appendix 1). The customer comment card allows customers to express their opinions and feedbacks and helps the restaurant to measure customer’s satisfaction and also to show areas of the department where it needs improvement. (Waters, 2014)
The restaurant in Hotel X has received a lot of comments where most customers are not satisfied with its service and that they have to wait for a long time for their food to be served.
This is due to lack of staff and the inefficiency of their performance. They might be unmotivated there are only 2-3 staffs working per shift while attending more than 40 customers everyday. Another reason is because the inconsistency of the quality of the food due to the frequent change of cooks.
To overcome these problem, the restaurant may consider in changing the menu according to what the chef specializes at and is unique and different from other restaurants available outside Hotel X. It can also consider in promoting buffet where less staff is needed (Singh, 2010) especially during peak season. To gain back staff’s efficiency, pre-work briefings are to be done daily with their opinions and suggestions are to be heard whenever possible as this will make them feel more motivated in doing their tasks. Lastly, the service can be improved by timing when the order was taken as well as when the food was received by customers. Moreover, changing of table arrangements and staffs are to be allocated on which tables they are to serve would be able to improvise the service in the restaurant as well.
With this, the restaurant may be able to improve its service and gain back their customers satisfaction and will be able to attract more customers especially when new menu is being introduced.
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