How to Raise Recreation Service Prices Without Making People Mad

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How to Raise Recreation Service Prices Without
Making People Mad

• John L Crompton
• Distinguished Professor
• Texas AM University

Available at http//www.rpts.tamu.edu/faculty/crom
pton/crompton-recent-presentations.shtml
2
Pricing Functions in a Public PARD

• Facilitates Appropriate Income Redistribution
• Facilitates Equity
• Facilitates the Efficient Allocation of Resources
• Generates Revenues

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Stages in Establishing a Price
Determine the proportion of costs which the price
should recover
Stage 1
Partial overhead costs
Full cost recovery
Marginal costs
No costs
Variable costs
Determine the going rate
Stage 2
Survey similar services offered by other
government and social service agencies
Survey similar services offered by commercial
suppliers
Examine the appropriateness of differential
opportunities based on
Stage 3
Participant -Income -Age
Product
Time
Place
Quantity
Stage 4
Consider psychological dimensions of price
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Reference Price Genesis (1)
Adaptation-Level Theory A new stimulus is judged
against a standard to which an individual has
become accustomed.
If a person has lived in the silence of a desert,
the birds and crickets of a farm will seem noisy.
But if one has lived in the hubbub of Manhattan,
the same farm sounds will seem blissfully quiet.
However, after living on the farm for a while,
the previous city dweller will then find
Manhattan noisy. The reason is that new stimuli
are incorporated into prior information so that
the reference point is shifted.
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Reference Price Genesis (2)
Assimilation-Contrast Theory A stimulus (price)
will be assimilated or rejected (contrasted)
depending on how close it is to the adaptation
level. There is a latitude of acceptance around
that adaptation level.
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Conceptualization of the Latitude of Price
Acceptance
Non-commitment zone
Non-commitment zone
Latitude of Price Acceptance
Rejection
Rejection
Either assimilation or contrast
Either assimilation or contrast
Assimilation
Contrast
Contrast
Median of the reference price range
Bargain Price
Resistance Price
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Reference Price Definition

• The price people expect to pay is determined by
• Average of all priced paid in the past, but
  weighted to reflect most recent price.
• Price most recently paid.

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The Genesis of Reference Price and its
Applications in the Parks and Recreation Field

• THEORETICAL GENESIS
• Adaptation-level theory
• Assimilation-constrast theory

• CONTEXTUAL INFLUENCES
• Onsite tangibles
• Ambiance
• Structure Quality
• Staff dress
• Level of crowding
• Type of clienteles
• Agency environment
• Program image
• Cost of service production
• Threat of service loss
• Awareness of service benefits
• Use of revenues

REFERENCE PRICE
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The Genesis of Reference Price and its
Applications in the Parks and Recreation Field

• THEORETICAL GENESIS
• Adaptation-level theory
• Assimilation-constrast theory

• CONTEXTUAL INFLUENCES
• Onsite tangibles
• Ambiance
• Structure Quality
• Staff dress
• Level of crowding
• Type of clienteles
• Agency environment
• Program image
• Cost of service production
• Threat of service loss
• Awareness of service benefits
• Use of revenues

• RESIDUAL INFLUENCERS
• Prior Purchase ..experience
• Frequency of previous ..purchases
• Socio-demographic ..characteristics
• Organic psychological ..processes

REFERENCE PRICE
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The Genesis of Reference Price and its
Applications in the Parks and Recreation Field

• THEORETICAL GENESIS
• Adaptation-level theory
• Assimilation-constrast theory

• CONTEXTUAL INFLUENCES
• Onsite tangibles
• Ambiance
• Structure Quality
• Staff dress
• Level of crowding
• Type of clienteles
• Agency environment
• Program image
• Cost of service production
• Threat of service loss
• Awareness of service benefits
• Use of revenues

• NORMATIVE INFLUENCERS
• Equity Personal value ..system
• Horizontal equity
• Prevailing cultural norms
• Communitywide ..personal services ..continuum

• RESIDUAL INFLUENCERS
• Prior Purchase ..experience
• Frequency of previous ..purchases
• Socio-demographic ..characteristics
• Organic psychological ..processes

REFERENCE PRICE
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Reference Price Related Pricing Strategies

• Latitude of price acceptance

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Conceptualization of the Latitude of Price
Acceptance
Non-commitment zone
Non-commitment zone
Latitude of Price Acceptance
Rejection
Rejection
Either assimilation or contrast
Either assimilation or contrast
Assimilation
Contrast
Contrast
Median of the reference price range
Bargain Price
Resistance Price
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Proportional Not Absolute Terms

• 10 ? 15 5 increase but is a 50 increase
• May be rejected as outside the zone
• 70 ? 78 8 increase but is an 11 increase
• May be accepted as within the zone

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Acceptance of Price by Program Participants at
Three Levels
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Implementing Price Increases Consistent with the
Latitude of Price Acceptance
Price
Y
Years
Latitude of price acceptance. No client
resistance to these price increases Price
increase at year Y meets client resistance
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College Station Water Rates
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing

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Relationship Pricing

• Consistency within a similarity set e.g. a
  division Athletics, aquatics, arts, etc.
• Outstandingness of the high and low anchor
  prices.
• Horizontal equity Treat equals equally.

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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing

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Introductory Price Decay
Visits
Regular price
Introductory low price
Introductory period
After introductory period
Time, weeks
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Evaluation of Fees, Sample Summer Visitors,
Flaming Gorge National Recreation Area
Source Fix and Vaske, 2007
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Entrance Fee Evaluations at Selected National
Wildlife Refuges
Source Vaske, Donnelly and Taylor, 1999
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Perceptions of Appropriate Prices for Existing
City Recreation Services
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Perceptions of Appropriate Prices for Two
Proposed New Services
Activity A
Activity B
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship

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Price-Quality Relationship
Setting the right price in services is more than
a matter of generating dollars today. It is also
a matter of sending the right message about the
service. Prices are evidence. (Berry and
Parasuraman)
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Scitovsky 1945 Few of us can appraise the
qualities of an electric iron or of tooth paste,
and the frequent introduction of new models and
improvements prevents us from relying on
experience More and more, therefore, the
consumer of to-day has to judge quality by
indices of quality mass observation of ones
friends and their wives shows that more often
than not people judge quality by price (p. 100).
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A Traditional Economic Demand Curve and a
Price-Quality Demand Curve
120 110 100 90 80 70 60 50 40 30 20 10 0
Bridge Class Price (s)
Traditional
Price-Quality
10 20 30
40 50 60
Bridge Class Numbers
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Why Does Price Quality Exist?

• Past experience is consistent with there being a
  price-quality relationship. Belief in the saying
  You get what you pay for.
• The agencys higher costs associated with a
  commitment to high quality.

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ST. MARTINS WC2 tel BO 071.836.1443 ACC
071.379.4444 T 0836.430944 AGATHA
CHRISTIEs The Mousetrap Worlds longest ever
run! 40th year SORRY. No reduced prices at any
time From any source Mon-Sat at 800. Mats Tue at
245. Sat at 500.
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing

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Temporal Reframing

• The use of credit cards
• The pennies a day approach

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Change Value Perceptions
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(No Transcript)
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Temporal Reframing

• The use of credit cards
• The pennies a day approach
• The concept of payment depreciation

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Health Club Fees Payment Depreciation

• Pay the whole fee once a year
• Pay half the fee every 6 months
• Pay quarter of the fee every 3 months
• Pay one-twelfth of the fee every month

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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period

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Implementing Price Increases Consistent with the
Latitude of Price Acceptance
Price
Y
Years
Latitude of price acceptance. No client
resistance to these price increases Price
increase at year Y meets client resistance
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Participant Adjustment Period
If there is a price increase outside the latitude
of acceptance there is likely to be a decline in
use. However, after an initial period of time,
users may psychologically adjust to the new
reference price and regard it as fair.
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Concept of Participant Adjustment Period
Participant Adjustment Period
Participation
Time
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Length of Adjustment Period

• Availability of substitute suppliers
• Income level of the client group
• Magnitude of the increase

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Where the price has traditionally been zero, the
implementation of any price often results in a
significant attendance decline.
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period
• Odd pricing

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Truncation
A 79 93
B 75 89
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Why No Odd Pricing?

• Deceitful illusion?
• Lack of awareness of its potential
• No tradition concerns about controversy

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Recreation Class
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period
• Odd pricing
• Self-esteem pricing

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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period
• Odd pricing
• Self-esteem pricing
• Customary pricing

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Customary Pricing
Always cut quantity, NEVER quality The pain of
low quality is remembered long after the joy of
low price is forgotten
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An Illustration of Customary Pricing Applied to a
Recreation Class
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Reference Price Related Pricing Strategies

• Latitude of price acceptance
• Relationship pricing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period
• Odd pricing
• Self-esteem pricing
• Customary pricing
• External reference pricing

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External Reference Pricing

• Creation of discounts to induce trial or
  re-engagement with an activity

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The Program Adoption Process
Park and Recreation Agency Service
Awareness Passive Acceptance of Information
Interest Active Seeking Out of Benefit Information
Evaluation-Maybe Trial Mental or Actual Trial
Decision Commitment to Use the Service
Confirmation Reassure the Correct Decision Was
Made
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Discount Formats

• Regularly 20 for one week 15
• 25 off for one week
• Save 5 for one week
• Special 15 for one week

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Dollar Amount or Proportion?

• Dollar amount for high priced services
• Percent discount for lower priced services

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Consider Truncated Influence!
A 41 to 29
B 45 to 33
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External Reference Pricing

• Creation of discounts to induce trial or
  re-engagement with an activity
• Comparative pricing to persuade or re-assure
  people that an agencys prices are better than
  those of its competitors

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External Reference Pricing

• Creation of discounts to induce trial or
  re-engagement with an activity
• Comparative pricing to persuade or re-assure
  people that an agencys prices are better than
  those of its competitors
• Facilitating acceptance of price discrimination

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Favoring Local Residents - Surcharges

• A state park agency charges residents 12 and
  non-residents 15 a night for camping.
• A city charges its residents 20 to play golf and
  non-residents 25.
• A golf course charges 40 a round on Saturdays,
  but 50 for rounds started before 10am.
• Registration is 30. If you register late, the
  fee goes up to 40.
• When campers go to register at a state park the
  staff response is The fee is 12 you dont
  have a state parks sticker? Then it is 16 you
  want a hook up? Then it is 19.

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Favoring Local Residents - Discounts

• The state agency price for camping is 15.
  Residents receive a 3 discount to 12.
• It is 25 to play golf. Residents receive a 5
  discount to 20.
• The Saturday price for golf is 50. A 10
  discount is given to those who start after 10am.
• Registration is 40. A 10 discount is given to
  those who register early.
• The camping fee at the state park is 19. You
  are a state resident? Then it is 15. You dont
  need a hook up? Then it is 12.
• Surcharges make people mad discounts make them
  happy!

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The Genesis of Reference Price and its
Applications to Parks and Recreation

• THEORETICAL GENESIS
• Adaptation-level theory
• Assimilation-constrast theory

• CONTEXTUAL INFLUENCES
• Onsite tangibles
• Ambiance
• Structure Quality
• Staff dress
• Level of crowding
• Type of clienteles
• Agency environment
• Program image
• Cost of service production
• Threat of service loss
• Awareness of service benefits
• Use of revenues

• NORMATIVE INFLUENCERS
• Equity Personal value system
• Horizontal equity
• Prevailing cultural norms
• Communitywide personal services ..continuum

• RESIDUAL INFLUENCERS
• Prior purchase experience
• Frequency of previous purchases
• Socio-demographic characteristics
• Organic psychological processes

REFERENCE PRICE

• REFERENCE PRICE RELATED PRICING STRATEGIES
• Latitude of price acceptance
• Service relationship marketing
• Introductory pricing
• Price-quality relationship
• Temporal reframing
• Participant adjustment period
• Odd pricing
• Self-esteem pricing
• Customary pricing
• External reference pricing

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Mean Reference PricePublic Swimming Pools
2.5- 2.0- 1.5- 1.0- 1.0- 0.5- 0.0-
Control
Cost
Commercial
Cost/ Commercial
Source McCarville and Crompton (1987)
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Mean Reference Price for Users ofPublic Swimming
Pools
2.5- 2.0- 1.5- 1.0- 1.0- 0.5- 0.0-
Control
Cost
Commercial
Cost/ Commercial
Source McCarville and Crompton (1987)
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Mean Reference Price for Nonusers ofPublic
Swimming Pools
2.5- 2.0- 1.5- 1.0- 1.0- 0.5- 0.0-
Control
Cost
Commercial
Cost/ Commercial
Source McCarville and Crompton (1987)
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Resident User Attitudes Toward Resident Fees
Before and After Being Presented with Information
(n303)
Source Reiling, Crinet and Oltmanns, 1988
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Residents and Nonresidents Attitudes Toward
Hoover Powerplant Fees (Before Information and
After Two Sets of Information)
Source Schwer and Daneshvary (1997)
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Results of Duncans Multiple Range Test for
Differences Between Treatment Groups Reference
Price Levels
Source McCarville, Crompton and Sell (1995)
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Mean WTP Levels for Public Aerobics Classes
42- 40- 38- 36- 34- 32- 30- 28- 26- 24- 22- 20- 18
-
WTP
Control
Treatment
Group
Participant
Non-participant
Source McCarville (1991)
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Analysis of Variance Comparison of Treatment
Groups Internal Reference Price (n434)
Note Different superscripts indicate significant
difference
Source McCarville, Crompton and Snell (1993)
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How to Raise Recreation Service Prices Without
Making People Mad

• John L Crompton
• Distinguished Professor
• Texas AM University

Available http//www.rpts.tamu.edu/faculty/crompto
n/crompton-recent-presentations.shtml