CASE STUDY THREE-How Freeline Group uses pricing strategy for profit maximisation -

Freeline raised their room prices by an average of 1%, a move that represented the company's first significantprice increasein 18 months. Consumers failed to notice because the price change didn't affect private and executiverooms, but anyone who booked standard rooms saw as much as a 10 percent increase. The company's third quarter net income rose 25% to $417.8 million from $333.1 million a year.

Freeline claims the price increase is due to rising cost of employees in the services industry. In addition, the price hike was applied to less than a third of their hotels and only targets certain regions. Implementing such a specific and minor price increase when the bottom line is already in great shape might seem like a greedy tactic, but Freeline`s approach to pricing is a strategy to use to improvemargins. As said before, it only takes a1% increase in prices to raise profits by an average of 11%.

For the most part, Freeline is a master of employingvalue based pricingto maximize profits, and they use research and customer analysis to formulate targeted price increases that capture the greatest amount consumers are willing to pay without driving them off.Profit maximizationis the process by which a company determines the price and product output level that generates the most profit. While that may seem obvious to anyone involved in running a business, it's rare to see companies using a value based pricing approach to effectively uncover the maximum amount a customer base is willing to spend on their products.

An Overview of the Freeline Pricing Strategy

The Right Customers and the Right Market

While cutting prices is widely accepted as the best way to keep customers during tough times, the practice is rarely based on a deeper analysis or testing of an actual customer base. In Freelines' case, price increases throughout the company's history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these hotel getaways as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives, Freeline raises prices to maximize profits from these price insensitive customers who now depend on their exquisite luxury stay.

Rather than trying to compete with cheaper chains, Freeline uses price hikes to separate itself from the pack and reinforce thepremium image of their brandand services. Since their loyal following isn't especially price sensitive, Freeline hotels maintain a fairlyinelastic demand curve, and a small price increase can have a huge positive impact on their margins without decreasing demand for hotel getaways. In addition, only certain regions are targeted for each price increase, and prices vary across the U.S. depending on the current markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same).

Product/ Services Versioning & Price Communication

They also apply price increases to specific rooms rather than the whole lot. By raising the price of the standard size rooms exclusively, Freeline is able to capture consumer surplus from the customers who find more value in upgrading to private or exclusive rooms after witnessing the price of a small drip with tax climb over the $2 mark. Byversioning the productin this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes.

Freeline also expertly communicates their price increases to manipulate consumer perception. The price hike might be based on an analysis of the customer's willingness to pay, but they associate the increase with what appears to be a fair reason. Using increased commodity costs to justify the price as well as statements that aim to make the hike look insignificant, help foster an attitude of acceptance.

QUESTION 1

Discuss the concept Value-based pricing and provide examples from the case study on how Freeline implemented this approach. (10 marks)

QUESTION 2

Identify from the case study the pricing strategies Freeline are implementing with their products.(10 marks)

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