I need help in summarise this case study and solve dissolution question at the end of case study.

To Trust or Not to Trust: Variable Pricing and the Consumer Una McMahon-Beattie, Adrian Palmer and Ian Yeoman The following complaint was received by www.complaints.com on 5 August 2002: RE: Sky Broadcasting - paid too much for Premiership Plus Subscription - unfair pricing. I have been a Sky subscriber from the very beginning, and have always thought their service to be excellent. However, I feel cheated and conned by them. It has, in my opinion, always been their marketing policy to increase their subscription prices as any pay per view event gets closer. BUT NOT THIS TIME. I subscribed paying f50.00 in July 2002, the fee earlier being $40.00. I feel conned because contrary to all previous marketing policies the fee has now been reduced to f40.00! This is not acceptable and Sky's customer services were adamant that despite being a very loyal customer no recompense would be made. I shall consider very carefully whether or not I subscribe [to] Sky's Premiership Plus or any other events as I no longer TRUST them.' This type of complaint is indicative of the reaction of many customers to the variable pricing practices employed by many service companies. Indeed, one of the key elements in revenue management is the variable pricing. However, the perception of trust and its effect on variable pricing decisions is an undervalued and under-researched area. Therefore, in the following cases, we will examine customer perceptions of pricing and the concept of trust by examining the interactions of revenue, pricing and trust through investigating the ongoing buyer-seller relationship in service industries. We will first investigate the impact of variable pricing on customers through a simulation case of two dining clubs. Then, we will examine the actual reactions to attempts by Ama- zon.com in September 2000 to implement a differential pricing structure that would track on-line purchasing behaviours in order to charge loyal customers higher prices for the same product. The aim of these cases is to help you understand how variable pricing can severely undermine trust in a service provider and to help you consider how to 157158 Revenue Management and Pricing manage a long-term buyerseller relationship if you actively engage in variable pricing and revenue management. WHAT IS TRUST? Trust is a complex concept that has been seen as a crucial precursor to and outcome of buyerseller relationship development. Indeed, in the business eld there has been an increasing number of studies undertaken into the concept of trust, particularly its role in cooperative behaviour in distribution channels (e. g., Morgan and Hunt, 1994; Chow and Holden, 1997; Garbirino and Johnson, 1999). There is a distinct difference between manifesting trust in a discrete transaction and trust earned over an extended set of encounters or purchases. There are also differences between physical, person to person trust and digital trust as experienced with on-line transactions. Using the ndings of interpersonal research (Larzelere and Huston, 1980), most studies dene trust as the extent to which a rm believes that its exchange partner (e. g., organization) is honest and/or benevolent. Trust in a partner's honesty is a person's belief that a partner is reliable, stands by their word, fulls their promises and role obligations, and is sincere (Anderson and Narus, 1990). Trust in the partner's bene- volence is a person's belief that a partner is genuinely interested in one's interest and is motivated to seek joint gains. A benevolent partner subordinates immediate self- interest for long-term group gain (Crosby e! 01., 1990) and will not take unexpected actions that would have a negative impact on the organization (Anderson and Narus, 1990). In marketing terms, trust is important in channels of distribution, and indeed is a prerequisite to most buyerseller relations requiring long-term commitments (Larzelere and Huston, 1980). Three characteristics of trust make it vitally important for further examination of the impact of variable pricing on customers. First, it is risky (Swan and Nolan, 1985; Gambetta, 1988) and therefore has signicant implications for customer purchase decisions. To trust someone or indeed something involves a rational decision-making process. It also involves taking a risk. Trust, in other words is not 'blind faith', but can be calculative, and by this very denition, involves risk. Indeed risk and trust are inseparable components in decision-making. Second, you cannot substitute it com- pletely (Shapiro, 1987) making a reliance on trust almost a necessary condition of purchase exchange. Third, where a trusting relationship develops, it represents an intangible value (Granovetter, 1985) which, from a transaction cost economics per- spective, may help explain exchange relationships better. Furthermore, research has suggested that whilst traditional aspects of the marketing mix, namely price and reliable delivery, actually make a sale, trust operates as an 'order qualier', not as an 'order winner' (Doney and Cannon, 1997). As such, trust, like product quality, must be at a satisfactory level for the product or service to even be included in a buyer's con- sideration set. This has signicant implications for revenue managers both in estab- lishing a satisfactory level of trust and in the implementation of strategies that maintain it. Variable Pricing and the Consumer 159 THE IMPACT OF INFORMATION TECHNOLOGY ON TRUST Information technology is allowing revenue management inventory organizations to set their prices in very much the same way as traditionally practised in eastern bazaars - by individual bargaining and haggling. 'The price list' is not typical of small businesses dealing with small numbers of buyers. It has no part in the business methods of traders in many eastern countries for whom bartering on a one-to-one basis is the norm. Price lists emerged in response to the industrialization of economies and the growth in the size of markets served by individual firms. Price lists became a method of simplifying transactions between a large organization and large numbers of its customers. Over time, there has been a tendency for societies to fragment in their motivations to make purchases, which has been reflected in companies developing increasingly fine methods of segmenting markets (Kotler et al., 1996). In the move from mass marketing to target marketing, firms subtly developed multiple price lists, based on slightly dif- ferentiated product offers aimed at different market segments. Today, the process of market segmentation has proceeded to the point where companies can realistically deal with individual market segments (Peppers and Rogers, 1995). Intriguingly, the condi- tions for pricing by suppliers of consumer goods and services would appear to be reverting to those that apply in eastern bazaars, in which the seller seeks to apply a price that is uniquely appropriate to each individual buyer. There is plenty of evidence of this move towards unique one-to-one pricing in the Internet-based auction sites which have grown in number during the late 1990s (Wisse, 1999; Palmer and McCole, 1999). On-line auctions represent an extreme case of one-to-one pricing which is being facilitated by information technology. Much more pervasive is the ability of firms to subtly adjust prices offered to individual customers. Rather than having a fixed price list, an enquirer for a specified product may receive different quotations at different times of enquiry. Similarly, two different enquirers may simultaneously receive different price quotations. The theory and practice of relationship marketing has been based on an assumption that companies are able and willing to enter a dialogue through which additional value is generated (Gummesson, 1998). A seller may learn more about the needs and moti- vations of individual customers and develop product offers that are unique in satisfying those needs. In this two-way relationship a seller should be able to assess the value which each individual buyer (or potential buyer) puts on its product, and price its offer uniquely. To an economist, the supplier would seek to appropriate the consumer sur- plus, which arises as a result of individuals being prepared to pay a price which is higher than a ruling and uniform market price. There is now considerable evidence of companies who adjust prices according to the unique circumstances of individual buyers. National newspapers for example, typically charge low annual subscriptions to encourage uptake among potential customers, but reduce their discounts as customers show increasing levels of loyalty. Travel related companies have become sophisticated in finely adjusting their prices according to their availability of capacity and the travel motivations of the buyer. However, variable pricing of this nature would appear to undermine a central thesis of the relationship marketing argument, that trust is an essential antecedent of successful long-term buyer- seller relationships (Morgan and Hunt, 1994). It has been noted that trust is a parti- cularly important factor early in a relationship and an essential precondition for the relationship to move to more committed stages of development (Grayson and Ambler, 1999). As such it could be argued that trust may be undermined where a buyer of160 Revenue Management and Pricing consumer goods or services perceives that the price that they are being offered for a specied product is less equitable than a similar bundle of benets offered to another buyer, or offered to that customer on a different occasion. Traditional haggling over prices in open markets was visible for all to see. With many modern (and particularly on-line) ITbased systems of individual pricing, the results are less visible and can typically only be compared indirectly. The lack of openness in pricing creates conditions for mistrust. Indeed, several recent pricing studies suggest that consumers' reactions to a price change depend not just on the magnitude and direction of the change, but on buyers' perceptions of the seller's circumstances and motivations that led to it (Bobinski er al., 1996). For example, Kahneman er a]. (1986) have examined how consumers' perceptions of the 'fairness' of price increases were inuenced by the circumstances that led to them. They found that buyers typically perceive a given price increase as 'fair' if it is a reaction to an increase in seller costs, but as unfair if it is a reaction to increased consumer demand. This has obvious direct implications for revenue management pricing systems. Similarly, Lichtenstein, er al. (1989) examined how consumers' attributions regarding a retailer's motives for dis- counting a product inuenced their attitudes toward the deal. They found, for example, that consumers had more negative attitudes toward the deal when they attributed it to the retailer's desire to unload a difcult-to-sell offering. Customer perception is therefore important, especially in relation to the use of IT, since there is a greater opportunity to offer price differentials to consumers on a one-to- one basis. Trust and mistrust are at bipolar opposites (Pearce, 1974), and consumers who perceive that suppliers are untrustworthy through various pricing differentials consider them to be practising malfeasance, and not having their best interests at heart. Therefore, consumers risk that the price they pay at a particular moment in time is the best price that they will get. TRUST AND EQUITY Trust is at the heart of relationship marketing and revenue management. It is a fun- damental element in a successful long-term relationship with our customers. It is also reasonable to assume that trust is related to equity. Can a buyer trust a seller when there is a suspicion that the seller is providing a lower price to other buyers for an identical bundle of benets? Likewise, if a new customer is targeted and is rewarded with low prices, what does this say about loyal customers' trust in the supplier? Should it encourage individual buyers to disloyalty? These are the types of questions that you will consider in the following cases. DINING CLUBS CASE In order to test the effect of variable pricing on consumer trust, the authors set up a simulation involving two hypothetical dining clubs. A dining club, as dened here, offered discounts at a selection of restaurants. Each dining club offered facilities for club 'members' to obtain membership prices at a selection of ve local restaurants. The restaurants themselves were real and were known by reSpondents. The management of the restaurants was aware of the simulation exercise. The two dining clubs differed only Variabie Pricing and the Consumer 161 in reSpect of the pattern of discounting employed - the average price charged was similar for the two clubs. Restaurants were chosen as the product in question since they were typical of products with a cost structure which typically allows for wide variability in prices; as a product they should be fairly low in involvement; and most consumers should be reasonably familiar with prices of the type of product. As a simulation approach was adopted, no transactions were actually completed. However, the ability to vary prices was considered to be typical of what currently happens in large organ- izations. The members were presented with a series of flyers relating to offers at the various restaurants. The price of the offers varied over the period of the simulation. In addition, members of each dining club were divided into two communication groups. One group received communication by means of a printed yer; the other group received messages by email. They understood that this was a simulation exercise and were encouraged to participate by the offer of a number of prizes of free meals. The sample comprised 104 respondents who were self-selecting. Their demographic characteristics were felt to be representative of diners in general. The dining clubs were positioned as offering a discount to the normal prices charged by the sample of restaurants. The mean discount was pitched at 10 per cent below normal prices. However, the dining clubs differed in their variation of prices around this mean. 0 Dining Club Al: The same discounted prices were offered at all times. A weekly newsletter by email reminded customers of the offer. O Dining Club A2: As dining club Al, but communication was by printed yer. 0 Dining Club Bl: Some deep discounts were offered. At other times the price was higher than what would have been obtainable by dealing directly with the restau- rant. A weekly newsletter by email gave special offers. 0 Dining Club BZ: As dining club Bl, but communication was by printed yer. Each dining club was given a distinctive name to improve memorability. The series of messages was communicated to potential and actual customers of the product and were differentiated only by price. Six messages were sent to members over a period of six weeks. Trust by respondents in each product was measured at the conclusion of the simulation. The dining clubs were 'new' to respondents, so it was assumed that trust at the outset was equal for the two clubs. How was Trust Measured? Trust was measured using a multiple item scale based on those developed by Butler (1991). This has been tested for validation and standardisatiOn in many studies (e.g., Chow and Holden, 1997). Butler identied ten conditions of trust: (1) availability, (2) competence, (3) consistency, (4) discreteness, (5) fairness, (6) integrity, (7) loyalty, (8) openness, (9) promise fullment, and (10) receptivity. Butler also developed an eleventh scale, 'overall trust', which tests the relationships between the conditions and overall trust in an individual. Butler's scales were adapted for this simulation on the basis of the inputs of focus groups. Basic demographic and behavioural variables were also recorded and analysed. ' 162 Revenue Management and Pricing Outcomes The trust survey achieved a response rate of 4? per cent, with 43.8 per cent of these having received communications by means of a printed yer and 56.2 per cent by email. Notably, results recorded on the scales measuring the conditions of 'overall trust', 'integrity' and 'loyalty' indicated that the respondents' level of trust was lower in the club offering variable discounts. For example, the recorded responses to one of the statements measuring overall trust ('This company is basically honest') effectively highlighted the lower level of overall trust in the club offering variable discounts. Fifty- ve per cent of respondents agreed with this statement in relation to the club offering a steady 10 per cent discount, while only 39 per cent of respondents agreed with it in relation to the variable discount club. Similarly, lower levels of trust were recorded in the club offering a variation of prices in responses to a statement regarding the 'integrity' of the two dining clubs ('This club wouId not make false claims to me about any offer'). The uniform discount club recorded 47 per cent of respondents in agree- ment with this statement whilst the variable discount club only registered 39 per cent in agreement. As such it may be assumed that respondents tended to be less trusting of the variable pricing club. With regard to the medium of communication, the use of email appeared to lower the proportion of respondents who would join the club offering a uniform discount but increased slightly the proportion of those wanting to join the variable discount club. There are strong theoretical reasons for supposing that a consumer's trust in an organization may be undermined where there is a perception that they might not have obtained the best deal available from the supplier. This basic simulation has provided some evidence of this effect. Despite the advantages of the longitudinal simulation approach adopted in this simulation, its limitation should be recognized, especially the absence of a signicant level of risk on the part of participants. Nor could the simu- lation develop trust on the basis of tangible property qualities since there were no actual interaction with the service on which trust could be based. However, it did allow trust to focus on messages, how these were manipulated and how they affected customers' perceptions of trust in a service provider. AMAZON.COM: VARIABLE PRICING IN PRACTICE In September 2000, Amazon.com attempted to implement a differential pricing struc- ture that would track online purchasing behaviours to charge loyal customer higher prices for DVDs. Consmners were quick to discover the price differences and com- plaints followed. Amazon customers on DVDTalk.com, an online forum, reported that certain DVDs had three different prices, depending on the so-called cookie a customer received from Amazon (Wolverton, 2000). Cookies are small les that web sites transfer to customers' hard drives through the browsers they use. These les allow sites to recognize customers and track their purchase patterns. Depending on previous purchases a DVD such as Men in Black could cost $33.97, $27.97 or $25.97. The list price was $39.95. Streitfeld (2000) also cites the example of one customer who ordered the DVD of Julie Taymour's Titus paying $24.49. The next week he went back to Amazon and saw the price had jumped to $26.24. As an experiment, he stripped his computer of the electronic tags that identied him to Amazon as a regular customer and the price fell to $22.74. One angry poster on DVDTalk.com stated, 'Amazon $5.... - Variable Pricing and the Consumer 163 apparently offers good discounts to new users, then once they get the person booked and coming back to their site again and again, they play with the prices to make mm money' (cited in Bicknell, 2000). Loyal, repeat customers were particularly incensed, One such customer on DVDTalkcom stated: This is a ver y strange business model. to cltarge customers more when they buy or come back to the site more. i have no problem with coupons for rst-time customers as marketing enticements. but i thought the idea was to attract rst and then work hard to keep them. This is denitely not going to earn customer loyalty. (Cited in Streitfeld, 2000) Amazon.com quickly issued reports claiming that it had been presenting different prices to different customers but denied that it had done so on the basis of any past pur- chasing behaviour at Amazon. As spokesman Bill Curry stated: it was done to determine consumer responses to different discount levels. This was a pure and simple price test. This is not dynamic pricing. We don't do that and have no plans ever to do that. (Cited in Streitfeld, 2000) However an Amazon customer service representative claimed in an email to a DVDTalk member that the company had been engaged in a dynamic price test: 1 would like to send along tny most sincere apology for any contsion or frustration caused by our dynamic price test. Dynamic testing of a customer base is a conunon practice among both brick and mortar and internet companies. (Cited in Streitfeld, 2002) Amazon.com quickly cancelled its differential pricing and refunded the difference to customers who had paid the higher prices (Adamy, 2000). We are well aware that Amazon's experience with different prices is not new. Air- lines, hotels, car rental companies and cruise lines have been charging different prices for the same service for years. Even physical retail outlets charge customers different prices for the same product depending on the store's location and the time of year (Cox, 2001). The problem with on-line variable pricing is that the customer is an unwilling participant. As Streitfeld (2002), a Washington Post staff writer, points out: . . . traditional methods used to calculate prices are sledgehammers compared with the Internet 's scalpel. For one thing, the Web provides a continuous feedback loop: The more the consumer buys'om a Web site. the more the site knows about him and the weaker his bargaining position is. It's as if the corner drugstore could see you coming down the sidewalk. clutching your fevered brow. and then double the price of aspirin. Adverse customer reaction resulted in a Speedy end to Amazon's experiment with differential pricing. Customers were disillusioned by the company's attempts to 'punish' loyal consumers. As John Dziak, a Los Angeles-based actor, summarized it, 'you trust a company, then you hear they're doing this kind of stuff, your trust wavers and you go 164 Revenue Management and Pricing paradox is emerging that one-to-one pricing on the Internet may severely undermine trust in a service provider. DISCUSSION QUESTIONS 1. Why is the maintenance of trust particularly important with on-line transactions where the price charged to the consumer by a particular company may vary con- siderably overtime? 2. What strategies would you advise a revenue manager to adopt in order to maintain consumer trust whilst employing differential pricing? 3. How would you avoid the appearance of punishing regular, loyal customers with higher prices