In this section, we focus on the customer decision-making process through an ana- lytical explanation. Before going into details, let us present how standby upgrade program works in detail:
The guest (she) first makes a choice between booking a standard room and pre- mium room (or do not purchase). When she completes the reservation, she receives a banner ad indicating that customized upgrade offers are available via email or on brand.com confirmation page (see Figure 3.2). After clicking the banner ad, she re- ceives a list of discounted upgrade offers (see Figure 3.3). These offers include room upgrades (e.g. standard guestroom to a suite), room features (e.g. city view), ameni- ties (e.g. internet), early check-in/late check-out, parking, spa services, etc. If she requests an upgrade, she learns whether the upgrade(s) is awarded at the time of check-in. If awarded, she is automatically charged the discounted price, otherwise she keeps the original booking and pays nothing extra.
For simplicity, consider a hotel with one standard and one premium room type. A customer makes a set of decisions based on her valuation for the standard room and
Figure 3.3 Standby Upgrade Offers
premium room, the standard and premium room prices, her awareness of standby up- grades, and the standby upgrade price. Figure 3.4 illustrates this process. Following Yılmaz et al. (2017), we approach this problem using the customer valuation for the differential, i.e., the difference between her premium and standard room valuations, instead of using a two-dimensional valuation for standard room and premium rooms. We postulate that customers are heterogeneous in their valuations for the premium room differential, and their loyalty status has a direct effect on their capabilities of being strategic. The customers without loyalty membership are assumed to be non- repeat customers, therefore not aware of standby upgrade programs. On the other hand, loyalty program members are mainly repeat customers who potentially know about the standby upgrade program based on their experience. Note that there are some high-tier loyalty members who accumulate points above a certain threshold and qualify for additional benefits such as free upgrades. Since these customers are not targeted by standby upgrades, we only focus on the basic-tier loyalty customers in this paper.
Figure 3.4 Steps of Customer Decision-making Process
3.3.1 Customers with No Loyalty Program Membership
Customers with no loyalty membership are likely to be unaware of the standby up- grade program prior to booking a room since most of them are not repeat customers. Therefore, they are unlikely to act strategically: They make a decision between a standard and premium room initially without considering the possibility of receiving a standby upgrade offer after booking. If they book a standard room, they then make a decision on the standby upgrade offer based on their valuation on the differential between two rooms, v: For a price set8 (pS, p), a customer without loyalty member- ship books the premium room initially if her valuation is v ≥ p. If v < p, she books a standard room and sees the standby upgrade offer. If v ∈ [pS, p), she accepts the offer, otherwise she rejects.9
8Today, most hotels use state-of-the-art tools to price their standard rooms. On the other hand,
they use a fixed premium differential, p, and standby upgrade price,pS, pegged to standard room price.
9Our data shows that some of these customers do not click the banner ad. They may be missing
the banner ad, or may have very low valuations for standby upgrades and do not want to see the offer. We cannot distinguish between customers who do not see the offer and who do see the offer but have low valuations.
We use the group of customers without loyalty membership as an uncontaminated myopic reference group in our analysis for investigating the strategic behavior of customers with loyalty memberships.
3.3.2 Loyalty Program Members
Our data set shows the award rate, i.e., the likelihood of getting a premium room through standby upgrades, for customers requesting the standby upgrade offers as around 50%. We postulate that at least a portion of loyalty program members may be aware of this high award rate and choose to opt for a standby upgrade offer even if they have high valuations for the differential and would, in the absence of a standby upgrade program, book a premium room directly.
Consider such a customer with a belief on award rate, r0 ∈[0,1]. There exist two threshold values for this customer at a given r0: (i) The indifference point between keeping the standard room and requesting standby upgrade, v1 = pS. (ii) The in- difference point between requesting standby upgrade and booking a premium room,
v2 = p−r 0p
S
1−r0 . Thus, for a price set (pS, p), a strategic customer books the premium room initially if her valuation is v ≥ v2. If v ∈ [v1, v2), she books a standard room
and chooses the standby upgrade offer. Otherwise, she books a standard room and rejects the offer. Note that v2 = ∞ if r0 = 1. Figure 3.5 illustrates the utility-
maximizing actions for a strategic customer on an example with r0 ∈[0,1],v ∈[0,1] and (pS, p) = (0.5,0.7).
Given our explanations, we expect strategic customers to be less likely to book premium rooms at the onset, but more likely to click the banner ad to see the standby upgrade offers compared to myopic customers. We also expect these customers to be more likely to request an upgrade.10
10We assume that customers who consider standby upgrades do not differ in their valuations for
𝑠𝑡𝑎𝑛𝑑𝑏𝑦
𝑝𝑟𝑒𝑚𝑖𝑢𝑚
𝑣 𝑟′
Figure 3.5 Optimal Actions for a Strategic Customer based on v and r0