How to Raise Recreation Service Prices Without Making People Mad Virginia Recreation and Parks Society John L Crompton University Distinguished Professor

How to Raise Recreation Service Prices Without Making People Mad

Virginia Recreation and Parks Society

John L CromptonUniversity Distinguished Professor and

Regents ProfessorTexas A&M University

Reference PriceThe price people expect to pay

for a service.

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

RESIDUAL INFLUENCERS

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

REFERENCE PRICE

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




NORMATIVE INFLUENCERS

•Equity: Community value ..system•Horizontal equity•Prevailing cultural norms•Communitywide –..personal services ..continuum

REFERENCE PRICE





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: Community value ..system•Horizontal equity•Prevailing cultural norms•Communitywide –..personal services ..continuum

REFERENCE PRICE


Context 1High-end Restaurant

Major Hotel

Context 2Low-end Restaurant

Context 3Specialist Wine Store

Context 4Supermarket

Reference Price Related Pricing Strategies

• Latitude of price acceptance

Conceptualization of the Zone of Price Tolerance

Median of the reference price

range

Either assimilation or contrast

Either assimilation or contrast

Rejection Rejection

Non-commitment

zone

Non-commitment

zoneZone of Price Tolerance

Assimilation

Bargain Price

Resistance Price

ContrastContrast

Guidelines for Width of Acceptance Zone

• Private sector: 15%-30% below regular price to be effective as a discount– Greater than 30%; not bona fide– 10% for price increases

• Public Parks and Recreation: maybe more scope at the high end because subsidies generate consumer surplus

Activity Existing Price

Low (50% of cost)

Medium (Break even)

High (Going rate)

Yes% $

Yes% $

Yes% $

Swim Lessons $8.00 100 10 92 12 76 15

Youth Swim $0.50 94 .50 84 .75 77 1

Aerobic fitness $12.00 78 14 59 23 38 32

Weight Conditioning

$16.00 55 16 52 22 33 30

Youth baseball $10.00 69 20 72 28 44 35

Tennis lessons $8.00 76 13 86 15 62 20

Preschool classes

$34.00/mo. 74 36 34 50 9 100

Photography classes

$13.00 52 25 53 32 54 40

Adult specialty crafts

$15.00 50 33 36 43 42 50

Youth dance classes

$12.00 68 14 67 20 64 25

Cross country ski

$15.00 44 24 53 34 30 45

Resident camping

$70.00 47 97 53 121 28 125

Whitewater raft trips

$18.00 60 23 22 32 25 35

Acceptance of Price by ProgramParticipants at Three Levels

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

Implementing Price Increases Consistent with the Latitude of Price

Acceptance

Y

Price

Years

Latitude of price acceptance. No client resistance to these price increases

Price increase at year Y meets client resistance

College Station Water Rates

Usage Old Rate New Rate

0-10,000 $2.22 $2.22

10,000-15,000 $2.22 $2.88

16-20,000 $2.22 $3.54

21-25,000 $2.22 $4.20

26,000 and up $2.22 $4.86


• Latitude of price acceptance• Relationship pricing

Relationship Pricing

• Consistency within a similarity set e.g. a division: Athletics, aquatics, arts, etc.

• “Outstandingness” of the high and low anchor prices.

High End Outstandingness Impact

A store owner has two camel hair jackets priced at $100 and $150 and finds that the more expensive jacket is not selling. A new camel hair jacket is added and displayed for $250; the new jacket does not sell, but sales of the $150 jacket increase

Which Presentation Will Lead to a Higher Order of Reference Price for Aerobics?

DescendingBootcamp $100Jazzercise $80Yoga $65Spinning $50Aerobics ?

AscendingAerobics ?Spinning $50Yoga $65Jazzercise $80Bootcamp $100



• “Outstandingness” of the high and low anchor prices.• Horizontal equity: Treat equals equally.



• “Outstandingness” of the high and low anchor prices.• Horizontal equity: Treat equals equally.• Change the relationship context.


• Latitude of price acceptance• Relationship pricing• Introductory pricing

Introductory Price Decay

After introductory periodIntroductory period

Regular price

Introductory low price

Time, weeks

Sales

Evaluation of Fees, Sample Summer Visitors, Flaming Gorge National Recreation Area

n Mean

% evaluating fee asToo Low About right Too high

Non-annual rec. use pass 289 $5.69 4 74 22

Annual rec. use pass 99 $22.16 - 78 22

Daily river parking fee 170 $4.29 3 58 39

Season river parking fee 12 $20 - 73 27

Camping 358 $50 - 56 44

Red Canyon Lodge 7 $159 - 90 10

Boat rentals 84 $105 1 51 48

Non-season boat slip 28 $54 - 58 42

Season boat slip rental 20 $1,254 - 50 50

Guide services 9 $235 - 70 30

Source: Fix and Vaske, 2007

Entrance Fee Evaluations at Selected National Wildlife Refuges

Sample Size Entrance Fee is:

National Wildlife Refuge Too Low

About Right

TooHigh

Sacramento, CA 290 5 92 3

Aransas, TX 196 4 87 9

Dungeness, WA 404 3 87 10

Chincoteaque, VA 203 12 86 2

St. Catherine’s Creek, MS 98 15 80 5

Balcones, TX 84 4 89 6

Buenos Aries, AZ 167 14 86 0

Piedmont, GA 321 5 88 7

Total 1763 6 88 6

Source: Vaske, Donnelly and Taylor, 1999

Service Area Current Average Price ($)

Most Appropriate Price ($) Price (%) Per Visit Cost of

Provision ($)

Parks, playgrounds,

greenbeltsNo Charge 0 83 4.00

Tennis 5.00 5.00 66 9.00

Swimming 2.00 2.00 72 9.00

Golf 11.00 11.00 53 19.00

Recreation centers 3.00 3.00 68 10.00

Organized athletics 3.80 3.80 62 6.00

Outdoor nature programs 2.00 2.00 67 9.00

Senior Citizen programs 1.00 1.00 68 6.00

Arts facilities or programs 2.00 2.00 62 6.00

Community education programs

2.00 2.00 62 12.00

Programs for people with disabilities

No Charge 0 90 11.00

Perceptions of Appropriate Prices for Existing City Recreation Services

Price ($) %

No charge 16

.75 20

1.25 28

1.75 14

2.25 7

3.00 15

Price ($) %

No charge 5

1.00 19

2.00 33

3.00 25

4.00 4

5.00 14

Perceptions of Appropriate Prices for Two Proposed New Services

Activity A Activity B


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

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 1991)

The Common Law of Business Balance“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lost a little money – that is all. When you pay too little you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.”

Scitovszky 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 one’s friends and their wives shows that more often than not people judge quality by price” (p. 100).

A Traditional Economic Demand Curve and a Price-Quality Demand Curve

120110100

908070605040302010

0 10 20 30 40 50 60

Bridge Class Price ($’s)

Bridge Class Numbers

TraditionalPrice-Quality

“The word ‘cheap’ usually means inferior quality nowadays; and in the United States ‘expensive’ is in the process of losing its original meaning and becoming a synonym for superior quality. Worse still, one of the largest American breweries uses the advertising slogan: ‘Michelob, America’s highest-priced brew!’”Scitovszky, 1945

Why Does Price Quality Exist?(only works if no other cues)

• Past experience is consistent with there being a price-quality relationship. Belief in the saying “You get what you pay for”

• The agency’s higher costs associated with a commitment to high quality

• Avoids the risk that inexpensive services may be less likely to give satisfaction

ST. MARTIN’S WC2 tel BO 071.836.1443ACC 071.379.4444* T 0836.430944AGATHA CHRISTIE’s

The MousetrapWorld’s longest ever run! 40th yearSORRY. No reduced prices at any timeFrom any sourceMon-Sat at 8:00. Mats Tue at 2:45. Sat at 5:00.


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

Service Enhancement Pricing

Participants are more likely to support user fees when such fees are used to maintain and improve the resource at which they are collected.


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

Temporal Reframing

(i) The use of credit cards

Temporal Reframing

(i) The use of credit cards

(ii)The “pennies a day” approach

Change Value Perceptions

Psychologically Repositioning a Bond Proposal for a New Natatorium

The median home value in the community is $150,000Construction cost of the natatorium $2 millionAnnual property tax payment by an average home owner: $12Annual operation and maintenance cost $100,000 Annual property tax payment by an average home owner $6 Total annual property tax payment by an average homeowner $18 which is $1.50 per month

In most years, there are heartbreaking stories in the local news media of children from this community who have drowned in area lakes. An agreement with the ISD means that every fourth grader in the community will be taught to swim, so lives will be saved.

Invest $1.50 a month and save a child’s life!


• Latitude of price acceptance• Relationship pricing• Introductory pricing• Price-quality relationship• Service enhancement pricing• Temporal reframing• Sunk cost effect

Sunk Cost Effect

• There is a greater tendency to continue with a program once an investment had been made in it

• At the time of purchase feel compelled to use it to avoid feeling they have wasted their money

Payment Depreciation

Over time, price is discounted so ultimately that the initial service takes on the characteristics of a free service

Health Club Fees: Payment Depreciation

(i) Pay the whole fee once a year

(ii) Pay half the fee every 6 months

(iii)Pay quarter of the fee every 3 months

(iv)Pay one-twelfth of the fee every month


• Latitude of price acceptance• Relationship pricing• Introductory pricing• Price-quality relationship• Service enhancement pricing• Temporal reframing• Sunk cost effect• Participant adjustment period

Implementing Price Increases Consistent with the Latitude of Price

Acceptance

Y

Price

Years

Latitude of price acceptance. No client resistance to these price increases

Price increase at year Y meets client resistance

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 “acceptable.”

Concept of Participant Adjustment Period

Participant AdjustmentPeriod

Time

Length of Adjustment Period

• Availability of substitute suppliers

• Income level of the client group

• Magnitude of the increase

3 Mitigation Strategies

• If season passes are involved, “grandfather.” Invite early renewal. Core users (20-80 law)



• Long time of advance notice



• Long time of advance notice• Principle of Dual Entitlement – demonstrate

the increase is fair and not arbitrary

Where the price has traditionally been zero, the implementation of any price often results in a significant attendance decline.


• Latitude of price acceptance• Relationship pricing• Introductory pricing• Price-quality relationship• Service enhancement pricing• Temporal reframing• Sunk cost effect• Participant adjustment period• Odd pricing

Truncation

A$79 $93

B$75 $89

The Influence of Odd Pricing on Demand

4 8 12 16 20 24 28 32 36 40 44

45

42

39

36

33

30

27

24

21

18

“The price decreases from $45 to $18. But at the “odd” prices of $38, $29 and $19 disproportionately more people participate than at the rounded numbers above them. Thus, 10 people enroll at $40, but this increases to 15 at $39. Similarly, at $30 enrollment is 20 people, but this number increases to 26 when the odd price of $29 is used.

Why No Odd Pricing?

• Deceitful illusion?

• Lack of awareness of its potential

• No tradition – concerns about controversy

Recreation ClassCost increase ($’s per year)

Year Price ($’s)

1 24

2 27

3 29

4 33

5 39


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


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

Customary Pricing

•Keep price within the latitude of price acceptance and cut a program’s cost

•Always cut quantity, NEVER quality“The pain of low quality is

remembered long after the joy of low price is forgotten”

A poor salesman sells on price, whereas a good salesman sells on the quality of the product

How important is each of the following factors in your decision to have your child participate in youth sports with the Gloucester (Virginia) Parks and Recreation Department? N=505

Location 3.6

Time of Activity 3.9

Price 3.1

Program Quality 4.3

Coach’s Quality 4.3

Parks and Recreation’s Staff Quality 4.1

Knowing Other Participants in the Activity 2.6

An Illustration of Customary Pricing Applied to a Recreation Class

Year Number of Classes Price

1 10 $50

2 9 $50

3 8 $50

4 7 $50

5 10 $70

6 9 $70


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

External Reference Pricing

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

The Program Adoption ProcessPark and Recreation Agency Service

AwarenessPassive Acceptance of Information

InterestActive Seeking Out of Benefit Information

Evaluation-Maybe TrialMental or Actual Trial

DecisionCommitment to Use the Service

ConfirmationReassure the Correct Decision Was Made

Discount Formats

• Regularly $20; for one week $15

• 25% off for one week

• Save $5 for one week

• Special: $15 for one week

Dollar Amount or Proportion?

• Dollar amount for high priced services

• Percent discount for lower priced services

Consider Truncated Influence!

A$41 to $29

B$45 to $33



2. Comparative pricing to persuade or re-assure people that an agency’s prices are better than those of its competitors

Comparative Boat Registration Fees

Description Texas Florida Michigan

16’ and under $18.00 $27.50 $10.60

16’ – 26’ $27.00 $43.50 $60.00

26’ – 40’ $36.00 $107.50 $162.00

Over 40’ $45.00 $171.50 $186.00

1994-1995 Hunting & combination License Prices for Surrounding States

StateResident Non-Resident

Small Game General Combination Small Game General

Arkansas $10.50 $25.00 $35.50 $65.00 $185.00

Louisiana $10.50 $21.00 $53.00 $86.00 $160.50

New Mexico $9.50 $43.50 $47.00 $79.00 $348.00

Oklahoma $12.50 $44.75 $53.25 $85.00 $301.50

Texas N/A $18.00 $30.00 $75.00 $205.00

Average (Excluding

Texas)$10.75 $33.56 $47.19 $78.75 $248.75



2. Comparative pricing to persuade or re-assure people that an agency’s prices are better than those of its competitors

3. Facilitating acceptance of price discrimination

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 don’t have a state parks sticker? Then it is $16; you want a hook up? Then it is $19.”

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 don’t need a hook up? Then it is $12.”

Surcharges make people mad; discounts make them happy!

Presentation available at:

• http://agrilife.org/cromptonrpts/selected-books-articles-and-presentations/recent-presentations/

Documents

How to Raise Recreation Service Prices Without Making People Mad Virginia Recreation and Parks Society John L Crompton University Distinguished Professor