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An Approach to Hotel Services Dynamic Pricing Based on the Delphi Method and Fuzzy Cognitive Maps


Abstract and Figures

E-tourism services open up new opportunities for businesses to expand and when possible to gain completive advantage. Dynamic pricing is an area of interest for both researchers and professionals. It’s the process of price specification in a way that best suits a tourism organization under certain cir-cumstances that reflect its competitive environment. Many research studies have addressed dynamic pricing from different perspectives. This study suggests that the use of a hybrid approach that combines Delphi method and fuzzy cognitive maps is suitable for it introduces fuzzy logic in order to capture the subjectivity and vagueness involved into evaluating the business settings, but it also provides for the necessary flexibility in analyzing the assumptions and the implications of different pricing scenarios.
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H. Papadopoulos et al. (Eds.): AIAI 2013, IFIP AICT 412, pp. 557–566, 2013.
© IFIP International Federation for Information Processing 2013
An Approach to Hotel Services Dynamic Pricing
Based on the Delphi Method and Fuzzy Cognitive Maps
Dimitris K. Kardaras1,*, Xenia J. Mamakou1, Bill Karakostas2,
and George Gkourakoukis1
1 Business Informatics Laboratory, Dept. of Business Administration,
Athens University of Economics and Business, 76 Patission Street, Athens 10434, Greece
2 Centre for HCI Design, School of Informatics, City University, Northampton Sq.,
London EC1V 0HB, UK
Abstract. E-tourism services open up new opportunities for businesses to ex-
pand and when possible to gain completive advantage. Dynamic pricing is an
area of interest for both researchers and professionals. It’s the process of price
specification in a way that best suits a tourism organization under certain cir-
cumstances that reflect its competitive environment. Many research studies
have addressed dynamic pricing from different perspectives. This study sug-
gests that the use of a hybrid approach that combines Delphi method and fuzzy
cognitive maps is suitable for it introduces fuzzy logic in order to capture the
subjectivity and vagueness involved into evaluating the business settings, but it
also provides for the necessary flexibility in analyzing the assumptions and the
implications of different pricing scenarios.
Keywords: dynamic pricing, Delphi method, fuzzy cognitive maps, hotel
management, e-tourism.
1 Introduction
Tourist arrivals around the world will increase over 200% by 2020 as predicted by the
World Tourism Organization [35]. The hotel service has four characteristics [15],
[36]: Intangibility: referring to the nature of the service. A service consumer cannot
judge the quality of a service until the service is consumed. Inseparability: which
implies that both the customer and the service provider should be present so that the
service takes place. Variability: implying that the service depends on the provider, the
time and the location that is consumed by the customer. Perishability: which refers to
the inability of the services to be stored and consumed another time. Heterogeneity:
implying that when in contrast to the products, services can be differentiated, espe-
cially due to the fact that they are intangible.
Tourism is a highly competitive business but its competitive advantage is no
longer natural, but increasingly driven by science, information technology and inno-
vation [5]. The Internet represents already the primary source for tourist to gather
558 D.K. Kardaras et al.
information for travelers, since 95% of Web users use the Internet to gather travel
related information and about 93% indicate that they visited tourism Web sites when
planning for vacations let alone the fact that the number of people who search the
Internet for tourism related information increases rapidly [5]. Travelers increasingly
resort to the Internet to search for tourism offers, to collect destination information
and to organize their trips. The available information is there on the web and steadily
increasing as well, thus making competition among business more intensive. In such a
volatile environment, with well-informed competitors as well as customers, hotel
management should adapt their pricing policy in order to meet the requirements of
tourists but also to respond to challenges of the competition.
However, one of the most important features in hotel management, also in the tour-
ism industry as a whole, is that many of its products / services are perishable. This
makes it more difficult to set the appropriate price for a given business environment at
a given point in time [10]. In addition, bearing in mind that tourism is extremely
vulnerable to various external pressures and events, such as natural disasters and
terrorist attacks, one cannot be sure for its demand. Therefore, dynamic pricing
becomes an even more complicated decision problem [34]. As a result, drawing
the appropriate pricing policy that can flexibly adjust to current circumstances is of
paramount importance for hotel management.
2 Literature Review
One of the many implications that e-tourism has brought to tourism industry is the
way that tourism businesses set the price for their services. Dynamic pricing, stems
from dynamic packaging, which can be defined as “the combining of different travel
components, bundled and priced in real time, in response to the request of the con-
sumer or booking agent” [5]. The problem in the dynamic pricing in the case of the
hotel industry is related to the unknown demand distribution of this service [34]. Lew-
is and Chambers (1989), in Danziger et al., (2004) [10], claim that “pricing in the
hotel industry appears to be unscientific, self-defeating, myopic, and not customer-
based”. Other than the seasonality, hotel service prices are influenced by factors such
as unknown demand distribution, income availability, the political stability in a tour-
ism destination, the terrorist attacks, etc. [34].
Dynamic pricing originally introduced in the early 2000s from hotel chains, such
as Hilton, InterContinental and Ledra Marriott [23]. Dynamic pricing, which is also
known as yield management pricing policy [2], [30] is commonly used in the hotel
industry, implying “a method that can help a firm to sell the right inventory unit to the
right customers at the right time and at the right price, and thus to help a company
optimize its profit”. It is also defined as a sophisticated way of managing the of-
fer/demand by manipulating prices and available capacity simultaneously [30]. Dy-
namic pricing is related to policies such as the Last Room Availability (LRA) and the
Best Available Rate (BAR). The LRA policy offers better prices for certain number or
types of rooms. A hotel could for example adopt the LRA policy for all room types,
365 days a year, as opposed to a static agreement, where LRA is offered in only 2
An Approach to Hotel Services Dynamic Pricing Based on the Delphi Method 559
room types [29]. On the other hand, BAR ensures customers that the price they pay is
the best rate a hotel can offer, given the demand for that particular day [29].
There are two ways for consumers and service providers to reach a dynamic pric-
ing agreement. The first is associated to a client who has a significant volume for a
specific hotel. The amount of discount off of the Best Available Rate (BAR) reflects
on the one hand the volume that the client brings to this hotel and on the other the
travel patterns of the client [29]. The second way to reach a dynamic pricing agree-
ment is associated to the multi-location and the minimal volume of this agreement, in
which case, the client offers small volumes for several locations; thus the hotel chain
will offer a minimal discount off of the Best Available Rate (BAR) [29]. A blend of
these two ways is also possible. Given the fact that the pricing in the case of the hotel
industry is based on a constrained supply and a fluctuating demand, the static model
of pricing is not realistic. Hence, the dynamic pricing model is regarded as a reasona-
ble solution [29]. Several methods have been applied for hotel services pricing such
as the Activity Based Costing –ABC [9], the thumb approach and the Hubbart formu-
la. According to the first, “the room price is equal to 1/1000 of the investment price”,
whereas according to the Hubbart formula “the room rate equals the satisfied room
revenue divided by the anticipated rooms sold, and satisfied room revenue is the cost
of the hotel and the owner-desired profit”[6]. Recent studies indicate the value of
dynamic pricing in terms the financial but also other tangible or intangible benefits it
produces for hotels.
3 Methodology
The aim of this research is to determine the factors that mostly affect the process of
dynamic pricing and to develop a model that supports the process of dynamic pricing.
This study consists of two phases. The first phase adopts the Delphi method and cap-
tures the opinions of a group of 30 experts, with respect to the most influential pricing
factors. A two-round Delphi method identified 20 pricing variables which were then
included in the dynamic pricing model. In the second phase the same group of experts
had to indicate the interrelationships among the factors identified during the first
phase. Then, this study utilizes fuzzy cognitive maps in order to model the interrela-
tionships among the factors identified and to provide a model that supports pricing
scenarios analysis. The experts were asked to express their beliefs with respect to the
strength and polarity of all possible causal relationships among the pricing factors
identified from the Delphi method.
3.1 Delphi Method
The Delphi method (DM) was originally developed by Dalkey and Helmer [8]. It can
be used to acquire experts’ knowledge and beliefs and reach a reliable consensus
among the experts [24]. DM rounds (up to four) of experts’ questioning provide the
experts with important information, like medians, averages and deviation from
the previous rounds, so that they can rethink and revise their original beliefs and
560 D.K. Kardaras et al.
assumptions. Studies show that the experts’ opinions converge towards the average of
the group’s opinions [4]. DM is applied through a series of recurring questions, usual-
ly in the form of questionnaires to a group of experts. After each round of question-
ing, the questions of each subsequent cycle to each member are accompanied by
information on the responses of the other group members, which are presented ano-
nymously. In this way, feedback is given for the experts to revise their opinions.
According to Skulmoski et al. [32], the Delphi method is characterised by the Ano-
nymity of the Delphi participants, the Iteration, through which the participants recon-
sider their opinions, the Controlled feedback, since it provides feedback information
to the experts regarding the other members’ opinions from previous rounds and Statis-
tical aggregation of the experts’ responses, thus producing the consensus of the group.
DM is simple and flexible [32], it avoids a direct confrontation among the participants
during the application of the method [28] and it also offers the experts feedback in
order to review their assumptions and positions [27].
Many methods have been proposed to combine experts’ opinions such as mean,
median, max, min, mixed operators [20]. This research uses the geometric mean to
represent experts’ consensus. Thus, the importance of each of the factors identified is
calculated by using the geometric mean of all the corresponding answers of the partic-
ipants. The geometric mean has been used in the literature as one of the best ways to
aggregate experts’ opinions [16].
According to Mullen [26], there is no consensus regarding the size of the experts
panel required by DM. Panel sizes as little as 9 experts [12] have been used in DM, or
groups of 10 experts [3], 13 experts[22], or 31 members[16]. DM studies have also
engaged groups as large as low hundreds, or even thousands in some studies in Japan
[21]. The panel size of 30 experts in the current study is therefore, within the recom-
mend range.
3.2 Fuzzy Cognitive Maps
A Fuzzy Cognitive Map (FCM) is a graph that consists of a number of nodes Ci
representing the concepts of the domain in study. These nodes are connected to each
other with weighted arcs W(i,j) showing how concept i is causally affected by concept
j. The arcs that connect two concepts have weights that correspond to fuzzy qualifiers,
such as ‘a little’, ‘moderately’, ‘a lot’. Furthermore fuzzy numbers can be assigned in
order to show the extent to which a concept affects another. FCMs are commonly
used to model and study perceptions about a domain, to investigate the interrelation-
ships among its concepts and to draw conclusions based on the implications of specif-
ic scenarios. The impact among the concepts of a FCM is estimated using the indirect
effect. In other words, the impact caused due to the interrelationships among the con-
cepts along the path from a cause variable (X) to an effect variable (Y) and the total
effect, i.e. the sum of all the indirect effects from the cause variable X to the effect
variable Y [14].
FCMs are represented by means of an NxN matrix, where N is the number of
the concepts in the FCM with i and j representing concepts in the FCM. Every value
of this matrix represents the strength and direction of causality between interrelated
An Approach to Hotel Services Dynamic Pricing Based on the Delphi Method 561
concepts. The value of causality is assigned values from the interval [-1, +1].
According to [31]:
> 0 indicates a causal increase or positive causality from node i to j.
= 0 there is no causality from node i to j.
< 0 indicates a causal decrease or negative causality from node i to j.
The multiplication between matrices representing FCMs produces the indirect and
total effects [37] and allows the study of the impact that a given causal effect D1 is
causing. Causal effects can be represented with a 1xN vector [1]. This impact is cal-
culated through repeated multiplications: ΕxD1 = D2, ExD2 = D3 and so forth, that
is, ExDi = Di+1, until equilibrium is reached, which is the final result of the effect
D1. Equilibrium is reached when the final result equals to zero, i.e. all cells of the
resulting vector are equal to zero (0) and there is no any further causal impact caused
by any concept. Different thresholds, depending on the modelling needs, restrict the
values that result from each multiplication within the range [-1, +1]. Therefore, if a
value is greater than (+1) then it is set to (+1), or it is set to (-1) if the resulting value
exceeds the lower limit of (-1). For example, a threshold of (+/-0.5) implies that if the
resulting value is greater than (+0.5) or lower than (-0.5) then the value is set to (+1)
or (-1) respectively. FCMs have been used in many applications such as in modelling
complex dynamic, which are characterized by strong non linearity [33], in persona-
lised recommendations [17], [25], in managing relations in airline services [13], in
systems modelling and decision making [14], in EDI design [18] and in EDI perfor-
mance evaluation [19].
In order to construct the FCM, this study adopts the approach proposed by [3-4],
who propose the development of an FCM for ERP tools selection based on experts’
consensus, which was reached after a two-round consultation with the use of the Del-
phi method. The FCM is constructed by considering the median of the experts’ res-
ponses in order to represent the magnitude of causality among the FCM concepts. As
for the sign of each causal relationship, the sign that the majority of the experts pro-
pose is selected.
4 Delphi Method Results
The group of experts who agreed to participate in this study had to specify the impor-
tant factors that influence hotel service prices. The two-round Delphi method resulted
in the following list of 20 factors.
The results show that trust is the foremost important factor that influences service
price and the decision of a customer to proceed in booking. It is interesting to note
that experts find trust even more important than demand. It implies that long term
good reputation of the hotel and its highly appreciated services among the customers
can provide the foundation for the hotel management to adjust pricing policies even at
hard times. Therefore, hotel management should pay special attention to increasing its
customers’ trust towards their hotel services.
562 D.K. Kardaras et al.
Table 1. List of factors affecting dynamic pricing
Factors affecting dynamic pricing Geometric
Trust: Hotels ability to reflect all the necessary reassurances to gain cus-
tomers trust.
Product's description: All the necessary information that may interest the
customer regarding offered services and hotel facilities.
Awareness and Star Rating: The importance of hotels brand awareness as
well as its Star Rating Categorization.
The distribution channel: The distribution channel that the company uses for
its dynamic pricing, and its nature. (Internet, mobile devices, agencies etc).
Forecast ability: Hotel's ability to forecast future bookings (short and
long term).
Booking incentives: The incentives that hotels offer to its customers in
order to increase bookings efficiency. Eg: LRA (Last Room Availabil-
ity), BRG (Best Rate Guarantee) etc.
The profile of the customer: The nature of the potential customer. For
example, there are high-value customers willing to pay more and low-
value customers looking for last minute offers.
Customer's behavioural trends: The way customers react. For example,
buyers tend to request a ceiling or cap rate because they don't like to
drive into the unknown.
Competition: The competition between hotels operating in the same market. 3.72
Market orientation: How clear is the orientation of the market through which
the hotel offers its services? There is a variety of markets and most of them,
present their prices as the best existing prices. This can confuse customers.
Heterogeneity among hotels: Usually, many hotels operate in the same
area, of the same heterogeneous type of service and ranking.
Demand and availability: Demand and availability over the region where
the hotel operates.
Economical and political situation: Economical and political situation on
the region where the hotel operates.
Legal constraints: There may exist legal constraints regarding the nature
of the offers, such as maximum and minimum possible prices.
Booking Season: A product may have different price on an ordinary date
and different on a holiday season.
Customer's perceptions: Customer's perceptions of price and satisfaction.
The perception of price fairness over offered services etc.
Customer's preferences: Depending on the product, there might be various
preferences that define the final product price (wifi, breakfast/dinner etc).
Room availability: Room availability in the hotel. 2.46
Historical records: Historical records that allow a company to make price
decisions based on earlier records.
Customer arrival rate: The arrival rate of new customers at the hotel. 3.71
An Approach to Hotel Services Dynamic Pricing Based on the Delphi Method 563
5 Fuzzy Cognitive Mapping
Following the Delphi method, the experts were asked to judge the direction and
strength of interrelationships among the pricing factors. The median was calculated in
order to specify the strength of factors’ interralationships, for it allows for positive or
negative signs to be modelled in the FCM. As for the sign of each relationship,
following the method by Bueno and Salmeron [3], it is defined according to the
majority of the experts’ answers. By analyzing experts’ responses the following part
of the complete FCM was constructed:
Fig. 1. Part of the Dynamic Pricing FCM
By implementing the FCM as a matrix, several pricing scenarios can be investi-
gated. For example, assume that a hotel operates in an area of low heterogeneity,
which implies that hotel services are similar to each other, thus intensifying the com-
petition and subsequently increasing the pressure for lower prices. Other assumptions
regarding the current situation of the hotel in the scenario are a high trust that custom-
ers hold for the hotel, and high demand. The linguistic variables used to describe the
scenario are expressed in terms of the following scale [7]:
Table 2. Linguistic variables and corresponding mean of fuzzy numbers
Linguistic Values The Mean of fuzzy numbers
Very High 1
High 0.75
Medium 0.5
Low 0.25
Very Low 0
564 D.K. Kardaras et al.
Each scenario, which assumes a causal effect, is represented by the Scenario-
Vector (SV), which is a vector (1xn), where n is the number of variables that consti-
tute the dynamic pricing FCM. Drawing on the theory of FCM, by multiplying the SV
and the FCM, the management can examine the implication on prices and then decide
what the most favourable pricing policies can be assumed and followed. More than
one multiplication may be needed, until the system produces a final value for the
“Price” variable, i.e. the price adjustment (PA). The sign of the value of “Price” indi-
cates that the system suggests a price increase or reduction. The value indicates that
magnitude of the price adjustment which in fuzzy terms can be a very high or high,
etc. increase.
Assume the following scenario represented by the activation vector shown in
Fig. 2:
Fig. 2. FCM scenario
Specifying the threshold at 0.3 the results of the FCM simulation are the following:
Fig. 3. FCM result
The results in Fig. 3 indicate that price could be increased by low while at the same
time customers’ perception of the hotel will increase by medium.
By taking into consideration the current price that hotel management can specify
the new-price for example, with the following multiplication:
New-Price = (Old-Price) + ((Old-Price) x (Price-Adjustement)).
For example, if Old-Price=100 euros and Price-Adjustement = +low, then the
New-Price=100 + (100*0.3) = 130 euros.
6 Conclusions
By applying a hybrid approach that combines the Delphi method and fuzzy cognitive
mapping this research work investigates the potential of developing FCMs in order to
support dynamic pricing for hotel management. The combination of the two methods
has been used in other research works [3] but not in dynamic pricing of hotel services.
The proposed approach to dynamic pricing can provide hotel management with a
useful tool in their decision making tasks. As a future work, this study suggests the
full development and evaluation of a useable tool based on FCM for dynamic pricing.
An Approach to Hotel Services Dynamic Pricing Based on the Delphi Method 565
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This study explores hospitality competencies needed by the graduates of higher education institutions for their future employability within the industry based on Competency-Based Education. Using the Delphi method, the study involved a panel of industry from four- and five-star hotels in Malaysia as experts. It ends up with three rounds of data collection. Findings from the first round method revealed the experts agreed that 69 competencies are required within the industry. In the second round, the experts indicated that all the competencies are relevant for hospitality graduates’ future employability. The third round showed that the competencies were finalized under clusters, namely, Workplace, Personal Effectiveness, Management and Academic. In conclusion, Competency-Based Education has successfully determined the competencies required by the industry. Further, the study suggests a strong coordination from both educational providers and the industry in preparing hospitality graduates with competencies to enhance future employability and to survive the competitive environment.
Full-text available
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This paper gives an account of an experiment in the use of the so-called DELPHI method, which was devised in order to obtain the most reliable opinion consensus of a group of experts by subjecting them to a series of questionnaires in depth interspersed with controlled opinion feedback.
We propose fuzzy cognitive maps, a branch of fuzzy logic, to study interaction of factors affecting processes and details of the approach are discussed. Application of the technique to discriminate between factors affecting slurry rheology is demonstrated. It has been shown that hydrodynamic interaction, effective particle concentration, shape and size, temperature and shear rate have a significant influence on the slurry viscosity. The complex interaction of the various factors delineated by previous workers is also presented.
This pilot study explored the utility of a behavioral process technique in assessing the attributes service providers deem most important when pricing a hotel room. Prior studies in the Israeli hospitality industry reveal that brand name, star rating, location, and number of rooms are all assets that can predict price. However, tracing the processes of individual decision makers' pricing strategies was not addressed in past research. The technique we used tracks item by item information acquisition to address this issue. Decision makers estimated the market price of a hotel room after sequentially revealing market information about competing hotels. The order of information search and the price estimate were measured.
Suppose that one of two prices for the same product must be posted every day. Under each price, the demand function is described by a compound Poisson process with possibly unknown parameters. The objective is to sequentially post daily prices so as to maximize the total expected, possibly discounted gross revenue over a finite pricing horizon. To effectively balance between understanding the demand function and achieving economic revenues, we formulate the optimal pricing problem with a bandit model and characterize the solution by means of stochastic dynamic programming. When there is only one unknown demand function in the model, the optimal pricing decision is determined by a pricing index, whose limit is the Gittins index. These index values also demonstrate that it may be worth sacrificing some immediate payoff for the benefit of information gathering and better-informed decisions in the future. Moreover, the optimal stopping solution is derived and the myopic strategy is shown not to be optimal in general. When both demand functions are unknown, a version of the play-the-winner pricing rule is derived.
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