Pricing Strategies in the Service Sector- A Look at Price Competition in the Restaurant and Hotel Industries

Naoko Nonoyama

Summary

In the past few years， the prices of goods-particularly consumer goods-have been falling steadily. Price declines have also been noticeable among restaurants hotels， and travel businesses in the service sector. These price declines have occurred against a background of both cyclical factors such as the recession， as well as structural factors such as growing competition and changes in distribution channels. In addition， the downtrend is being reinforced by increasingly price conscious consumers， particularly because of the high proportion of discretionary spending in the service sector.
The restaurants industry has responded to the “low-price boom”by actively reducing prices primarily in family restaurants and fast food outlets. City hotels have offerd room discounts and promotional gifts. Judging from the cases we studied， while price cuts have substantially spurred demand， demand is also signficantly affected by how consumers evaluate non-price factors such as quality of service， thus complicating the price reduction strategy. Moreover， in some businesses， long-term negative effects are emerging because price cuts are failing to increase profits.
In the service industry， since non-price factors are an important aspect of services offered， price cutting must fully consider the effects on service quality. Aside from labor cost cuts， the service sector does not have as much leeway to reduce prices by cutting costs as in manufacturing. However， since labor cost cuts affect the most important aspect of quality of service， the tradeoff between cost cutting and price reductions involves substantial risk. This aspect of the service industry complicates the low-price strategy.
Due to the nature of the service sector， there is a strong tendency for information on prices and services not be adequately conveyed to consumers. This scarcity of information poses the risk that consumers will not support services and the services will not be properly evaluated. As consumer evaluations of value and price become more diverse and mature， pricing strategies in the service sector will need to supply information more aggressively. In addition， third party assessments such as by rating organizations will help improve the credibility of services and generate new demand.
As intense competition continues to pull downward， the strategic importance of pricing decisions will grow. Services known for their arbitrary prices will need to consider the possibility of a price diversity that flexibly conforms to what consumers want and can afford. Price diversity and standardization of service quality will increase demand， expand the variety of services， and lead to the development of the sector in the long term.