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Segmenting cruise passengers with price sensitivity
ARTICLE IN PRESS
Tourism Management 26 (2005) 753–762 www.elsevier.com/locate/tourman
Segmenting cruise passengers with price sensitivity James F. Petrick Department of Recreation, Park and Tourism Sciences, 2261 TAMU, Texas A&M University, College Station, TX 77843-2261, USA Received 2 April 2003; accepted 7 March 2004
Abstract It has been suggested that discounted cruises have degraded the industry’s standards (Berlitz Guide to Cruising and Cruise Ships, Berlitz, Princeton, NJ, 1994), and that value-oriented cruise lines are gaining a competitive advantage over ‘‘high-end’’ cruises (http://www.cruisinformationservice.co.uk/press/factsheetdetail.aspx?id=45). This use of price discounting has created new challenges for the cruise industry, as they have attracted a more price-sensitive market than they have in the past. Thus, the purpose of the current study was to segment cruise passengers based on their price sensitivity to determine if price-sensitive markets are desirable. Results revealed that less price-sensitive visitors are more likely to spend more, while visitors who were more price sensitive were more likely to positively evaluate their experiences. Both theoretical and managerial implications are discussed. r 2004 Elsevier Ltd. All rights reserved. Keywords: Price; Price sensitivity; Cruise; Perceived value; Satisfaction; Repurchase; Loyalty
1. Introduction One of the most powerful tools that tourism managers have control of is price (Han, Gupta, & Lehman, 2001). Price significantly impacts tourists’ decision-making processes, and is highly related to purchase behavior (Kalyanaram & Winer, 1995). Within the field of tourism, price is utilized differently by the various service providers. The airline industry has been the most innovative (Orkin, 1990), by effectively using both differential pricing (i.e., pay more for first class than coach) and yield management (pay more when demand is higher). These strategies have since been incorporated into the lodging industry. The main reason that both have found success with these strategies is that their marginal costs (costs associated with providing service to one more guest) ‘‘are just a fraction’’ of their total expenses incurred (Orkin, 1990, p. 36). Since the cost of one extra passenger or one extra hotel guest is little, providing large discounts when demand is low, offers Corresponding author. Tel.:+1-979-845-8806; fax:+1-979-8450446 E-mail address: [email protected] (J.F. Petrick).
0261-5177/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.tourman.2004.03.015
hoteliers and airlines the ability to generate positive returns by lowering prices considerably. Yield management has also been successful in these industries because they are able to rely on a consistent business clientele, whose demand is more inelastic than pleasure travelers (i.e., changes in price have little effect on demand). Business travelers ensure that some seats/rooms will be sold at full to almost full fare, allowing for other seats/ rooms to be sold at substantial savings, while still generating profits. Due to higher marginal costs, and a very small portion of business travelers, the cruise industry has had greater difficulty incorporating yield management principles. The costs to the cruise provider for each additional passenger can be substantial, and include the costs of all meals (up to five per day) and the labor costs of a room steward, waiter, busboy, etc. Additionally, there are numerous fixed costs associated with each cruise ship a cruise line operates. Cruise ships can cost upwards of $400 million, which make a breakeven point of their purchase substantial. While some ships are owned outright, many are owned by financial institutions and then leased back (Cartwright & Baird, 1999). Regardless of how the ship is owned, it inevitably has to
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be paid for by leasing or payment of interest and capital on loans, resulting in extremely high fixed costs. Additional fixed costs for cruise lines include wages, crew meals, marketing, maintenance, agent fees and berthing fees (Cartwright & Baird, 1999). Adding to the difficulty in setting profitable prices is that this highly competitive industry is currently experiencing a change in the demographic profile of passengers. Data published by CLIA (2003a) show that the cruise passenger is younger (52 years old), and less wealthy (median income of $57,000) than ever before. Further, the market of the cruise industry that is seeing the greatest growth is the short (3–4 day) cruise (CLIA, 2000). These market changes suggest that ‘‘high-end’’ cruise lines will be losing a share of the market, and value-oriented cruise lines may be gaining a competitive edge. Thus, many cruise lines have started value pricing in order to ensure that their ships are full, even though the total collection of fares on a full-ship usually do not exceed the costs associated with operating the ship (Burger, 2002). Therefore hotel management must generate additional revenues from passengers while they are on board (through the sale of beverages, tours, gambling, etc.) in order to break-even or generate a profit. According to Dickenson and Vladimir (1997), discounting cruise fares is more the norm than the exception. Research has shown that discounts from published fares (in cruise brochures) of over 25% are easily obtained throughout the various cruise markets (Cartwright & Baird, 1999). These ‘‘value-fares’’ have had an impact on the quality that cruise lines can provide, and may be the driving force behind the demographic changes in the current cruising clientele. Ward (1994) commented in the 1994 Berlitz Guide to Cruising and Cruise ships that discounted cruises had degraded the industry’s standards. Combined, these changes in the market have made it integral for the cruise industry to examine the ramifications of offering discounts, and whether ‘‘price-watching’’ passengers are desirable.
2. Review of Related Literature One way to examine the effects of price discounts is to segment visitors based on their price sensitivity. While price elasticity describes aggregate changes in the quantity of demand related to changes in price, price sensitivity describes how individuals respond to various prices (Goldsmith & Newell, 1997). A price-sensitive visitor is one who is more likely to base their purchase decisions on price than a visitor who is less price sensitive. Thus, price-sensitive cruisers are those who are more likely to require discounted prices in order to purchase a cruise.
For the current study, price sensitivity will be measured with the Lichtenstein, Bloch and Black (1988) scale which measures a person’s price sensitivity as it relates to the purchase of a specified product. Their interpretation of price sensitivity is related to how conscious consumers are to price when making a purchase. Thus, their measures are related to how much consumers rely on price when making a purchase, and the importance of making a purchase when it is on sale. The majority of research related to price sensitivity has examined the effect of brand loyalty on price sensitivity (Brown, 1974; Krishnamurthi & Raj, 1991; Webster, 1965). The findings from this body of research reveal that loyalty reduces consumers’ price sensitivity. Thus, loyalty may allow cruise management to charge higher prices than their competitors and serve as a defense mechanism against cruise lines who charge lower prices. Krishnamurthi and Papatla (2003) examined this relationship further, by examining how the direction and strength of the loyalty/price sensitivity relationship varies across customers of various products (liquid detergents, margarine, ketchup and yogurt). They found that the loyalty/price sensitivity relationship is dynamic across consumers, as well as over time. If the same were to be found in the cruise industry, it would suggest that cruise management should have varying price promotions targeting consumers at different loyalty levels. Price unfairness or fairness, is generally derived by comparing one’s reference price to the actual price paid. Reference price is the price that consumers store in their memory (usually based on price last paid), which serves as a point of comparison for future purchases (Han et al., 2001). Reference price has been shown to play a significant role in the brands that consumers choose (Monroe, 1990; Winer 1986). Consumers who encounter a price that is lower than their reference price generally perceive the purchase as a gain, while a price higher than the reference price is perceived as a loss. Transaction utility is derived form the perceived gain (or loss) over and above the utility they obtain from the product (Mayhew & Winer 1992; Thaler 1985). With the use of utility theory, Dellaert and Lindberg (2003) examined differences in day trippers’ price sensitivity. They found that as hotel visitors’ utility of a day trip increased, and/or the price decreased, respondents’ price sensitivity decreased. They further found that both income and education were related to respondents’ responses to price changes, and that respondents who had both high incomes and low education gave inconsistent responses (less price sensitive). These results suggest that differences would be found in the income and education of segments based on price sensitivity, and that persons who have high incomes, yet low education, may be less price sensitive than expected.
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Oh (2003) extended economic utility theory to investigate the effects of positive and negative deviations from hotel visitors’ internal reference price. Not surprisingly, he found that visitors have a tendency to interpret actual price as less expensive when they believe they paid less than what they thought was fair market value (received a good deal). He further found that visitors who thought they received a good deal had higher perceptions of quality for their experience. Additionally, he found that visitors reacted more negatively to price unfairness (i.e., loss) than they did positively toward gains for both quality and value. This result can be explained with prospect theory which suggests that losses loom larger than gains (Han et al., 2001). Conversely, a few studies have found that consumers are not more responsive to losses than to gains (Krishnamurthi, Mazumdar & Raj, 1992; Greenleaf, 1995). Research has also identified that there is a latitude of acceptance around the reference price, in that minor changes in price do not have an impact on consumer choice (Gupta & Cooper, 1992; Kalwani & Yim, 1992). Thus, consumers who experience price differentials within this tolerance zone (zone of price insensitivity), do not experience any positive or negative transaction utility (Weber–Fechner Law). Kalyanaram and Little (1994), examined how different variables might influence the zone of price insensitivity. Results of their study revealed that consumers who purchase less frequently, have higher reference prices, and have higher brand loyalty, have a wider zone. Thus, first time visitors, visitors who are used to spending more, and more loyal visitors, may be less price sensitive when purchasing cruises. Han et al. (2001) also examined the effects on losses/ gains on consumers’ zone of price insensitivity and found that price promotion by competing brands is likely to make consumers more sensitive to losses, while having little influence on their perceptions of gains. They further found that with the use of cluster analysis, consumers could be effectively segmented into actionable target markets with the use of price sensitivity. With the use of these segments they revealed that not only do people have different price thresholds (zones of price insensitivity), but different brands are also interpreted as having different price thresholds. For cruise management, this means that specific markets may be able to be targeted who are less price sensitive, and that these markets might vary by cruise line.
discounts, in order to increase their passenger volume. Yet, in 2002 the industry saw an increase in worldwide guests of almost 16%, with a record 8.66 million cruise guests (CLIA, 2003b), and the first quarter of 2003 saw a record 2.2 million cruisers, up 23% over the same period last year (CLIA 2003c). Additionally, 13 new ships entered the worldwide market in 2002, and an estimated 14 new ships will enter in 2003 (CLIA, 2003b). Value for the dollar has been attributed to this rejuvenation (Cruise Information Service, 2003), as price discounting continues to saturate the market. This has resulted in a need by cruise management to determine if the price discounts that were used to rejuvenate the industry, are a viable long-term marketing strategy. It is therefore imperative to determine how price sensitive cruise visitors are, and to identify the differences between cruise passengers with varying levels of price sensitivity. Thus, the purpose of the current study is to segment cruise passengers based on their price sensitivity and identify differences between price sensitivity groups. Since empirical research has found that consumers who are more loyal, are less price sensitive (Krishnamurthi & Raj, 1991) and that loyalty consists of both an affective (attachment) and behavioral response to a service offering (Backman & Crompton, 1991) the following hypotheses are proposed: H1a:
H1b:
Cruise passengers who are more price sensitive will be less attached to the cruise line than passengers who are less price sensitive. Cruise passengers who are more price sensitive will be less likely to be behaviorally loyal to the cruise line than passengers who are less sensitive.
Research has also found that consumers who perceive the price of a product to be fair, are less likely to be price sensitive (Dellaert & Lindberg, 2003). It is thus proposed that: H2:
Cruise passengers who are more price sensitive will perceive the price of the cruise more negatively, than passengers who are less price sensitive.
It has further been found that consumers who spend more, and first time consumers are more likely to be less price sensitive (Kalyanaram & Little, 1994), which result in the following hypotheses: H3a:
3. Purpose of the study According to Shippax (2002), 2001 was the first year that the cruise industry registered a decline in the total number of passengers. This drop in occupancy forced many cruise lines to lower their prices by offering
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H3b:
Cruise passengers who are less price sensitive are more likely to be first time visitors than passengers who are more price sensitive. Cruise passengers who are less price sensitive are more likely to spend more money on their vacation, than passengers who are more price sensitive.
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H3c:
Cruise passengers who are less price sensitive are more likely to spend more money on their cabin (stay in suites) than passengers who are more price sensitive.
Demographically, it has been found that persons who are more price sensitive are likely to have lower incomes, and be less educated than those who are less price sensitive (Dellaert & Lindberg, 2003), resulting in the following hypotheses: H4a:
H4b:
Cruise passengers who are more price sensitive will have lower household incomes than passengers who are less price sensitive. Cruise passengers who are more price sensitive will be less educated than passengers who are less price sensitive.
Finally, a plethora of research has identified the importance of knowing the differences between market segments’ post-experience evaluations (Baker & Crompton, 2000; Caruana, Money, & Berthon, 2000; Jayanti & Ghosh, 1996; Oh, 1999; Petrick & Backman, 2002a,b; Spreng, Mackenzie, & Olshavsky, 1996). This body of research suggests that visitors who more positively evaluate their experiences are preferred over visitors with more negative evaluations. Thus, it would seem important to determine the effect of price sensitivity on cruise passengers’ overall satisfaction, perceptions of quality, perceived value and intentions to repurchase. Since past research has not examined these relationships, the following null hypotheses are proposed: H5a:
H5b:
H5c:
H5d:
There will be no differences in the satisfaction of cruise passengers with different levels of price sensitivity. There will be no differences in the ratings of factors of quality for cruise passengers with different levels of price sensitivity. There will be no differences in perceived value for cruise passengers with different levels of price sensitivity. There will be no difference in the intentions to repurchase a cruise for passengers with different levels of price sensitivity.
4. Methodology Cruise passengers were sampled on two separate 7 day Caribbean voyages based out of Florida, onboard the same ship. In order to ensure that cruise passengers taking back-to-back cruises were not sampled twice, the two samples were taken 3 weeks apart. One questionnaire was distributed, on the second to the last evening of the cruise, to each cabin on board the vessel
accommodated by a paying cruiser. A total of 591 questionnaires were distributed during the first cruise, and 592 during the second. Of these 394 (66.7%) and 398 (67.2%) completed questionnaires were returned from the first and second cruises respectively (N=792). The average age of respondents was 51.6, the median household income was $75,000–$99,999, 58.7% were female and, on average they had taken 8.1 cruises in their lifetime. The six page questionnaire comprised four sections. The first section measured participants’ cruising history and behavioral loyalty. In order to determine the number of cruises taken (first timers versus repeaters), respondents were asked ‘‘including this one, how many cruises have you taken with Holland America Line (HAL) in your lifetime? Behavioral loyalty was operationalized as the intensity of cruises taken with the cruise line. Intensity was operationalized as the average amount of cruises taken with HAL per year. This was done by taking the total amount of cruises with HAL, divided by the number of years they have been cruising with HAL. The second section measured cruise passengers’ tripographics including money spent per day and cabin-type. Money spent was operationalized by asking passengers to indicate the range for the ‘‘average amount of money’’ they spent on board per day. Past research suggests that the use of ranges is preferred, since consumers can more accurately recall how much money they have spent when given ranges (Jayanti & Ghosh, 1996; Rao & Sieben, 1992). The median point in the range was recorded as the measure of money spent. In order to determine cabin-type purchased, respondents were asked to place a check next to the type of cabin that best described the type of cabin they stayed in during the cruise. Forced choices were determined by ship personnel and included: inside cabin, outside cabin, mini-suite and suite. Section three measured visitors’ satisfaction, intentions to repurchase, price sensitivity, affective loyalty (attachment), and perceptions of price (price fairness). Satisfaction with the cruise line’s offerings (i.e., cuisine, outside deck areas, exercise facilities) were measured using a 10-point scale (ranging from very satisfied=1 to very dissatisfied=10). The 12 attributes that were used are the same as those used by the industry leaders when evaluating cruise lines (http://www.cruisereport.com). These 12 variables were later subjected to a factor analysis in order to obtain their underlying constructs. Similarly, overall satisfaction was measured with a single item, placed on a 10-point scale (ranging from very satisfied=1 to very dissatisfied=10) asking passengers to rate their overall experience. Intentions to repurchase was measured with the Grewal, Monroe, and Krishnan (1998) two-item, five-point Likert-type scale
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asking respondents the likelihood and possibility that they will repurchase a cruise with the cruise line again. Price sensitivity was measured with Lichtenstein et al.’s (1988) three-item price sensitivity scale. Each of the items were placed on five-point scales from 1 ‘‘strongly disagree’’ to 5 ‘‘strongly agree.’’ An example of one of the items is ‘‘When it comes to buying a cruise, I rely heavily on price.’’ Overall price sensitivity was operationalized as the sum of all three items, which had a Cronbach alpha of .85. The three items were also cluster analyzed in order to form price-sensitive segments. Similar to Backman and Crompton (1991), psychological attachment was measured with a five-item, sevenpoint Likert-type scale from the evaluative domain of the semantic differential scale. Perceived price was measured by using the monetary price dimension of the Petrick (2002) SERVPERVAL scale. All six items were used, and placed on five-point scales ranging from 1 ‘‘definitely false’’ to 5 ‘‘definitely true.’’ An example of one of the items is ‘‘A Holland America Cruise is fairly priced.’’ Perceived price was operationalized as the sum of the five items, which had a resultant Cronbach alpha of .94. The final section measured respondents’ demographics including education and income. Education was measured by asking respondents ‘‘how many years of education have you completed.’’ Forced choices ranged from 5 years to 20 plus, and included the headings of ‘‘Elementary’’ (placed over 5–8 years), ‘‘High School’’ (over 9–12 years), ‘‘College’’ (over 13–16 years) and ‘‘Graduate Study’’ (over 17–20+ years). Income was operationalized by asking respondents their ‘‘approximate total household income last year.’’ Eight different ranges were given, starting with ‘‘Under $25,000,’’ and ending with ‘‘$150,000 or more.’’
5. Results The analysis of the study consisted of three research steps. The first step involved performing a factor analysis of service quality items measuring satisfaction with ships various characteristics including tangibles and intangibles (i.e., cuisine, outside deck areas, services, exercise facilities). The second step involved partitioning the data set into groups by clustering cruise passengers with their responses to the Lichtenstein et al. (1988) price-sensitivity scale. The final step was to profile the delineated segments based on the proposed hypotheses with the use of Chi-squared tests of homogeneity for categorical variables and either multivariate analysis of variance (MANOVA) or analysis of variance (ANOVA) for continuous variables. To identify the underlying dimensions of the quality attributes, a varimax-rotated principal component analysis was employed. Due to factor loadings less than
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0.4, four items were dismissed from further analyses. The resultant two domains with eigenvalues equal to or greater than one, explained 68.20% of the variance in the original data set. Domains were named according to common characteristics of the items it included. Table 1 displays the domain descriptions, items, domain loadings, eigenvalues, and Cronbach’s alpha. The two domains were labeled as follows: (1) Ship’s physical appearance (tangibles), and (2) Service and activities (intangibles). These factors are congruent to the suggestion by Gundersen, Heide, and Olsson (1996) who amplify the importance of separating both tangible and intangible quality factors. In the subsequent analyses, the raw factor scores (the sum of attribute scores in each domain) were used to test whether the means were statistically different between price sensitivity clusters. In order to identify groups of respondents based on similar responses to the Lichtenstein et al. (1988) price sensitivity scale a K-means cluster analysis algorithm was employed. The best number of clusters was determined by examining the resultant dendograms. After several cluster solutions were attempted (2–4), three clusters were determined to be the best solution. Analysis of the cluster centers revealed that Cluster 1 had the lowest responses (least price sensitive) to all three items, while Cluster 3 had the highest responses, and Cluster 2 had response scores in the middle for all three items. All three items were found to have a significant (po.001) contribution to the clustering process. Thus, Cluster 1 (n=175) was termed ‘‘low sensitivity,’’ Cluster 2 (n=325) was termed ‘‘moderate sensitivity,’’ and Cluster 3 (n=240) was termed ‘‘high sensitivity.’’ Profiles of the three clusters are displayed in Table 2. As revealed, the clusters appear similar, with the exceptions that ‘‘moderates’’ are less likely to be female, and that clusters that are more sensitive, have a lower percentage of members whose overall household income is $100,000 or more. Examination of the hypotheses was thus conducted by looking at the differences between the three clusters identified, and the test variables. In following the results of Krishnamurthi and Raj (1991), H1a and H1b proposed that cruise passengers who are more price sensitive will be less attached and behaviorally loyal, respectively. MANOVA with post hoc Tukey’s T-tests was employed to examine these hypotheses. Tukey’s HSD was chosen because it is moderately conservative and controls for different error rates between groups, while allowing for groups of different sizes (Ott, 1993). Results found significant differences between sensitivity segments and their attachment to the cruise line ðF 2;640 ¼ 8:2; po:001Þ: Post hoc analysis revealed that the ‘‘low sensitives’’ (mean=29.5) were less attached than both ‘‘moderates’’ (mean=31.5) and ‘‘high sensitives’’ (mean=31.6). This finding is counter-intuitive to
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758 Table 1 Factor analysis of quality items Factor name
Factor loadings
Factor 1- Ship’s tangibles Outside deck areas Overall ship conditions Inside public rooms State rooms Factor 2- Intangibles Ports of call Shore excursions Entertainment/activities Cuisine Total variance explained
.856 .850 .811 .739 .883 .878 .634 587
Mean scorea
Eigenvalue
9.06 8.93 9.26 9.01 9.04
4.06
8.02 7.86 7.54 8.02 8.05
1.38
Explained variance (%) 50.77
17 25
Cronbach’s alpha 0.86
0.80
68.02
N=794. KMO measure of sampling adequacy=.835. a 1=very dissatisfied, 10=very satisfied.
Table 2 Price sensitivity cluster profiles
Total cruises in lifetime Cruises with Holland America Average age Female Income of $100,000 or more
Low sensitive (n=170)
Moderate (n=325)
High sensitive (n=240)
7.4 2.1 50.6 63.4% 37.6%
6.9 2.2 52.5 50.6% 47.1%
8.3 2.5 51.0 63.1% 65.8%
the hypothesis, and suggests that visitors who are more price sensitive are more likely to form an attachment to the cruise line. Thus, the research hypothesis (H1a) was rejected. ANOVA was also utilized to examine differences between price sensitivity segments and their behavioral loyalty (intensity of visits) to the cruise line. No differences were found between groups ðF 2;729 ¼ :61; p4:05Þ; resulting in H1b being rejected. The next hypothesis (H2) was based on the findings of Dellaert and Lindberg (2003) who found that consumers who perceive a product’s price to be fair, are less likely to be price sensitive. Results of the ANOVA found significant differences between sensitivity segments and their perceptions of price ðF 2;660 ¼ 12:5; po:001Þ: Post hoc analysis revealed that the ‘‘low sensitives’’ (mean=22.6) had worse perceptions of price than both ‘‘moderates’’ (mean=24.4) and ‘‘high sensitives’’ (mean=25.0). This finding is also counter-intuitive to the hypothesis and suggests that cruise passengers who are more price sensitive, are more likely to believe that the cruise was fairly priced. Therefore, H2 was rejected. The next set of hypotheses were based on the findings of Kalyanaram and Little (1994) who found that less price sensitive consumers are more likely to be first time purchasers and to spend more than those who are more
price sensitive. Chi-square analysis was used to determine whether or not less price sensitive groups were more likely to be first time visitors (H3a). Results revealed no significant differences ðX 22 ¼ :311; p4:05Þ between groups. Thus, H3a was rejected, suggesting that there is no difference between first time visitors’, and repeat visitors’ price sensitivity. Results of the ANOVA examining differences in sensitivity groups and the amount of money they spent (H3b) found significant ðF 2;719 ¼ 9:5; po:05Þ differences between groups. Post hoc analyses revealed that ‘‘low sensitive’’ passengers (mean=$123) spent on average more money per day than ‘‘high sensitive’’ (mean=$100) passengers. This finding is congruent with the proposed hypothesis and suggests that less price sensitive passengers may be more desirable because they spend more than passengers who are more price sensitive. The Chi-square examining differences in cabin type also revealed significant differences ðX 26 ¼ 55:3; po:001Þ between groups. It was found that ‘‘low sensitives’’ were more likely to stay in a suite (10.7%) or mini-suite (38.5%) than both ‘‘moderates’’ (3.7% and 23.4%, respectively) and ‘‘high sensitives’’ (1.7% and 15.4%, respectively). Conversely, ‘‘high sensitives’’ were more likely to stay in an inside cabin (21.7%) or outside cabin
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(61.3%) then both ‘‘moderates’’ (18.8% and 54.2%, respectively) and ‘‘low sensitives’’ (11.2% and 39.6%, respectively). This finding confirms the research hypothesis and reveals that less price sensitive cruisers are apt to pay more their cabin then price sensitive cruisers. Chi-square analysis was also employed to examine the Dellaert and Lindberg (2003) finding that persons who are more price sensitive, are more likely to have lower incomes (H4a). Results revealed significant differences ðX 214 ¼ 48:8; po:001Þ between groups. Post hoc analyses found that ‘‘low sensitive’’ passengers had considerably higher total household incomes than both ‘‘moderates’’ and ‘‘high sensitives,’’ and that ‘‘moderates had higher household incomes than ‘‘high sensitives.’’ Thus, H4a was accepted and the current analyses reveal that passengers who are more price sensitive, have lower household incomes. Hypothesis 4b4 was also based on the findings of Dellaert and Lindberg (2003) and proposed that passengers who are more price sensitive would be less educated than their counterparts. No differences were found between groups ðF 2;721 ¼ :23p4:05Þ; and the amount of education they have received. Thus H4b was rejected, and it is assumed that price sensitivity segments are not related to education. The final set of hypotheses examined differences in the overall satisfaction, perceptions of quality, perceived value and repurchase intentions for passengers from differing price sensitivity clusters (H5a, H5b, H5c, and H5d, respectively). Since no research had previously examined these propositions, it was hypothesized that no differences would be found. Results of the ANOVA examining differences in the overall satisfaction between sensitivity groups (H5a) found significant ðF 2;700 ¼ 9:5; po:001Þ differences between groups. Post hoc analyses revealed that both ‘‘high sensitives’’ (mean=8.8) and ‘‘moderates’’ (mean=8.7) were more satisfied than ‘‘low sensitives’’ (mean=8.1). In order to examine whether or not the individuals comprising the sensitivity groups differ in their ratings of quality factors (H5b), MANOVA was used. A significant ðF 2;602 ¼ 7:58; po:001Þ multi-variate effect was found which explained 2.6% of the variance (Wilks’ Lambda=.974). Follow-up one-way ANOVA’s were utilized to examine differences in factor ratings (tangibles, and intangibles). Significant differences (po.05) were found between groups for intangibles (services and activities) (F=7.57, po.001), but not for tangibles (p4.05). Results of the Tukey’s post hoc tests found that ‘‘low sensitives’’ (mean=30.3) were less satisfied with intangibles than both ‘‘moderates’’ (mean=32.1) and ‘‘high sensitives’’ (mean=33.0). The ANOVA examining differences in sensitivity groups’ perceived value (H5c) also found significant ðF 2;720 ¼ 5:0; po:01Þ differences between groups. It was
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found that ‘‘low sensitives’’ (mean=7.8) had significantly (po.05) lower perceived value than both ‘‘moderates’’ (mean=8.3) and ‘‘high sensitives’’ (mean=8.4), revealing that visitors who were more price sensitive, perceived the value of their cruise to be higher. The final ANOVA examined differences in the repurchase intentions between sensitivity clusters (H5d) and found significant differences ðF 2;730 ¼ 7:9; po:001Þ between groups. Results of the post hoc analysis disclosed that ‘‘high sensitives’’ (mean=8.2) and ‘‘moderates’’ (mean=8.0) had higher intentions to repurchase a Holland America Cruise than ‘‘low sensitives.’’ Thus, for all variables, ‘‘less sensitives’’ rated their experience lower than both ‘‘moderates’’ and ‘‘high sensitives.’’
6. Discussion and conclusions Since the cruise industry has recently changed its pricing structure to emphasize discount pricing, and price sensitivity has been identified as an important variable for understanding the decision-making tendencies of consumers, it is believed that the current results have both theoretical and managerial implications. By identifying segments based on the responses to price sensitivity questions related to cruise passengers’ preferences for purchasing cruises at a discount, the current study was able to assess whether passengers who are more apt to desire this pricing structure, are desirable guests. With the use of cluster analysis, three distinct segments based on price sensitivity were identified, and multiple differences between the resultant groups were found (see Table 3 for a summary of the differences). It was discovered that passengers who are less price sensitive have higher household incomes, spend more money per day on their cruise, and are more likely to purchase a more expensive cabin than passengers who are more price sensitive. This finding is congruent with past research (Kalyanaram & Little, 1994) which has found that consumers who are less price sensitive, are more apt to spend more. Thus, at face value, it appears that offering cruise discounts may attract less desirable markets, as respondents who are more price sensitive (more apt to cruise if there are discounts) were found to spend less. More research is necessary, in order to determine the differences in return on investment for attracting and serving markets with different levels of price sensitivity. Conversely, in comparison to ‘‘less sensitives’’ the segments of ‘‘moderates’’ and ‘‘high sensitives’’ were found to: be more attached, perceive the price more favorably, be more satisfied overall, rate the quality of services/activities higher, perceive the value to be higher, and be more likely to repurchase in the future. These
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Table 3 Summary of significant differences between price sensitivity groups
Attachment to the cruise line Perceived price Money spent per day Likelihood to stay in a suite Total household income Overall satisfaction Ratings of services and activities Perceived value of the cruise Repurchase intentions
Low sensitive
Moderate
High sensitive
Less
More
More
Worse More Highest
Better Less Moderate
Better Less Lowest
Highest Lower Lower
Moderate Higher Higher
Lowest Higher Higher
Lower
Higher
Higher
Lower
Higher
Higher
findings would suggest that offering discounts may attract cruise passengers who are more likely to appreciate the cruise line. These findings are relevant, as past research has consistently found that visitors who rate their experiences more positively are more likely to not only repurchase, but also provide more positive word of mouth advertising after their experiences. As stated by Reid and Reid (1993, p. 3) the importance of generating positive evaluations from customers is that they represent more than just a stable source of revenues, but also act as ‘‘information channels that informally link networks of friends, relatives and other potential travelers to a destination.’’ The current findings may be unique, since Holland America line has been awarded ‘‘World’s Best Cruise Value’’ for the past 11 years (WOCL, 2003). These combined findings would suggest that offering value (providing discounts) is very effective when actual value is perceived after the experience (consumers rate perceived value high). This may also explain why the current findings regarding attachment (Krishnamurthi & Raj, 1991) and perceived price (Dellaert & Lindberg, 2003) were incongruent with past findings. It is believed that less sensitive markets were more likely to form attachment, and perceive the price more favorably, because they believed the quality provided was high in comparison to the price paid (perceived the value to be higher). As suggested by Parasuraman and Grewal (2000) perceived value may be the most important indicator of repurchase intentions. These findings are similar to Oh (2003) who found that visitors who believe they received a good deal, have better perceptions of their experience. It is therefore possible that passengers who are more price sensitive, perceived that they received a better deal than those who were less price sensitive. Thus, more research is necessary in order to determine if passengers who are more price sensitive rate
cruise lines more positively than less price sensitive visitors, when perceptions of value are lower. Just because more price sensitive markets have been found to rate the cruise line more positively, does not mean that they are viable markets. As proposed by Kotler, Bowen, & Makens (1998), market segments must be measurable, substantial, actionable and accessible, if they are to be successfully utilized by management. Measurability refers to the degree to which a segment’s size and purchasing power can be measured, while substantiality is related to the degree to which a segment is large and/or profitable. Actionability is related to the degree to which programs can be effectively designed to please a segment and accessibility is the degree to which a segment’s size and purchasing power (substantiality) can be measured. Thus, in comparison to less price-sensitive markets, price-sensitive markets would be preferred if they were more measurable, substantial, actionable and accessible. Since less price-sensitive markets were found to be more substantial (higher incomes and spend more), marketing to price-sensitive markets might not be desirable. More research is necessary in order to determine if pricesensitive markets are substantial enough to be viable cruise markets. Since the difference between quality and price paid has consistently been found to be the best predictor of value (Petrick, 2002), cruise lines who provide discounts, must ensure that the quality provided, is greater than the perceived price. In the current study, price-sensitive markets perceived the price more positively than less price-sensitive markets. Thus, more research is necessary in order to determine if this relationship exists when price-sensitive markets do not perceive the price more positively than less sensitive markets. It is also suggested for further research that the causes of differences in perceptions of price between markets be identified, as this could be a key to utilizing price discounts effectively. Future research should also identify cruise passengers’ zone of price insensitivity in order to assist cruise management in understanding the effect of changes in price. As Gupta and Cooper (1992) revealed, there exists a latitude of acceptance related to reference price. By knowing the range of this zone, cruise management would be better equipped to know the effects of both price increases and reductions. Additionally, the current study did not find differences between price sensitivity segments for ‘‘tangibles’’ (ship’s physical appearance) though they did find differences for ‘‘intangibles’’ (services and activities). This finding reveals that tangibles may be ‘‘basic’’ attributes, while intangibles may be ‘‘key’’ attributes. Gale (1994) proposed that ‘‘basic’’ attributes do not offer an opportunity for competitive advantage, while ‘‘key’’ attributes help to determine market competitive-
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ness. Since marketing efforts should be based on ‘‘key’’ attributes (Gale, 1994), the current findings suggest the importance of marketing services and activities to attract desired markets. Since these factors were rated more positively by price-sensitive markets, marketing with the use of these attributes would more likely attract price-sensitive clientele. Gale (1994) further argued that ‘‘basic’’ attributes are only important when they are not adequate. Thus, while marketing the ship’s physical appearance (tangibles) would not be an effective strategy, failing to adequately maintain the ship’s physical appearance would have very negative impacts on cruise passengers overall evaluations. Theoretically, the current findings offer new insight into the ramifications of using price discounts to attract cruise passengers. Results propound that offering discounts to cruise passengers will attract passengers who will spend less, but appreciate the cruise line more. Thus, long-term success may be found by offering discounts, due to the retention of clientele (repurchase) caused by more positive evaluations of the cruise experience, and the generation of positive word of mouth adverstising. Conversely, not offering discounts may result in attracting a more affluent clientele, which may not be substantial enough to sustain long-term profitability. More research is necessary in order to determine the long-term ramifications of providing, or not providing discounts. The current study was limited to two cruises, on one vessel, on one cruise line. This limitation is relevant, as past research has found that price sensitivity is dynamic over time, across products and across consumers (Krishnamurthi & Papatla, 2003) Thus, future studies should examine the fore-mentioned relationships in a multitude of other settings, in order to better understand if these relationships exist across varying markets. Since Holland America is known for offering cruise value, it would be interesting to see if the current relationships exist for cruise lines noted for either low price (i.e., Carnival Cruise Line) or high quality (i.e., Cunard Cruise Line). The current study was further limited to only one cruising season (summer). The demographics of cruise passengers change greatly between summer and the rest of the year, and further research is necessary in order to determine the effect of offering discounts for other seasons. While results of the present study should not be generalized, they do imply that analyzing price sensitivity is important for cruise line management. By understanding the effects of offering price discounts, managers will be better equipped to make pricing decisions that are best suited for long-term success. Since little research has been conducted in this area, and pricing is one of the most important marketing decisions, it is further believed that the current results offer an initial conceptualization of the role of price
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Tourism Management 26 (2005) 753–762 www.elsevier.com/locate/tourman
Segmenting cruise passengers with price sensitivity James F. Petrick Department of Recreation, Park and Tourism Sciences, 2261 TAMU, Texas A&M University, College Station, TX 77843-2261, USA Received 2 April 2003; accepted 7 March 2004
Abstract It has been suggested that discounted cruises have degraded the industry’s standards (Berlitz Guide to Cruising and Cruise Ships, Berlitz, Princeton, NJ, 1994), and that value-oriented cruise lines are gaining a competitive advantage over ‘‘high-end’’ cruises (http://www.cruisinformationservice.co.uk/press/factsheetdetail.aspx?id=45). This use of price discounting has created new challenges for the cruise industry, as they have attracted a more price-sensitive market than they have in the past. Thus, the purpose of the current study was to segment cruise passengers based on their price sensitivity to determine if price-sensitive markets are desirable. Results revealed that less price-sensitive visitors are more likely to spend more, while visitors who were more price sensitive were more likely to positively evaluate their experiences. Both theoretical and managerial implications are discussed. r 2004 Elsevier Ltd. All rights reserved. Keywords: Price; Price sensitivity; Cruise; Perceived value; Satisfaction; Repurchase; Loyalty
1. Introduction One of the most powerful tools that tourism managers have control of is price (Han, Gupta, & Lehman, 2001). Price significantly impacts tourists’ decision-making processes, and is highly related to purchase behavior (Kalyanaram & Winer, 1995). Within the field of tourism, price is utilized differently by the various service providers. The airline industry has been the most innovative (Orkin, 1990), by effectively using both differential pricing (i.e., pay more for first class than coach) and yield management (pay more when demand is higher). These strategies have since been incorporated into the lodging industry. The main reason that both have found success with these strategies is that their marginal costs (costs associated with providing service to one more guest) ‘‘are just a fraction’’ of their total expenses incurred (Orkin, 1990, p. 36). Since the cost of one extra passenger or one extra hotel guest is little, providing large discounts when demand is low, offers Corresponding author. Tel.:+1-979-845-8806; fax:+1-979-8450446 E-mail address: [email protected] (J.F. Petrick).
0261-5177/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.tourman.2004.03.015
hoteliers and airlines the ability to generate positive returns by lowering prices considerably. Yield management has also been successful in these industries because they are able to rely on a consistent business clientele, whose demand is more inelastic than pleasure travelers (i.e., changes in price have little effect on demand). Business travelers ensure that some seats/rooms will be sold at full to almost full fare, allowing for other seats/ rooms to be sold at substantial savings, while still generating profits. Due to higher marginal costs, and a very small portion of business travelers, the cruise industry has had greater difficulty incorporating yield management principles. The costs to the cruise provider for each additional passenger can be substantial, and include the costs of all meals (up to five per day) and the labor costs of a room steward, waiter, busboy, etc. Additionally, there are numerous fixed costs associated with each cruise ship a cruise line operates. Cruise ships can cost upwards of $400 million, which make a breakeven point of their purchase substantial. While some ships are owned outright, many are owned by financial institutions and then leased back (Cartwright & Baird, 1999). Regardless of how the ship is owned, it inevitably has to
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be paid for by leasing or payment of interest and capital on loans, resulting in extremely high fixed costs. Additional fixed costs for cruise lines include wages, crew meals, marketing, maintenance, agent fees and berthing fees (Cartwright & Baird, 1999). Adding to the difficulty in setting profitable prices is that this highly competitive industry is currently experiencing a change in the demographic profile of passengers. Data published by CLIA (2003a) show that the cruise passenger is younger (52 years old), and less wealthy (median income of $57,000) than ever before. Further, the market of the cruise industry that is seeing the greatest growth is the short (3–4 day) cruise (CLIA, 2000). These market changes suggest that ‘‘high-end’’ cruise lines will be losing a share of the market, and value-oriented cruise lines may be gaining a competitive edge. Thus, many cruise lines have started value pricing in order to ensure that their ships are full, even though the total collection of fares on a full-ship usually do not exceed the costs associated with operating the ship (Burger, 2002). Therefore hotel management must generate additional revenues from passengers while they are on board (through the sale of beverages, tours, gambling, etc.) in order to break-even or generate a profit. According to Dickenson and Vladimir (1997), discounting cruise fares is more the norm than the exception. Research has shown that discounts from published fares (in cruise brochures) of over 25% are easily obtained throughout the various cruise markets (Cartwright & Baird, 1999). These ‘‘value-fares’’ have had an impact on the quality that cruise lines can provide, and may be the driving force behind the demographic changes in the current cruising clientele. Ward (1994) commented in the 1994 Berlitz Guide to Cruising and Cruise ships that discounted cruises had degraded the industry’s standards. Combined, these changes in the market have made it integral for the cruise industry to examine the ramifications of offering discounts, and whether ‘‘price-watching’’ passengers are desirable.
2. Review of Related Literature One way to examine the effects of price discounts is to segment visitors based on their price sensitivity. While price elasticity describes aggregate changes in the quantity of demand related to changes in price, price sensitivity describes how individuals respond to various prices (Goldsmith & Newell, 1997). A price-sensitive visitor is one who is more likely to base their purchase decisions on price than a visitor who is less price sensitive. Thus, price-sensitive cruisers are those who are more likely to require discounted prices in order to purchase a cruise.
For the current study, price sensitivity will be measured with the Lichtenstein, Bloch and Black (1988) scale which measures a person’s price sensitivity as it relates to the purchase of a specified product. Their interpretation of price sensitivity is related to how conscious consumers are to price when making a purchase. Thus, their measures are related to how much consumers rely on price when making a purchase, and the importance of making a purchase when it is on sale. The majority of research related to price sensitivity has examined the effect of brand loyalty on price sensitivity (Brown, 1974; Krishnamurthi & Raj, 1991; Webster, 1965). The findings from this body of research reveal that loyalty reduces consumers’ price sensitivity. Thus, loyalty may allow cruise management to charge higher prices than their competitors and serve as a defense mechanism against cruise lines who charge lower prices. Krishnamurthi and Papatla (2003) examined this relationship further, by examining how the direction and strength of the loyalty/price sensitivity relationship varies across customers of various products (liquid detergents, margarine, ketchup and yogurt). They found that the loyalty/price sensitivity relationship is dynamic across consumers, as well as over time. If the same were to be found in the cruise industry, it would suggest that cruise management should have varying price promotions targeting consumers at different loyalty levels. Price unfairness or fairness, is generally derived by comparing one’s reference price to the actual price paid. Reference price is the price that consumers store in their memory (usually based on price last paid), which serves as a point of comparison for future purchases (Han et al., 2001). Reference price has been shown to play a significant role in the brands that consumers choose (Monroe, 1990; Winer 1986). Consumers who encounter a price that is lower than their reference price generally perceive the purchase as a gain, while a price higher than the reference price is perceived as a loss. Transaction utility is derived form the perceived gain (or loss) over and above the utility they obtain from the product (Mayhew & Winer 1992; Thaler 1985). With the use of utility theory, Dellaert and Lindberg (2003) examined differences in day trippers’ price sensitivity. They found that as hotel visitors’ utility of a day trip increased, and/or the price decreased, respondents’ price sensitivity decreased. They further found that both income and education were related to respondents’ responses to price changes, and that respondents who had both high incomes and low education gave inconsistent responses (less price sensitive). These results suggest that differences would be found in the income and education of segments based on price sensitivity, and that persons who have high incomes, yet low education, may be less price sensitive than expected.
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Oh (2003) extended economic utility theory to investigate the effects of positive and negative deviations from hotel visitors’ internal reference price. Not surprisingly, he found that visitors have a tendency to interpret actual price as less expensive when they believe they paid less than what they thought was fair market value (received a good deal). He further found that visitors who thought they received a good deal had higher perceptions of quality for their experience. Additionally, he found that visitors reacted more negatively to price unfairness (i.e., loss) than they did positively toward gains for both quality and value. This result can be explained with prospect theory which suggests that losses loom larger than gains (Han et al., 2001). Conversely, a few studies have found that consumers are not more responsive to losses than to gains (Krishnamurthi, Mazumdar & Raj, 1992; Greenleaf, 1995). Research has also identified that there is a latitude of acceptance around the reference price, in that minor changes in price do not have an impact on consumer choice (Gupta & Cooper, 1992; Kalwani & Yim, 1992). Thus, consumers who experience price differentials within this tolerance zone (zone of price insensitivity), do not experience any positive or negative transaction utility (Weber–Fechner Law). Kalyanaram and Little (1994), examined how different variables might influence the zone of price insensitivity. Results of their study revealed that consumers who purchase less frequently, have higher reference prices, and have higher brand loyalty, have a wider zone. Thus, first time visitors, visitors who are used to spending more, and more loyal visitors, may be less price sensitive when purchasing cruises. Han et al. (2001) also examined the effects on losses/ gains on consumers’ zone of price insensitivity and found that price promotion by competing brands is likely to make consumers more sensitive to losses, while having little influence on their perceptions of gains. They further found that with the use of cluster analysis, consumers could be effectively segmented into actionable target markets with the use of price sensitivity. With the use of these segments they revealed that not only do people have different price thresholds (zones of price insensitivity), but different brands are also interpreted as having different price thresholds. For cruise management, this means that specific markets may be able to be targeted who are less price sensitive, and that these markets might vary by cruise line.
discounts, in order to increase their passenger volume. Yet, in 2002 the industry saw an increase in worldwide guests of almost 16%, with a record 8.66 million cruise guests (CLIA, 2003b), and the first quarter of 2003 saw a record 2.2 million cruisers, up 23% over the same period last year (CLIA 2003c). Additionally, 13 new ships entered the worldwide market in 2002, and an estimated 14 new ships will enter in 2003 (CLIA, 2003b). Value for the dollar has been attributed to this rejuvenation (Cruise Information Service, 2003), as price discounting continues to saturate the market. This has resulted in a need by cruise management to determine if the price discounts that were used to rejuvenate the industry, are a viable long-term marketing strategy. It is therefore imperative to determine how price sensitive cruise visitors are, and to identify the differences between cruise passengers with varying levels of price sensitivity. Thus, the purpose of the current study is to segment cruise passengers based on their price sensitivity and identify differences between price sensitivity groups. Since empirical research has found that consumers who are more loyal, are less price sensitive (Krishnamurthi & Raj, 1991) and that loyalty consists of both an affective (attachment) and behavioral response to a service offering (Backman & Crompton, 1991) the following hypotheses are proposed: H1a:
H1b:
Cruise passengers who are more price sensitive will be less attached to the cruise line than passengers who are less price sensitive. Cruise passengers who are more price sensitive will be less likely to be behaviorally loyal to the cruise line than passengers who are less sensitive.
Research has also found that consumers who perceive the price of a product to be fair, are less likely to be price sensitive (Dellaert & Lindberg, 2003). It is thus proposed that: H2:
Cruise passengers who are more price sensitive will perceive the price of the cruise more negatively, than passengers who are less price sensitive.
It has further been found that consumers who spend more, and first time consumers are more likely to be less price sensitive (Kalyanaram & Little, 1994), which result in the following hypotheses: H3a:
3. Purpose of the study According to Shippax (2002), 2001 was the first year that the cruise industry registered a decline in the total number of passengers. This drop in occupancy forced many cruise lines to lower their prices by offering
755
H3b:
Cruise passengers who are less price sensitive are more likely to be first time visitors than passengers who are more price sensitive. Cruise passengers who are less price sensitive are more likely to spend more money on their vacation, than passengers who are more price sensitive.
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H3c:
Cruise passengers who are less price sensitive are more likely to spend more money on their cabin (stay in suites) than passengers who are more price sensitive.
Demographically, it has been found that persons who are more price sensitive are likely to have lower incomes, and be less educated than those who are less price sensitive (Dellaert & Lindberg, 2003), resulting in the following hypotheses: H4a:
H4b:
Cruise passengers who are more price sensitive will have lower household incomes than passengers who are less price sensitive. Cruise passengers who are more price sensitive will be less educated than passengers who are less price sensitive.
Finally, a plethora of research has identified the importance of knowing the differences between market segments’ post-experience evaluations (Baker & Crompton, 2000; Caruana, Money, & Berthon, 2000; Jayanti & Ghosh, 1996; Oh, 1999; Petrick & Backman, 2002a,b; Spreng, Mackenzie, & Olshavsky, 1996). This body of research suggests that visitors who more positively evaluate their experiences are preferred over visitors with more negative evaluations. Thus, it would seem important to determine the effect of price sensitivity on cruise passengers’ overall satisfaction, perceptions of quality, perceived value and intentions to repurchase. Since past research has not examined these relationships, the following null hypotheses are proposed: H5a:
H5b:
H5c:
H5d:
There will be no differences in the satisfaction of cruise passengers with different levels of price sensitivity. There will be no differences in the ratings of factors of quality for cruise passengers with different levels of price sensitivity. There will be no differences in perceived value for cruise passengers with different levels of price sensitivity. There will be no difference in the intentions to repurchase a cruise for passengers with different levels of price sensitivity.
4. Methodology Cruise passengers were sampled on two separate 7 day Caribbean voyages based out of Florida, onboard the same ship. In order to ensure that cruise passengers taking back-to-back cruises were not sampled twice, the two samples were taken 3 weeks apart. One questionnaire was distributed, on the second to the last evening of the cruise, to each cabin on board the vessel
accommodated by a paying cruiser. A total of 591 questionnaires were distributed during the first cruise, and 592 during the second. Of these 394 (66.7%) and 398 (67.2%) completed questionnaires were returned from the first and second cruises respectively (N=792). The average age of respondents was 51.6, the median household income was $75,000–$99,999, 58.7% were female and, on average they had taken 8.1 cruises in their lifetime. The six page questionnaire comprised four sections. The first section measured participants’ cruising history and behavioral loyalty. In order to determine the number of cruises taken (first timers versus repeaters), respondents were asked ‘‘including this one, how many cruises have you taken with Holland America Line (HAL) in your lifetime? Behavioral loyalty was operationalized as the intensity of cruises taken with the cruise line. Intensity was operationalized as the average amount of cruises taken with HAL per year. This was done by taking the total amount of cruises with HAL, divided by the number of years they have been cruising with HAL. The second section measured cruise passengers’ tripographics including money spent per day and cabin-type. Money spent was operationalized by asking passengers to indicate the range for the ‘‘average amount of money’’ they spent on board per day. Past research suggests that the use of ranges is preferred, since consumers can more accurately recall how much money they have spent when given ranges (Jayanti & Ghosh, 1996; Rao & Sieben, 1992). The median point in the range was recorded as the measure of money spent. In order to determine cabin-type purchased, respondents were asked to place a check next to the type of cabin that best described the type of cabin they stayed in during the cruise. Forced choices were determined by ship personnel and included: inside cabin, outside cabin, mini-suite and suite. Section three measured visitors’ satisfaction, intentions to repurchase, price sensitivity, affective loyalty (attachment), and perceptions of price (price fairness). Satisfaction with the cruise line’s offerings (i.e., cuisine, outside deck areas, exercise facilities) were measured using a 10-point scale (ranging from very satisfied=1 to very dissatisfied=10). The 12 attributes that were used are the same as those used by the industry leaders when evaluating cruise lines (http://www.cruisereport.com). These 12 variables were later subjected to a factor analysis in order to obtain their underlying constructs. Similarly, overall satisfaction was measured with a single item, placed on a 10-point scale (ranging from very satisfied=1 to very dissatisfied=10) asking passengers to rate their overall experience. Intentions to repurchase was measured with the Grewal, Monroe, and Krishnan (1998) two-item, five-point Likert-type scale
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asking respondents the likelihood and possibility that they will repurchase a cruise with the cruise line again. Price sensitivity was measured with Lichtenstein et al.’s (1988) three-item price sensitivity scale. Each of the items were placed on five-point scales from 1 ‘‘strongly disagree’’ to 5 ‘‘strongly agree.’’ An example of one of the items is ‘‘When it comes to buying a cruise, I rely heavily on price.’’ Overall price sensitivity was operationalized as the sum of all three items, which had a Cronbach alpha of .85. The three items were also cluster analyzed in order to form price-sensitive segments. Similar to Backman and Crompton (1991), psychological attachment was measured with a five-item, sevenpoint Likert-type scale from the evaluative domain of the semantic differential scale. Perceived price was measured by using the monetary price dimension of the Petrick (2002) SERVPERVAL scale. All six items were used, and placed on five-point scales ranging from 1 ‘‘definitely false’’ to 5 ‘‘definitely true.’’ An example of one of the items is ‘‘A Holland America Cruise is fairly priced.’’ Perceived price was operationalized as the sum of the five items, which had a resultant Cronbach alpha of .94. The final section measured respondents’ demographics including education and income. Education was measured by asking respondents ‘‘how many years of education have you completed.’’ Forced choices ranged from 5 years to 20 plus, and included the headings of ‘‘Elementary’’ (placed over 5–8 years), ‘‘High School’’ (over 9–12 years), ‘‘College’’ (over 13–16 years) and ‘‘Graduate Study’’ (over 17–20+ years). Income was operationalized by asking respondents their ‘‘approximate total household income last year.’’ Eight different ranges were given, starting with ‘‘Under $25,000,’’ and ending with ‘‘$150,000 or more.’’
5. Results The analysis of the study consisted of three research steps. The first step involved performing a factor analysis of service quality items measuring satisfaction with ships various characteristics including tangibles and intangibles (i.e., cuisine, outside deck areas, services, exercise facilities). The second step involved partitioning the data set into groups by clustering cruise passengers with their responses to the Lichtenstein et al. (1988) price-sensitivity scale. The final step was to profile the delineated segments based on the proposed hypotheses with the use of Chi-squared tests of homogeneity for categorical variables and either multivariate analysis of variance (MANOVA) or analysis of variance (ANOVA) for continuous variables. To identify the underlying dimensions of the quality attributes, a varimax-rotated principal component analysis was employed. Due to factor loadings less than
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0.4, four items were dismissed from further analyses. The resultant two domains with eigenvalues equal to or greater than one, explained 68.20% of the variance in the original data set. Domains were named according to common characteristics of the items it included. Table 1 displays the domain descriptions, items, domain loadings, eigenvalues, and Cronbach’s alpha. The two domains were labeled as follows: (1) Ship’s physical appearance (tangibles), and (2) Service and activities (intangibles). These factors are congruent to the suggestion by Gundersen, Heide, and Olsson (1996) who amplify the importance of separating both tangible and intangible quality factors. In the subsequent analyses, the raw factor scores (the sum of attribute scores in each domain) were used to test whether the means were statistically different between price sensitivity clusters. In order to identify groups of respondents based on similar responses to the Lichtenstein et al. (1988) price sensitivity scale a K-means cluster analysis algorithm was employed. The best number of clusters was determined by examining the resultant dendograms. After several cluster solutions were attempted (2–4), three clusters were determined to be the best solution. Analysis of the cluster centers revealed that Cluster 1 had the lowest responses (least price sensitive) to all three items, while Cluster 3 had the highest responses, and Cluster 2 had response scores in the middle for all three items. All three items were found to have a significant (po.001) contribution to the clustering process. Thus, Cluster 1 (n=175) was termed ‘‘low sensitivity,’’ Cluster 2 (n=325) was termed ‘‘moderate sensitivity,’’ and Cluster 3 (n=240) was termed ‘‘high sensitivity.’’ Profiles of the three clusters are displayed in Table 2. As revealed, the clusters appear similar, with the exceptions that ‘‘moderates’’ are less likely to be female, and that clusters that are more sensitive, have a lower percentage of members whose overall household income is $100,000 or more. Examination of the hypotheses was thus conducted by looking at the differences between the three clusters identified, and the test variables. In following the results of Krishnamurthi and Raj (1991), H1a and H1b proposed that cruise passengers who are more price sensitive will be less attached and behaviorally loyal, respectively. MANOVA with post hoc Tukey’s T-tests was employed to examine these hypotheses. Tukey’s HSD was chosen because it is moderately conservative and controls for different error rates between groups, while allowing for groups of different sizes (Ott, 1993). Results found significant differences between sensitivity segments and their attachment to the cruise line ðF 2;640 ¼ 8:2; po:001Þ: Post hoc analysis revealed that the ‘‘low sensitives’’ (mean=29.5) were less attached than both ‘‘moderates’’ (mean=31.5) and ‘‘high sensitives’’ (mean=31.6). This finding is counter-intuitive to
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758 Table 1 Factor analysis of quality items Factor name
Factor loadings
Factor 1- Ship’s tangibles Outside deck areas Overall ship conditions Inside public rooms State rooms Factor 2- Intangibles Ports of call Shore excursions Entertainment/activities Cuisine Total variance explained
.856 .850 .811 .739 .883 .878 .634 587
Mean scorea
Eigenvalue
9.06 8.93 9.26 9.01 9.04
4.06
8.02 7.86 7.54 8.02 8.05
1.38
Explained variance (%) 50.77
17 25
Cronbach’s alpha 0.86
0.80
68.02
N=794. KMO measure of sampling adequacy=.835. a 1=very dissatisfied, 10=very satisfied.
Table 2 Price sensitivity cluster profiles
Total cruises in lifetime Cruises with Holland America Average age Female Income of $100,000 or more
Low sensitive (n=170)
Moderate (n=325)
High sensitive (n=240)
7.4 2.1 50.6 63.4% 37.6%
6.9 2.2 52.5 50.6% 47.1%
8.3 2.5 51.0 63.1% 65.8%
the hypothesis, and suggests that visitors who are more price sensitive are more likely to form an attachment to the cruise line. Thus, the research hypothesis (H1a) was rejected. ANOVA was also utilized to examine differences between price sensitivity segments and their behavioral loyalty (intensity of visits) to the cruise line. No differences were found between groups ðF 2;729 ¼ :61; p4:05Þ; resulting in H1b being rejected. The next hypothesis (H2) was based on the findings of Dellaert and Lindberg (2003) who found that consumers who perceive a product’s price to be fair, are less likely to be price sensitive. Results of the ANOVA found significant differences between sensitivity segments and their perceptions of price ðF 2;660 ¼ 12:5; po:001Þ: Post hoc analysis revealed that the ‘‘low sensitives’’ (mean=22.6) had worse perceptions of price than both ‘‘moderates’’ (mean=24.4) and ‘‘high sensitives’’ (mean=25.0). This finding is also counter-intuitive to the hypothesis and suggests that cruise passengers who are more price sensitive, are more likely to believe that the cruise was fairly priced. Therefore, H2 was rejected. The next set of hypotheses were based on the findings of Kalyanaram and Little (1994) who found that less price sensitive consumers are more likely to be first time purchasers and to spend more than those who are more
price sensitive. Chi-square analysis was used to determine whether or not less price sensitive groups were more likely to be first time visitors (H3a). Results revealed no significant differences ðX 22 ¼ :311; p4:05Þ between groups. Thus, H3a was rejected, suggesting that there is no difference between first time visitors’, and repeat visitors’ price sensitivity. Results of the ANOVA examining differences in sensitivity groups and the amount of money they spent (H3b) found significant ðF 2;719 ¼ 9:5; po:05Þ differences between groups. Post hoc analyses revealed that ‘‘low sensitive’’ passengers (mean=$123) spent on average more money per day than ‘‘high sensitive’’ (mean=$100) passengers. This finding is congruent with the proposed hypothesis and suggests that less price sensitive passengers may be more desirable because they spend more than passengers who are more price sensitive. The Chi-square examining differences in cabin type also revealed significant differences ðX 26 ¼ 55:3; po:001Þ between groups. It was found that ‘‘low sensitives’’ were more likely to stay in a suite (10.7%) or mini-suite (38.5%) than both ‘‘moderates’’ (3.7% and 23.4%, respectively) and ‘‘high sensitives’’ (1.7% and 15.4%, respectively). Conversely, ‘‘high sensitives’’ were more likely to stay in an inside cabin (21.7%) or outside cabin
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(61.3%) then both ‘‘moderates’’ (18.8% and 54.2%, respectively) and ‘‘low sensitives’’ (11.2% and 39.6%, respectively). This finding confirms the research hypothesis and reveals that less price sensitive cruisers are apt to pay more their cabin then price sensitive cruisers. Chi-square analysis was also employed to examine the Dellaert and Lindberg (2003) finding that persons who are more price sensitive, are more likely to have lower incomes (H4a). Results revealed significant differences ðX 214 ¼ 48:8; po:001Þ between groups. Post hoc analyses found that ‘‘low sensitive’’ passengers had considerably higher total household incomes than both ‘‘moderates’’ and ‘‘high sensitives,’’ and that ‘‘moderates had higher household incomes than ‘‘high sensitives.’’ Thus, H4a was accepted and the current analyses reveal that passengers who are more price sensitive, have lower household incomes. Hypothesis 4b4 was also based on the findings of Dellaert and Lindberg (2003) and proposed that passengers who are more price sensitive would be less educated than their counterparts. No differences were found between groups ðF 2;721 ¼ :23p4:05Þ; and the amount of education they have received. Thus H4b was rejected, and it is assumed that price sensitivity segments are not related to education. The final set of hypotheses examined differences in the overall satisfaction, perceptions of quality, perceived value and repurchase intentions for passengers from differing price sensitivity clusters (H5a, H5b, H5c, and H5d, respectively). Since no research had previously examined these propositions, it was hypothesized that no differences would be found. Results of the ANOVA examining differences in the overall satisfaction between sensitivity groups (H5a) found significant ðF 2;700 ¼ 9:5; po:001Þ differences between groups. Post hoc analyses revealed that both ‘‘high sensitives’’ (mean=8.8) and ‘‘moderates’’ (mean=8.7) were more satisfied than ‘‘low sensitives’’ (mean=8.1). In order to examine whether or not the individuals comprising the sensitivity groups differ in their ratings of quality factors (H5b), MANOVA was used. A significant ðF 2;602 ¼ 7:58; po:001Þ multi-variate effect was found which explained 2.6% of the variance (Wilks’ Lambda=.974). Follow-up one-way ANOVA’s were utilized to examine differences in factor ratings (tangibles, and intangibles). Significant differences (po.05) were found between groups for intangibles (services and activities) (F=7.57, po.001), but not for tangibles (p4.05). Results of the Tukey’s post hoc tests found that ‘‘low sensitives’’ (mean=30.3) were less satisfied with intangibles than both ‘‘moderates’’ (mean=32.1) and ‘‘high sensitives’’ (mean=33.0). The ANOVA examining differences in sensitivity groups’ perceived value (H5c) also found significant ðF 2;720 ¼ 5:0; po:01Þ differences between groups. It was
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found that ‘‘low sensitives’’ (mean=7.8) had significantly (po.05) lower perceived value than both ‘‘moderates’’ (mean=8.3) and ‘‘high sensitives’’ (mean=8.4), revealing that visitors who were more price sensitive, perceived the value of their cruise to be higher. The final ANOVA examined differences in the repurchase intentions between sensitivity clusters (H5d) and found significant differences ðF 2;730 ¼ 7:9; po:001Þ between groups. Results of the post hoc analysis disclosed that ‘‘high sensitives’’ (mean=8.2) and ‘‘moderates’’ (mean=8.0) had higher intentions to repurchase a Holland America Cruise than ‘‘low sensitives.’’ Thus, for all variables, ‘‘less sensitives’’ rated their experience lower than both ‘‘moderates’’ and ‘‘high sensitives.’’
6. Discussion and conclusions Since the cruise industry has recently changed its pricing structure to emphasize discount pricing, and price sensitivity has been identified as an important variable for understanding the decision-making tendencies of consumers, it is believed that the current results have both theoretical and managerial implications. By identifying segments based on the responses to price sensitivity questions related to cruise passengers’ preferences for purchasing cruises at a discount, the current study was able to assess whether passengers who are more apt to desire this pricing structure, are desirable guests. With the use of cluster analysis, three distinct segments based on price sensitivity were identified, and multiple differences between the resultant groups were found (see Table 3 for a summary of the differences). It was discovered that passengers who are less price sensitive have higher household incomes, spend more money per day on their cruise, and are more likely to purchase a more expensive cabin than passengers who are more price sensitive. This finding is congruent with past research (Kalyanaram & Little, 1994) which has found that consumers who are less price sensitive, are more apt to spend more. Thus, at face value, it appears that offering cruise discounts may attract less desirable markets, as respondents who are more price sensitive (more apt to cruise if there are discounts) were found to spend less. More research is necessary, in order to determine the differences in return on investment for attracting and serving markets with different levels of price sensitivity. Conversely, in comparison to ‘‘less sensitives’’ the segments of ‘‘moderates’’ and ‘‘high sensitives’’ were found to: be more attached, perceive the price more favorably, be more satisfied overall, rate the quality of services/activities higher, perceive the value to be higher, and be more likely to repurchase in the future. These
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Table 3 Summary of significant differences between price sensitivity groups
Attachment to the cruise line Perceived price Money spent per day Likelihood to stay in a suite Total household income Overall satisfaction Ratings of services and activities Perceived value of the cruise Repurchase intentions
Low sensitive
Moderate
High sensitive
Less
More
More
Worse More Highest
Better Less Moderate
Better Less Lowest
Highest Lower Lower
Moderate Higher Higher
Lowest Higher Higher
Lower
Higher
Higher
Lower
Higher
Higher
findings would suggest that offering discounts may attract cruise passengers who are more likely to appreciate the cruise line. These findings are relevant, as past research has consistently found that visitors who rate their experiences more positively are more likely to not only repurchase, but also provide more positive word of mouth advertising after their experiences. As stated by Reid and Reid (1993, p. 3) the importance of generating positive evaluations from customers is that they represent more than just a stable source of revenues, but also act as ‘‘information channels that informally link networks of friends, relatives and other potential travelers to a destination.’’ The current findings may be unique, since Holland America line has been awarded ‘‘World’s Best Cruise Value’’ for the past 11 years (WOCL, 2003). These combined findings would suggest that offering value (providing discounts) is very effective when actual value is perceived after the experience (consumers rate perceived value high). This may also explain why the current findings regarding attachment (Krishnamurthi & Raj, 1991) and perceived price (Dellaert & Lindberg, 2003) were incongruent with past findings. It is believed that less sensitive markets were more likely to form attachment, and perceive the price more favorably, because they believed the quality provided was high in comparison to the price paid (perceived the value to be higher). As suggested by Parasuraman and Grewal (2000) perceived value may be the most important indicator of repurchase intentions. These findings are similar to Oh (2003) who found that visitors who believe they received a good deal, have better perceptions of their experience. It is therefore possible that passengers who are more price sensitive, perceived that they received a better deal than those who were less price sensitive. Thus, more research is necessary in order to determine if passengers who are more price sensitive rate
cruise lines more positively than less price sensitive visitors, when perceptions of value are lower. Just because more price sensitive markets have been found to rate the cruise line more positively, does not mean that they are viable markets. As proposed by Kotler, Bowen, & Makens (1998), market segments must be measurable, substantial, actionable and accessible, if they are to be successfully utilized by management. Measurability refers to the degree to which a segment’s size and purchasing power can be measured, while substantiality is related to the degree to which a segment is large and/or profitable. Actionability is related to the degree to which programs can be effectively designed to please a segment and accessibility is the degree to which a segment’s size and purchasing power (substantiality) can be measured. Thus, in comparison to less price-sensitive markets, price-sensitive markets would be preferred if they were more measurable, substantial, actionable and accessible. Since less price-sensitive markets were found to be more substantial (higher incomes and spend more), marketing to price-sensitive markets might not be desirable. More research is necessary in order to determine if pricesensitive markets are substantial enough to be viable cruise markets. Since the difference between quality and price paid has consistently been found to be the best predictor of value (Petrick, 2002), cruise lines who provide discounts, must ensure that the quality provided, is greater than the perceived price. In the current study, price-sensitive markets perceived the price more positively than less price-sensitive markets. Thus, more research is necessary in order to determine if this relationship exists when price-sensitive markets do not perceive the price more positively than less sensitive markets. It is also suggested for further research that the causes of differences in perceptions of price between markets be identified, as this could be a key to utilizing price discounts effectively. Future research should also identify cruise passengers’ zone of price insensitivity in order to assist cruise management in understanding the effect of changes in price. As Gupta and Cooper (1992) revealed, there exists a latitude of acceptance related to reference price. By knowing the range of this zone, cruise management would be better equipped to know the effects of both price increases and reductions. Additionally, the current study did not find differences between price sensitivity segments for ‘‘tangibles’’ (ship’s physical appearance) though they did find differences for ‘‘intangibles’’ (services and activities). This finding reveals that tangibles may be ‘‘basic’’ attributes, while intangibles may be ‘‘key’’ attributes. Gale (1994) proposed that ‘‘basic’’ attributes do not offer an opportunity for competitive advantage, while ‘‘key’’ attributes help to determine market competitive-
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ness. Since marketing efforts should be based on ‘‘key’’ attributes (Gale, 1994), the current findings suggest the importance of marketing services and activities to attract desired markets. Since these factors were rated more positively by price-sensitive markets, marketing with the use of these attributes would more likely attract price-sensitive clientele. Gale (1994) further argued that ‘‘basic’’ attributes are only important when they are not adequate. Thus, while marketing the ship’s physical appearance (tangibles) would not be an effective strategy, failing to adequately maintain the ship’s physical appearance would have very negative impacts on cruise passengers overall evaluations. Theoretically, the current findings offer new insight into the ramifications of using price discounts to attract cruise passengers. Results propound that offering discounts to cruise passengers will attract passengers who will spend less, but appreciate the cruise line more. Thus, long-term success may be found by offering discounts, due to the retention of clientele (repurchase) caused by more positive evaluations of the cruise experience, and the generation of positive word of mouth adverstising. Conversely, not offering discounts may result in attracting a more affluent clientele, which may not be substantial enough to sustain long-term profitability. More research is necessary in order to determine the long-term ramifications of providing, or not providing discounts. The current study was limited to two cruises, on one vessel, on one cruise line. This limitation is relevant, as past research has found that price sensitivity is dynamic over time, across products and across consumers (Krishnamurthi & Papatla, 2003) Thus, future studies should examine the fore-mentioned relationships in a multitude of other settings, in order to better understand if these relationships exist across varying markets. Since Holland America is known for offering cruise value, it would be interesting to see if the current relationships exist for cruise lines noted for either low price (i.e., Carnival Cruise Line) or high quality (i.e., Cunard Cruise Line). The current study was further limited to only one cruising season (summer). The demographics of cruise passengers change greatly between summer and the rest of the year, and further research is necessary in order to determine the effect of offering discounts for other seasons. While results of the present study should not be generalized, they do imply that analyzing price sensitivity is important for cruise line management. By understanding the effects of offering price discounts, managers will be better equipped to make pricing decisions that are best suited for long-term success. Since little research has been conducted in this area, and pricing is one of the most important marketing decisions, it is further believed that the current results offer an initial conceptualization of the role of price
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