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“The Risk of Experience”

We know that in our business, the product is sold and consumed at the same time, (unlike retail business, the customer pays for the food and pays for it at the same time)

However, regardless of a hotel’s class or category, it is evidently common that the room rates, yields and Gross Operating Profits constantly fluctuate. This fluctuation if not controlled forces the management to reconsider service levels and cut corners to achieve targeted profits. This so called “repositioning” results into inconsistency of service standards, food production and leads to increase in service errors, widening the discrepancy in the promised and actual product quality.

Repositioning of service levels change the customer’s value perception and thus gives the market an opportunity to seek discounts.


This process of declining value can be found in almost all class of hotels, regardless of their affiliation. When the hotels either chain affiliated or independent compete in the market place, they tend to enter in a cut throat price war and discounting becomes part of their day-to-day sales strategy. At the same time the hotels do not realize that their property is moving away from the customers set of choices, forcing the management to re-price premium products with lower rates.

At that time, the management often starts studying competition and try to copy the packages, promotions and offers. All this happens without realizing the need of a well thought clear value proposition. In this cut and paste process, stand alone independent hotels suffer the most. And gradually it becomes difficult to maintain year round profitable business. Whereas, the full service hotels speedily reduce their room rate to capture the lower market tiers.

We as professional managers know, but do not admit, that when our customers perceive higher “Risk of Experience” they push our room rates further down. And demand rates which we agree to maintain market share.

In my opinion, customer’s “Risk of Experience” is everything. This perception drives the market share upward or downward and can only be minimized if not eliminated via a well-chosen Value Proposition.

Unfortunately not many hotels have done so; however foodservice industry has such examples like McDonalds, KFC and Outback Steak House where the Value proposition is so strongly knitted around the entire business that customers themselves feel the tangibility of intangible value of the product. Why these foodservice businesses do not under price their products? Isn’t McDonalds aware that a new KFC outlet has just opened next door? Instead, McDonalds comes up with “McChicken Burger” and “McNuggets” attracting KFC’s clientele. McDonalds knows that its product line is perceived as consistent in quality and therefore uses innovation to re-enforce its value proposition.

Hopefully, one day the Hotels too would start realizing the need of a unique value proposition, which can minimize its guest’s perception of risk.

The point is who would dare to break through the mediocrity and redirect the operation to only serve the needs of a well chosen market.

What can be done?

A direction to create true Value for your customer and win

As the competition grows so as the opportunity! Don’t be delusional! This may not be true if a hotel cuts corners and increases customer’s “Risk of Experience” every time the market shrinks.

It is proven that the competition will not provide any opportunity to mediocre; no matter what kind of opportunity rises it will be captured by the market leader, unless the core decision makers strictly follow the principle of business management driven from best suited Value Proposition.

Not every value proposition suits every hotel business; neither every market opportunity fits into every hotel’s profile.

Value Proposition Management is the tool which enables a hotel business to thrive at the justifiable costs, with more returns than expected.

No two hotels or resorts are ever alike, so as the Business or Marketing or even the Cost and Expense plans. The one, which works for your competitor, could lead to disaster if your hotel attempts to follow without looking into your intangible assets and physical strengths.

A Company with a well defined value proposition and its adoption as the “core vision” is more likely to gain a substantial lead within its own chosen market, therefore would always be the leader. In todays competitive market a master of non and jack-of-all-trades suffers.

You have seen McDonalds, proudly announcing “billions of burgers sold”, do they make the best burger in the world? No! But they lead the market wherever they are, and they do it through specializing in their own value proposition, excelling in it, and expanding and maintaining their product line. Needless to say that McDonalds become unconditional choice for a budget minded customer looking for a fast bite.

The key is to create and implement business rules driven from customer’s set of buying rules. These rules must reflect a single value proposition in every aspect of corporate culture, hotel operation and marketing scenarios. Should involve all levels of organizational hierarchy and cover from restaurant menu design to the quality of bathrobe.

Remember! The profit is the key of expansion, not the customer. Those days are over when the Hotels were dominating work styles of its customers. Now, the real customers are much simpler, well traveled, work longer hours or at their own pace. This new market does not have time to accept service flaws, expect fast answers and is very demanding in all aspects of their needs.

This new market expects product features in conjunction with its work habits without perception of risk and frustrating delays. The best characteristic of today’s new market is it does not go out of a pre-set frame of buying rules.

Rule #1 Match your set of business rules with the customer’s buying rules.

I am not saying that the Hotel has to discount room rates to meet with customer’s buying rules; this would frustrate the owners and would send a wrong signal to the market. Today’s new customer is very precise when it comes to Value assessment, although the price plays a major role, but there is more in it! Systems like Corporate Classics or Preferred Loyalty programs commonly being used in Hotel Chains from Holiday Inn, Shangri-La, and Hyatt do not provide the required returns on investment; minimizing Risk of Experience is the foremost rule proven to capture market share and is guaranteed to produce profits for your operation.

My fellow hoteliers my think generic marketing campaigns bring results, these used to work when not much was available to compete with, and so as the customers had their own all time favorite “spots”.

Now this customer’s loyalty hardly exists for the conventional player.

Unfortunately, the conventional players do not realize the paradigm shift within their markets. How many of us may overlook and will not learn from our competitor when it added a video conferencing facility which moved up the several points, pushing yours down the list. Or another hotel spent thousands of dollars more on its Chef, to expand its menu selection to include Japanese specialties and now has year- round favorable business from JTB.

Perhaps till today some of us are still keeping an eye on the conventional set of business rules, rather than on their market’s changing set of buying rules.

I suggest being careful when you make your next corporate plan. Observe realistically your customer’s set of buying rules, compare with your set of value proposition then if you find the crux of both matching, transform your corporate policies and operational system through revising your standard operating procedures, tailoring each one around the chosen value proposition.

Rule # Your plan should be easy to understand at rank and file level enabling them to measure their performance by end of each day.

Don’t overwhelm management with pages of meaningless documents that some of us think would impress the reader. Statistical information driven from Business Performance Review is much important because your teams need to know where they had been, and where they should be in a specific time frame. Once the goal is set, use of a Balance Scorecard will help in setting the strategy.

Choosing the right value Proposition requires understanding of its three founding value disciplines

Customer Intimacy

Defined as Higher operating costs, higher employee per room ratio, service offered on one-to-one basis, custom made solutions to the employees and customers, each demand being met individually.

This discipline requires an upscale product and complementing service levels and offers higher returns on investment. Giving the hotel best actual revenue share with best gross operating profit, through unbelievable number of loyal customers coming back year after year, this discipline is well adopted by companies like Ritz Carlton, and also being now tried by Boutique Hotels, but resulting into lesser success in means of ROI.

Intercontinental Hotels, Crown Plaza, Hilton and several other compatible hotel brands also claim to offer value driven from Customer intimacy, but not all are successful. The reason is simple; not being able to create a solution providing � employee satisfying work environment where delegation, training and human resource development is necessary.

Product leadership

Defined as The hotel with reflection of innovative thinking, always researching and developing products, leading the market with most advanced features among all competitors. Constantly adding in-room features, state of the art guest servicing techniques, ready to obsolete and replace own innovation with a further developed product defines this discipline.

High R&D costs, with corporate management working on innovative products while the operations management is consistently offering innovative solutions exceeding the expectation of its market. This discipline also generates high profit, with less variable expenses and more fixed costs. The guests are served by highly motivated and innovative team, each team is managed by a team-leader fully trained in satisfying the queries, knows how to handle unexpected and can offer alternate solutions in no time. This discipline enables the hotel to maintain its leadership and motivate its customers to buy products on highest possible price tag. On the other hand, customer do not stay loyal to one innovation. They know that they might get an introductory flyer within next few months introducing a newly added in-room feature, and that it may enhance their next experience.

Operational Excellence

Defined as consistency in product quality and presentation. The businesses working on this principle successfully deliver the product on a firm quality standard again and again. Thus minimizing the perception of risk in customers mind and assures value. Market for such businesses expect Fast and efficient service with no frills and thrills. Radisson’s first in the market travel agent commission program was built on the same principle and did provide assurance to the travel agent of prompt commission payment, the same process was then copied by some well known GDS reservation service providers.

This means returning customers would increase; operations will have lower costs with almost negligible wastage of resources, property will have enhanced sale volume, resulting into higher revenue and market share with possibility of capturing a leading position in the marketplace.

This value discipline requires taking control of each task in the process of customer experience � right from reservation to city ledger. Businesses incorporating Operational Excellence tend to focus on elimination of human error, and if there is an error then generous compensations are offered.

Operational Excellence needs automation throughout the property, reducing the chances of human error to minimum; The Hotels which excel in this discipline ensure that all decisions right from selection of employee up to producing menu items fall through strict quality control process.

In early 70s the idea behind budget accommodations was to capitalize on operational excellence and serve the on-road salesmen traffic.

Formation of a Value Proposition

Each one of the above disciplines represents a specific market. Therefore, the first step before choosing the discipline is to choose the customer in view of your property’s profile. Then choose the discipline which will maximize ROI.

If a hotel is in formation phase or restructuring its market position, changing the value discipline can be disastrous, the management can overcome this through reinforcing financial resources and shifting the responsibilities horizontally, retraining and improving the delegation factor across the organization.

Finally, this would enable the business to lead the market, exceed customer’s expectation, with best market share.

Similar to any other service industry, value in hotel business should be measured from “customer’s perception of risk”. Lesser the risk, more the value will be.

In a conventionally managed hotel where the most negligible service flaw keeps coming back through guest feed back and the management overlooks it every time. What will happen? This will begin the cycle of revenue losses and higher costs � may be through loss of customer or most likely through discounts which your sales manager has to offer on already discounted rates to keep the client. No mater what you offer to compensate - the guest will perceive higher risk in choosing your hotel next time. And once the perception of risk goes up, it spreads out like a wild fire and in no time changes the entire market’s perception.

Every hotel wants to create a perfect model of service, not allowing the customers to leave unhappy, paying much attention to details, stressing on training and retaining “good” employees. But forgetting that in our business the product is delivered and consumed at the time of purchase, both, the employee and the customer perceives certain percentage of risk at the time of service delivery and its consumption. A well-chosen value proposition is the only key to reduce the perception of risk both internally and externally. This will minimize the chances of discrepancy between committed and delivered product quality, and create your team’s and client’s confidence in the product value.

I have worked with Hotels where marketing and sales teams were always under-pricing their own product, at times even the promotional packages were further discounted.

A well-chosen value proposition discourages conventional sales tools and techniques like under-pricing, discounting and falsely committing to services which may not be feasible to offer due to cost constraints. Instead, choosing a Value proposition and creating products around it will give your operation a balance between cost and profitability.

It will also enable the teams to make a fast, accurate and win-win decision. Whether it is a routine or a custom made solution, if it is within the parameters of chosen value proposition; it will perfectly serve your customer’s needs.

Choosing a well-defined Value Proposition and incorporating it through out the corporate culture creates this natural flexibility which enables the business to adopt the change in market trend faster then the competitor, without compromising on profits.

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