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Marginal Upselling: An Empirical Investigation in the Perishable Service Industry
Authors: Aidin Namin (Loyola Marymount University, USA), Velitchka Kaltcheva (Loyola Marymount University, USA), Dinesh K Gauri (Loyola Marymount University, USA)
This paper investigates, and empirically validates, advertising strategy and policies in the cruise industry for different cruise cabin types. An experiential good, cruises are one of the major offerings in the marketing, service, and hospitality fields. We model advertising strategy as share of advertising expenditures by the focal company relative to total ad expenditures in the cruise industry over weekly time periods. We estimate our demand model (i.e., number of bookings over time) using a Poisson regression setting. Our model’s major variables include different cabin types, weeks left between booking and departure, and share of advertising, as well as several interaction terms and covariates, including, traveler’s income, and travelers’ distance from sailing point. Using a proprietary dataset, which covers booking information from a leading cruise company in the United States, we empirically test our model.
Empirically validating the effect of marginal upselling, our findings indicate that for the closest three weeks to cruise departure, increasing share of advertising by the focal company would result in an increase in the number of bookings for suite and ocean-view (with a higher impact for the latter), but would result in loss of bookings for balcony and upper/lower cabin types. Such loss of demand is expected to be higher for balcony. For those weeks which happen to be 2 to 26 weeks from the departure date, increasing share of advertising expenditure contributes positively to number of bookings for suite and ocean-view cabin types with a similar effect for either. While it harms demand for upper/lower and balcony cabins, with a considerably larger negative effect on upper/lower cabins. If the increase in share of advertising happens between 26 to 52 weeks before cruise departure, then it would result in an increase in demand for ocean-view cabins only, causing reduction in demand for all three other cabin types, relative to our baseline. The negative impact on upper/lower is remarkably higher than the other two, where the impact is very similar for them. Finally, if increase in advertising expenditure share occurs during the farthest two weeks from departure, the company should expect demand elevation for upper/lower and ocean-view cabin types, with a stronger impact on the latter, while they should anticipate demand reduction for suite and balcony types, with a larger reduction for suites.
From the academic point of view, to the best of our knowledge, our analysis is among the first studies in the literature which investigates the impact of upselling for different cabin types in the service industry. From the practitioners’ perspective, our unique results have important managerial implications for cruise-ship managers and shed light on advertising decisions made in this growing industry.