Chapter 12 “The real issue is value, not

price.”
Pricing
Products: -Robert T. Lindgren
Pricing
Considerations,
Approaches,
and Strategy
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Chapter Objectives Chapter Objectives

• Outline the internal factors affecting pricing • Contrast the differences in general pricing
decisions, especially marketing objective, approaches, and be able to distinguish
marketing-mix strategy, costs, and among cost-plus, target profit pricing, value-
organizational considerations based pricing, and going rate

• Identify and define the external factors • Identify the new product pricing strategies of
affecting pricing decisions, including the market-skimming pricing and market-
effects of the market and demand,
penetration pricing
competition, and other environmental
elements

©2006 Pearson Education, Inc. Marketing

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for Hospitality
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1
 Chapter Objectives Price
• Understanding how to apply pricing strategies • Price is the amount of money charged for a
for existing products, such as price bundling good or service
and price adjustment strategies
• The only marketing mix element that
• Discuss the key issues related to price produces revenue
changes, including initiating price cuts and
price increases, buyer and competitor
reactions to price changes, and responding to • Changing too much chases away potential
price changes customers, charging too little cuts revenue

©2006 Pearson Education, Inc. Marketing

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for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition ©2006 Pearson Education, Inc. Marketing
Marketing
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Factors to Consider Internal Factors

when Setting Prices
• Marketing Objectives
– Survival
– Current Profit Maximization
– Market-Share Leadership
– Brad Equity Growth
– Product-Quality Leadership

©2006 Pearson Education, Inc. Marketing

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for Hospitality
and Tourism,
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2
 External Factors Affecting
Internal Factors Pricing Decisions
• Marketing Mix Strategy • Market and Demand

• Costs • Cross Selling and Upselling

– Fixed vs. Variable Costs
• Consumer Perceptions of Price and
Value
• Organizational Considerations
©2006 Pearson Education, Inc. Marketing
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for Hospitality
and Tourism,
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External Factors Affecting Price Elasticity of Demand

Pricing Decisions
• Analyzing the Price – Demand
Relationship

• Price Elasticity of Demand

• Factors Affecting Price Sensitivity

©2006 Pearson Education, Inc. Marketing

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3
 Factors Affecting Price Factors Affecting Price
Sensitivity Sensitivity
• Unique Value Effect • End-Benefit Effect
• Total Expenditure Effect
• Substitute Awareness Effect • Sunk Investment Effect
• Price Quality Effect
• Business Expenditure Effect

©2006 Pearson Education, Inc. Marketing

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for Hospitality
and Tourism,
and Tourism,
4th edition
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and Tourism,
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Cost Based Pricing

General Pricing Approaches Product

• Cost-Based Pricing Cost

• Break-Even Analysis and Target Profit Pricing Price

• Value-Based Pricing
Value

• Competition-Based Pricing
Customers

©2006 Pearson Education, Inc. Marketing

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4
 Break-even Analysis or Target Profit
Break-even Pricing

• BE= Fixed Costs/Contribution (SP-VC)

• Example - Meal - SP = $20, VC = $8
• Fixed costs are $2400 a day
• BE=$2400/$12 = 200
• Need to sell 200 meals @ $20 to break-even
• VC = 40%, contribution = 60%
• BE = $2400/.6 = $4000

©2006 Pearson Education, Inc. Marketing

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for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition ©2006 Pearson Education, Inc. Marketing
Marketing
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Value-based Pricing Competition-Based Pricing

Customer
Product

Value
Cost

Price
Price

Cost
Value

Product
Customer
©2006 Pearson Education, Inc. Marketing
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for Hospitality
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5
 New-Product
Pricing Strategies
Pricing Strategies
• New-Product Pricing Strategies
• Prestige Pricing

• Existing-Product Pricing Strategies

• Market-Skimming Pricing

• Psychological Pricing
• Market-Penetration Pricing

• Promotional Pricing
©2006 Pearson Education, Inc. Marketing
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Existing-Product
Setting Initial Product Prices
Pricing Strategies
Market Skimming Market Penetration
• Product-Bundle Pricing
> Setting a high price
> Setting a low price • Price-Adjustment Strategies
for a new product to
for a new product in – Volume Discounts
skim maximum
revenues from the
order to attract a – Discounts Based on Time of Purchase
large number of – Discriminatory Pricing
target market.
guests.
> Results in fewer, – Yield Management
> Results in a larger • Non-Use of Yield Management
more profitable sales.
market share.
> Popular night club • Last-Minute Pricing
> New Marriott
charges a high cover
charge

©2006 Pearson Education, Inc. Marketing

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6
 Product-Bundling Pricing
• Transfer surplus reservation price (the maximum Psychological Pricing
price a customer will pay for a product)
– Customer A will pay $60 for a Disney pass and and • Price-quality relationship
$120 for a hotel room,Customer B will pay $95 for the
Disney pass and $80 for the hotel room – A hotel
selling a two night package with pass for $350 will get
both customer • Reference prices
• Price-bundling also reduces price competition –
by making it hard to figure price of components
– In an airline and hotel package it is difficult to • Rounding
determine the price of the room

• Length of the field

©2006 Pearson Education, Inc. Marketing
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Promotional Pricing Price Sensitivity Measurement

• Price Sensitivity Measurement (PSM) helps to
• Temporary pricing of products below establish a balance of price with product or
service value based on consumer’s
list price and sometimes below cost perceptions of that value.
– The product or service to be cheap?
– The product or service to be expensive?
– Value Pricing – The product or service to be too expensive, so
expensive that you will not consider buying it?
– The product or service to be too cheap, so cheap
– Price Sensitivity Measurement that you would question the quality?

©2006 Pearson Education, Inc. Marketing

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7
 Other Pricing
Initiating Price Cuts
Considerations
• Excess capacity
• Price Spread Effect
– “The highest price menu item should
not be more the 2.5 times the price • Dominate market
of the lowest”
• Increase market share
• Price Points

©2006 Pearson Education, Inc. Marketing

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for Hospitality
and Tourism,
and Tourism,
4th edition
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Initiating Price Increases Reactions to Prices Changes

• Increase profits • Buyer’s reaction

• Cost inflation • Competitor’s reaction

• Excess demand • Trade Ally’s reaction

©2006 Pearson Education, Inc. Marketing

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8
 Responding to Price Changes Best Practices
• Why did competitor change price? • Boston Market
• Royal Caribbean Cruises revenue
– To gain market share? Use excess capacity?
management department
• La Colombe D’Or cross-selling
• Where is my product in its life cycle?
strategies
• What is its importance in the company’s
product mix?
©2006 Pearson Education, Inc. Marketing
Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition ©2006 Pearson Education, Inc. Marketing
Marketing
for Hospitality
for Hospitality
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Upper Saddle River, NJ 07458 Kotler,
Kotler, Bowen,
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Key Terms Key Terms

• Cost-plus pricing • Price
• Survival
• Cross-selling
• Upselling
• Discriminatory pricing • Value-based pricing
• Yield management/Revenue
• Fixed costs management

• Going-rate pricing
©2006 Pearson Education, Inc. Marketing
Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition ©2006 Pearson Education, Inc. Marketing
Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
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Upper Saddle River, NJ 07458 Kotler,
Kotler, Bowen,
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Makens Upper Saddle River, NJ 07458 Kotler,
Kotler, Bowen,
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