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7 Pricing Methods used in Hotels

7.1 Introduction

Pricing is the only element of the marketing mix that produces revenues for the firm, while all the
others are related to expenses. Price is the most flexible element of marketing strategy in that pricing
decisions can be implemented proportionately quickly in comparison with the other elements of
marketing strategy.

7.1.1 Significance of pricing in thepre-encounter marketing mix:Price plays an important part in

establishing customers’ perceptions of aproduct and of a company’s position in the marketplace. Over
time, brands oftenbecome associated with particular value propositions, which become fixed in
theconsumers’ perception of that brand.

7.1.2 Price: Price isthe summation of all sacrifices made by a consumer in order to experience the
benefits of a Product.

7.2 Stages in setting prices

Stages in setting prices requires a considerable amount of consumer, competitor and internalcompany
research. The managers of smaller hospitality companies adopt a simpler approachto setting prices, based
upon a combination of historical factors and the currenteconomic situation.

7.3 Factors influencing pricingdecisions

Factors that influence price decisions can be sorted in to two major categories:

1. External environmental factors, over which companies have little (if any) control
2. Internal factors, over which companies have a considerable amount of control.

7.3.1 External factors: The Five of the environmental variables that have an impact on pricing
decisions – demand, inflation, industry structure, competition,and legal/regulatory factors.

7.3.2 Internal factors

The seven internal factors that affect the pricing decision:pricing objectives, costs, company
resources, positioning, customers, product,and channel.

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7.4 Pricing strategies

In hotels, consumers often associate star ratings with quality standards.Alternative pricing
strategies include the market leader and market followeroptions but there are also unsustainable pricing
strategies, which are ultimately self-defeating.

7.4.1 Market leader strategies: Well-established hotel companies, with a loyal customer base and a
strong brandimage, can adopt market leader strategies where the prices are aligned with servicequality.

7.4.2 Market follower strategies: New entrants and less established hotel brands, seeking to build
market share bypenetration pricing, adopt a market follower strategy. A market follower strategyoffers
similar quality but pitches prices lower than the market leader in order to bemore competitive, attract
customers and grow market share.

7.4.3 Unsustainable strategies: Unfortunately, some hotels implement over-priced strategies, which are
unsustainableas a long-term proposition. These companies charge rates higher than the qualitycan justify.
Some of these hotels might have myopic management who unknowingly has become over-priced.

7.5 Pricing methods

The next aspect of pricing is to review how prices are calculated in the hospitalityindustry.The
price the company charges is somewhere between one that is too low to produce a profit and one that is
too high to produce sufficient demand. Product costs set a floor for the price; consumer perception of the
product's value set the ceiling. The company must consider competitors' prices and other external and
internal factors to find the best price between the two extremes. They can be - Market-led, Competitor-
led, Profit-led, Cost-led

7.5.1 Cost-led pricing methods

A. Break-even analysis& target profit pricing: The purpose of break-even analysis is to enable
management to calculate variouscost, volume and profit scenarios to make appropriate pricing decisions.
This cost-oriented pricing approach is break-even pricing, in which the firm tries to determine the price at
which it will break even.

B. Cost Based Pricing method:The simplest method is cost-plus pricing, adding a standard markup to
the cost of the product. Cost as a percentage of selling price is another commonly used pricing technique
in the restaurant industry.
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C. Fixed mark-up: An unusual pricing feature of some restaurant wine lists is a standard (or fixed)mark-
up, regardless of the cost of the wine. The problem with this pricing method is that it ignores thefinancial
and storage costs of acquiring and keeping high quality wines.

7.5.2 Profit-led pricing method: Rate of return: The goal of ROR pricing is to find a price
structurethat provides the required return on investment.

7.5.3Competition-led pricing method: Price followership is the pricing strategy based on

competition-orientated objectivesso prices do not change until the competitor makes the first move. The
managerthen responds to maintain the price differential, which may be set in currency orpercentage terms.

7.5.4Marketing-led pricing methods

Yield management: This is acomplex form of price discrimination used in larger properties to help
maximizeREVPAR (revenue per available room). Because of the focus on sales, yield managementis also
known as revenue management.

7.5.5 Value-based pricing: Value-based pricing uses the buyers' perception of value, not the seller's
cost, as the key to pricing.

7.6 Pricing Strategies - Practical International approach:

The Price – Value matrix:As the name implies, your goal is to develop a pricing strategy that places
your brand and its products in a certainposition relative to your competition. One way to visualize this is
theprice-value matrix.

Price Positioning Strategies

Skim: This strategy clearly positions your company above the rest; it tells consumers something is special
(i.e., worth paying more for) about your products.
Match: This strategy puts your pricing on par with the competition, but not necessarily for all rates.
Surround: This strategy positions your first room type as the cheapest in the market, but offers your
rooms with better options at a price that’s close to your competitors’ first available rates.
Undercut: To undercut, offer a price that’s comparable to your competition and another that’s lower.
Penetrate: Being the low-priced option in your market has benefits and drawbacks. The strategy is
primarily designed to get people in the door and in seats. For new establishments, low prices often seem
the best way to entice consumers to try their products.
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