CH 11 - Tourism

PRICING: UNDERSTANDING AND CAPTURING
CUSTOMER VALUE
LECTURE NOTES
PRICE
 Price is the only marketing mix element that produces revenue. All others represent cost.
 A pricing mistake can lead to a business failure, even when all other elements of the business
are sound.
 Mistakes may include:
 Pricing that is too cost oriented
 Prices that are not revised to reflect market changes
 Pricing that does not take the rest of the marketing mix into account
 Prices that are not varied enough for different product items and market segments.
PRICE
 Price: The amount of money charged for a product or service, or the sum of
the values that consumers exchange for the benefits of having or using the
product or service.
 Charging too much chases away potential customers…charging too little can
leave a company without enough revenue to maintain the operation properly.
 Ex: Equipment wears out, carpets get stained, and painted surfaces need to be
repainted. A firm that does not produce enough revenue to maintain the operation
eventually goes out of business.
INTERNAL AND EXTERNAL COMPANY FACTORS AFFECTING A
COMPANY’S PRICING DECISIONS
INTERNAL FACTORS AFFECTING PRICING
DECISIONS
INTERNAL FACTORS AFFECTING PRICING DECISIONS:
MARKETING OBJECTIVES
 Before establishing price, a company must select a product strategy. If the company
has selected a target market and positioned itself carefully, its marketing mix strategy,
including price, will be more precise.
 The strategic decisions on market positioning have a major influence on price.
 Ex: Four Seasons positions its hotels as luxury hotels and charges a room rate that is
higher than most.
 Ex: Motel 6 has positioned themselves as limited-service motels, providing rooms for
budget-minded travellers, this market position requires charging a low price.
 Objectives Include:
 Survival: A technique used when a company’s or business unit’s sales slump, creating a loss that
threatens its existence. Because the capacity of a hotel or restaurant is fixed, survival often involves
cutting prices to increase demand and cash flow. This can disrupt the market until the firm goes out
of business or the economy improves.
 Current profit maximization: Many companies want to set a price that will maximize current
profits. They estimate what demand and costs will be at different prices and choose the price that
will produce the maximum current profit, cash flow, or return on investment (ROI), seeking current
financial outcomes rather than long-run performance.
 Objectives Include:
 Market-share leadership: Some companies want to obtain a dominant market- share position. They believe
that a company with the largest market share will eventually enjoy low costs and high long-run profit. Thus, prices are set as
low as possible (Marriot).
 Product-quality leadership: Quality leaders such as Ritz-Carlton and Groen charge more for their products,
but they also have to reinvest in their operations continuously to maintain positions as quality leaders.
 Others: Set low prices to prevent competition from entering the market or set prices at the same level as its
competition to stabilize the market or reduce prices temporarily to create excitement for a new product or draw more
customers into a business.
MARKETING MIX STRATEGY
 Price is only one of many marketing mix tools that a company uses to achieve its marketing objectives.
 Price must be coordinated with product design, distribution, and promotion decisions to form a
consistent and effective marketing program therefore decisions made for other marketing mix
variables may affect pricing decisions.
 Ex: resorts that plan to distribute most of their rooms through wholesalers must build enough margin into
their room price to allow them to offer a deep discount to the wholesaler.
 Ex: Owners usually refurnish their hotels every five to seven years to keep them in good condition. Prices
must cover the costs of future renovations.
 A firm’s promotional mix also influences price (must also consider promotional costs when setting
prices).
COST
 Costs set the floor for the price a company can charge for its product.
 A company wants to charge a price that covers its costs for producing,
distributing, and promoting the product.
 Beyond covering these costs, the price has to be high enough to deliver a
fair rate of return to investors.
 Low costs doesn’t always mean low prices.
COST
 Fixed costs: Costs that do not vary with production or sales level.
 Variable costs: Costs that vary directly with the level of production.
 Total costs: Costs that are the sum of the fixed and variable costs for
any given level of production.
ORGANIZATIONAL CONSIDERATIONS
 Management must decide who within the organization should set prices.
 In small companies, top management, rather than the marketing or sales department,
often sets the prices. In large hospitality companies, pricing is typically handled by a
revenue management department under guidelines established by corporate
management.
 Many corporations within the hospitality industry now have a revenue management
department with responsibility for pricing and coordinating with other departments
that influence price.
 Revenue Management: Forecasting demand to optimize

profit. Demand is managed by adjusting price. Fences are often
built to keep all customers from taking advantage of lower
prices. For example, typical fences include making a reservation
at least two weeks in advance or staying over a Saturday night.
• In other words…Revenue management is:

• Charge different value segments different prices for same product based on
price sensitivity
• Revenue management (RM) increases revenue for the firm through better use
of capacity and reservation of capacity for higher-paying segments.
• Revenue management uses mathematical models to examine historical data
and real time information to determine
 What prices to charge within each price bucket
 How many service units to allocate to each bucket
EXTERNAL FACTORS AFFECTING PRICING
DECISIONS
EXTERNAL FACTORS AFFECTING PRICING DECISIONS:
NATURE OF THE MARKET AND DEMAND
 Although costs set the lower limits of prices, the market and
demand set the upper limit.
 Customers balance the product’s price against the benefits it
provides (Value).
 Before setting prices, a marketer must understand the
relationship between price and demand for a product.
CONSUMER PERCEPTIONS OF PRICE AND VALUE
 Like other marketing decisions, pricing decisions must be buyer oriented because
eventually the consumer who decides whether a product’s price is right.
• From a customer’s point of view, the price charged by a supplier is only part of the
costs involved in buying and using a service.
• There are other costs of service, which are made up of the related monetary and
non-monetary costs.
• Related Monetary Costs: These go above and beyond the purchase price paid to
the supplier.
• Ex:Visiting a Cinema
• Non-monetary Costs: Non-monetary costs reflect the time, effort, and discomfort
associated with the search, purchase, and use of a service.
CONSUMER PERCEPTIONS OF PRICE AND VALUE
 There are four distinct categories of non-monetary costs:

1. Time: (Travelling to the service venue, waiting in a que…) Ex:
Governmental Services
2. Physical: like effort, fatigue, and discomfort.
3. Psychological: Mental Effort, perceived risk and anxiety, cognitive
dissonance and feelings of inadequacy and fear.
4. Sensory: relate to unpleasant sensations affecting any of the five senses
(putting up with crowding, noise, unpleasant smells, drafts, excessive
heat or cold, uncomfortable seating…etc.)
ANALYSING THE PRICE-DEMAND RELATIONSHIP
 Each price a company can charge leads to a different level of demand.

 It shows the number of units the market will buy in a given period at
different prices that might be charged.
 In the normal case, demand and price are inversely related; that is, the
higher the price, the lower the demand.
 Most company managers understand the basics of a demand curve, but
few are able to measure their demand curves.
 Estimating demand curves requires forecasting demand at different
prices.
PRICE ELASTICITY OF DEMAND
 If demand hardly varies with a small

change in price, we say that the
demand is inelastic. If demand changes
greatly, we say the demand is elastic.
PRICE ELASTICITY OF DEMAND
 Buyers are less price-sensitive when the product is unique or when it is high in
quality, prestige, or exclusiveness.
 Businesses are less price-sensitive when travel is needed to serve a client or
potential client.
 Consumers are less price-sensitive when substitute products are hard to find.
 Ex: The only full-service hotel in an area where there is a high demand for four-star
hotels will be able to charge and get good revenue for its rooms until competition
arrives.
 If demand is elastic rather than inelastic, sellers generally consider lowering their
prices.A lower price may produce more total revenue.
FACTORS AFFECTING PRICE SENSITIVITY
Unique Value Effect

 Creating the perception that your offering is different from those of your competitors avoids price
competition.
 The guests may not always be able to describe what they mean by “value” but they certainly recognize
it when they see or experience it.
 Price is a reflection of value and occasionally guests are highly offended by paying five-star prices for a
three-star product.
 The Internet offers photos of properties and even menu offerings but staged photos may not
accurately reflect reality.
Substitute Awareness Effect

 Hotel restaurants often charge more for meals based on the substitute awareness effect. The guest
who arrives in the evening, being unfamiliar with the city, usually has breakfast in the hotel. The guest
knows that a better value probably exists elsewhere but is unfamiliar with other restaurants in the
city.
 Although the breakfast in the hotel may cost twice as much as a meal in a nearby restaurant, the
search costs, the time it would take to find the restaurant, and the travel time to it are greater than
the dollar savings of the meal.
 When consumers discover products offering a better value, they switch to those products.
 Many hotel restaurants are empty in the evening.They are perceived as overpriced by the local market.
Business Expenditure Effect

 When someone else pays the bill, the customer is less price-sensitive.
 When setting rates, management needs to know what the market is willing to pay. If a
hotel can attract people traveling for business who have a generous travel allowance
and are willing to pay high room rates, the hotel is leaving money on the table by
offering discounts.
 Airlines have been known to offer a second business-class ticket at a discount when
one is purchased at full price. Hotels have been known to offer bonus frequent-flyer
miles. Both of these promotions are taking advantage of the business expenditure
effect.
End-benefit Effect
 Customers are more price-sensitive when the price of the product accounts for a
large share of the total cost of the end benefit.
 Ex: a couple paying $3,000 in airfare to travel to Australia will pay $350 a night for a
luxury ocean-front hotel. The $350 is a small cost of the end benefit (their vacation).
Total Expenditure Effect
 The more someone spends his or her own money on a product or
service, the more sensitive that person is to the product’s price.
 The total expenditure effect is useful in selling lower-price products or
products that offer cost savings to volume users.
 Ex: Frequent flyer on an airline
Price Quality Effect

 Consumers tend to equate price with quality, especially when they lack any prior
experience with the product.
 Ex: a friend may recommend that you stay at the Grand Hotel on your trip to
Houston. If you call to make reservations and the reservationist offers you a $69
weekend rate, you may perceive this rate as too low for the class of hotel that you
want and select another. The Grand Hotel may have met all your needs, but because
of the low price, you assumed it would not.
Hidden Fees
 The hospitality industry is known for charging hidden fees or
fees that a guest has to pay to use the product that are not
included in the basic price.
 Ex: Internet, Parking, Baggage Fee
COMPETITORS’ AND OTHER ELEMENTS
 Competitors’ prices and their possible reactions to a company’s own pricing moves are other external
factors affecting pricing decisions.
 When setting prices, the company must also consider other factors in the external environment.
 Economic factors such as inflation, boom, or recession and interest rates affect pricing decisions.
 Ex: Gasoline prices went from $2.40 a gallon to $3.80 a gallon, many families were paying $50 to $100
more a month for gasoline. This money reduced their leisure budget, reducing the money they had to
spend on restaurants.
 Reaction: Many restaurants had to reduce their prices to maintain customer counts. Most cannot offer
the same product at a lower price and survive. The restaurants create new menus with lower-cost
items that can be sold at a lower price.
GENERAL PRICING APPROACHES
 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 perceptions 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 these two extremes.
GENERAL PRICING APPROACHES
 We will review the following approaches:

1. The cost-based approach (cost-plus pricing, BE analysis, and target profit
pricing)
2. The value-based approach (perceived-value pricing)
3. The competition-based approach (going rate)
COST-BASED PRICING
 The simplest pricing method is cost-plus pricing, adding a standard mark-

up to the cost of the product.
 Cost as a percentage of selling price is another commonly used pricing
technique in the industry.
 Break-even analysis and target profit pricing: Price is set to break
even on the costs of making and marketing a product, or to make a
desired profit.
VALUE-BASED PRICING
 Value-based pricing: Companies base their prices on

the product’s perceived value. Perceived-value pricing
uses the buyers’ perceptions of value, not the seller’s
cost, as the key to pricing.
COMPETITION-BASED PRICING
 Competition-based pricing. Competition-based price

is based on the establishment of price largely against
those of competitors, with less attention paid to costs
or demand.
PRICING STRATEGIES
PRICING STRATEGIES
NEW PRODUCT PRICING STRATEGIES
 Pricing strategies usually change as a product passes through its life cycle.
 The introductory stage is especially challenging.
 Prestige pricing: Hotels or restaurants seeking to position themselves
as luxurious and elegant enter the market with a high price that supports
this position.
 Market-skimming pricing: Price skimming is setting a high price when
the market is price-insensitive.
PRICING STRATEGIES
NEW PRODUCT PRICING STRATEGIES
 Marketing-penetration pricing: Companies set a low initial

price to penetrate the market quickly and deeply, attracting
many buyers and winning a large market share.
 Product-bundle pricing: Sellers using product- bundle pricing
combine several of their products and offer the bundle at a
reduced price.
PRICING STRATEGIES
EXISTING-PRODUCT PRICING STRATEGIES
 The strategies just described are used primarily when

introducing a new product. However, they can also be useful
with existing products. The following strategies are ones that
can be used with existing products.
PRICING STRATEGIES
 Price-Adjustment Strategies:
 Companies usually adjust their basic prices to account for various customer
differences and changing situations.
1. Volume discounts: Hotels have special rates to attract customers who are likely to purchase a
large quantity of hotel rooms, either for a single period or throughout the year.
2. Discounts based on time of purchase: A seasonal discount is a price reduction to buyers
who purchase services out of sea- son when the demand is lower. Seasonal discounts allow the
hotel to keep demand steady during the year.
3. Discriminatory pricing. Segmentation of the market and pricing differences based on price
elasticity characteristics of the segments. In discriminatory pricing, the company sells a product or
service at two or more prices, although the difference in price is not based on differences in cost.
It maximizes the amount that each customer pays.
TO PRICE-DISCRIMINATE SUCCESSFULLY, THE FOLLOWING
CRITERIA MUST BE MET:
➢ Different groups of consumers must have different responses to price; that is, they
must value the service differently.
➢ The different segments must be identifiable and a mechanism must exist to price
them differently.
➢ There should be no opportunity for persons in one segment who have paid a lower
price to sell their purchases to other segments.
➢ The segment should be large enough to make the exercise worthwhile.
➢ The cost of running the price discrimination strategy should not exceed the
incremental revenues obtained.This is partly a function of criterion/
➢ The customers should not become confused by the use of different prices.
PRICING STRATEGIES
 Psychological pricing: Psychological aspects such as prestige, reference prices,

round figures, and ignoring end figures are used in pricing.
 Promotional pricing: Hotels temporarily price their products below list price,
and sometimes even below cost, for special occasions, such as introduction or
festivities. Promotional pricing gives guests a reason to come and promotes a positive
image for the hotel.
 Value pricing: Value pricing means offering a price below competitors
permanently, which differs from promotional pricing, in which price may be
temporarily lowered during a special promotion.
PRICE CHANGES
 Initiating Price Cuts: Reasons for a company to cut price are

excess capacity, inability to increase business through
promotional efforts, product improvement, follow-the-leader
pricing, and desire to dominate the market.
 Initiating Price Increases: Reasons for a company to
increase price are cost inflation or excess demand.
PRICE CHANGES – REACTIONS
 Buyer Reactions To Price Changes: Competitors, distributors, suppliers,

and other buyers associate price with quality when evaluating hospitality
products they have not experienced directly.
 Competitor Reactions To Price Changes: Competitors are most likely
to react when the number of firms involved is small, when the product is
uniform, and when buyers are well informed.
 Responding To Price Changes: Issues to consider are reason, market
share, excess capacity, meeting changing cost conditions, leading an industry-
wide program change, temporary versus permanent.

CH 11 - Tourism

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 11 - Tourism

Uploaded by

Copyright:

Available Formats

PRICING: UNDERSTANDING AND CAPTURING

 Revenue Management: Forecasting demand to optimize

• In other words…Revenue management is:

 There are four distinct categories of non-monetary costs:

 Each price a company can charge leads to a different level of demand.

 If demand hardly varies with a small

Unique Value Effect

Substitute Awareness Effect

Business Expenditure Effect

Price Quality Effect

 We will review the following approaches:

 The simplest pricing method is cost-plus pricing, adding a standard mark-

 Value-based pricing: Companies base their prices on

 Competition-based pricing. Competition-based price

 Marketing-penetration pricing: Companies set a low initial

 The strategies just described are used primarily when

 Psychological pricing: Psychological aspects such as prestige, reference prices,

 Initiating Price Cuts: Reasons for a company to cut price are

 Buyer Reactions To Price Changes: Competitors, distributors, suppliers,

You might also like