Download 09 Pricing

Chapter 10
Pricing Products:
Pricing
Considerations,
Approaches, and
Strategy
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“The real issue is value, not price.”
-Robert T. Lindgren
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Key Terms
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Price
Survival
Upselling
Value-based pricing
Yield management/Revenue management
Cost-plus pricing
Cross-selling
Discriminatory pricing
Fixed costs
Going-rate pricing
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Chapter Objectives
• Outline the internal factors affecting pricing
decisions, especially marketing objective,
marketing-mix strategy, costs, and organizational
considerations
• Identify and define the external factors affecting
pricing decisions, including the effects of the
market and demand, competition, and other
environmental elements
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Chapter Objectives
• Contrast the differences in general pricing
approaches, and be able to distinguish among
cost-plus, target profit pricing, value-based
pricing, and going rate
• Identify the new product pricing strategies of
market-skimming pricing and market-penetration
pricing
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Chapter Objectives
• Understanding how to apply pricing
strategies for existing products, such as
price bundling and price adjustment
strategies
• Discuss the key issues related to price
changes, including initiating price cuts and
price increases, buyer and competitor
reactions to price changes, and responding
to price changes
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Price
• Price is the amount of money charged for a
good or service
• The only marketing mix element that
produces revenue
• Changing too much chases away potential
customers, charging too little cuts revenue
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Price
The firm has multiple ways to change price by the:
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quality of good or services
acceptable form of payment
time or place of transfer of ownership
quantity of money or goods or services to be
paid by the buyer
quantity of goods or services offered by the
seller
premium or discounts according to quantity
time or place of payment
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Price
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Price is important to marketers
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It is the only revenue producing part of the mix
It is used to match supply to demand so financial
objectives can be achieved
It is a powerful force in attracting attention and
increasing sales
It establishes the market positioning of the
product
The pricing practice can have a major impact on
customer loyalty
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Price
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Price should be arrived at after a
thorough decision making process
Pricing is ultimately customer driven
Unique hospitality implications
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Set physical facilities may require
marketing to a new target that will accept
the price rather than setting the price to
the target market
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Factors to Consider when Setting Prices
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Internal Factors
• Marketing Objectives
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Survival
Current Profit Maximization
Market-Share Leadership
Brand Equity Growth
Product-Quality Leadership
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Internal Factors
• Marketing Mix Strategy
• Costs
–Fixed vs. Variable Costs
• Organizational Considerations
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External Factors Affecting Pricing Decisions
• Market and Demand
• Cross Selling and Upselling
• Consumer Perceptions of Price
and Value
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External Factors Affecting Pricing Decisions
• Analyzing the Price – Demand
Relationship
• Price Elasticity of Demand
• Factors Affecting Price Sensitivity
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Price Elasticity of Demand
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Factors Affecting Price Sensitivity
• Unique Value Effect
• Substitute Awareness Effect
• Business Expenditure Effect
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General Pricing Approaches
• Cost-Based Pricing
• Break-Even Analysis and Target Profit
Pricing
• Value-Based Pricing
• Competition-Based Pricing
• Reference Pricing
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Cost Based Pricing
Product
Cost
Price
Value
Customers
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Break-even
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 / 0.6 = $ 4000
SP : Sales price
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Break-even Analysis or Target Profit Pricing
©2006 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Marketing for Hospitality and Tourism, 4th edition
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Kotler, Bowen, and Makens
Value-based Pricing
Customer
Value
Price
Cost
Product
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Value-Based Pricing
Determining price after estimating market
demand and customers perceived value
– Quantified as what is received divided by
what was paid
Cost is irrelevant
Forces management to:
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Review objectives in marketing the product
Keep in touch with customer wants and
needs
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Value-Based Pricing
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Trust is a major antecedent (previous)
to loyalty
• Identification with the organization
– Relate so strongly to the organization
that price is removed from
consideration set
– Tactics to increase customers’ feeling
of affiliation
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Components of Value
Financial
Value
Temporal
Value
Functional
Value
Experiential
Value
Emotional
Value
Social
Value
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Financial Value
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Role of the firm is to make customers less
price sensitive and thus pay more for a
product
Buyers are more price sensitive when the
cost is large in relation to their household
income or budget
End-benefit effect
Fairness effect
Price quality
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Temporal Value
• Saving time will be worth money to
the customer
– Research shows that business
travelers feel their time is worth an
average $ 150 per hour
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Functional Value
- Product or service does what it was designed to do
- Main components are RATER
Reliability – your ability to provide the service you have promised
consistently, accurately, and on time.
Assurance – the knowledge, skills, and credibility of staff; and their
ability to use this expertise to inspire trust and confidence.
Tangibles – the physical evidence of the service you provide. This
could be offices, equipment, employees, and the communication
and marketing materials that you use.
Empathy – the relationship between employees and customers.
Responsiveness – your ability to provide a quick, high quality
service to your customers
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Customer experiences should be managed
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Other Components of Value
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Experiential value
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Guests are active participants rather than
passive observers in the service
Emotional value
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Catering to the customers’ need to feel
special
Social value
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Celebration of special occasions with
friends and family
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Competition-Based Pricing
Product
Cost
Price
Value
Customer
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Reference Price
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The price range
– Price last paid
anticipated by the
– Price of similar items
consumer based on
prior experience or
– Price considering the
brand name
knowledge
– Real or imagined cost
The price for which
to produce the item
consumers believe the
– Perceived cost of
product should sell
product failure
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Reservation Price
• The maximum price a customer is
willing to pay for a product
• Should be built into the pricing
decision
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Pricing Strategies
• New-Product Pricing Strategies
• Existing-Product Pricing Strategies
• Psychological Pricing
• Promotional Pricing
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New-Product
Pricing Strategies
• Prestige Pricing
• Market-Skimming Pricing
• Market-Penetration Pricing
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Setting Initial Product Prices
Market Skimming
Setting a high price for a
new product to skim
maximum revenues from
the target market.
Results in fewer, more
profitable sales.
Popular night club
charges a high cover
charge
Market Penetration
Setting a low price
for a new product in
order to attract a
large number of
guests.
Results in a larger
market share.
New Marriott
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Skim Pricing
Works best when:
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Customers are price insensitive
Customers place a high value on the product’s
differentiating attributes
There is value attached to prestige and
exclusivity
The price is not important in relation to the
benefits derived
The firms has no real competition for the
product offer
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Penetration Pricing
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Generate sales volume even if it means
lower margins relative to the competition
The opposite of skim pricing
Works best when:
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A large share of the market is willing to change
suppliers in response to the price differential
Customers look only at price and not at other
features
Price is not a trivial matter to customers
Customers are brand insensitive
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Penetration Pricing
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Only works long term if the firm
has lower costs than competitors
Does not generate new demand,
but takes market share from
others
Often used when a new hotel
opens
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Match Pricing
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One firms matches the price of firms that are
in direct competition
Works best when:
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Customer perceives no difference in the competition
Cost structure allows pricing near the competition
Assumes competitors have made the correct pricing
decision
Market must be able to buy at this level
Market must be totally concerned about price
Drawbacks
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Product is rarely the exact same as the competition
Firms usually do not have the same goals
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Neutral Pricing
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Using market variables other than
price to gain market share
Firm believes that the customer
wants a coherent (logical) pricing
strategy
Firm believes the customer wants
choice or added value
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Neutral Pricing
Value added services
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Added on to the basic product to
enhance the perception of value
A part of loyalty marketing
Fails when firm adds services the
customer does not want or need
Solution is flexible service offerings
tailored to the customer
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Neutral Pricing
Value added services
– Determine which services are of value to
your customer and:
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Do not offer the service
Give the service away at no charge
Raise the price equal to the cost of the service
Raise the price less than the cost of the service
Raise the price slightly higher than the cost of
the service to camouflage a price increase on the
standard product
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Existing-Product Pricing Strategies
• Product-Bundle Pricing
• Price-Adjustment Strategies
– Volume Discounts
– Discounts Based on Time of Purchase
– Discriminatory Pricing
– Yield Management
• Non-Use of Yield Management
• Last-Minute Pricing
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Product-Bundling Pricing
• Transfer surplus reservation price (the maximum price a
customer will pay for a product)
– Customer A will pay $ 60 for a Disney pass and and $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
• 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
determine the price of the room
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Psychological Pricing
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Includes the visibility of the consumer and
product
Buyers and non-buyers may have different
impressions
Price lining clumps(bulks) prices together so
the perception of increased quality is created
Marketer must be aware of how the customer
uses price to differentiate products
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Psychological Pricing
Prices cause psychological reactions in the
consumer
Prices may imply quality
High price = high quality
Low price = low quality
Higher priced items may sell better
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Promotional Pricing
• Temporary pricing of products below list
price and sometimes below cost
– Value Pricing
– Price Sensitivity Measurement
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Price Sensitivity Measurement
• Price Sensitivity Measurement (PSM) helps to
establish a balance of price with product or service
value based on consumer’s perceptions of that
value.
– The product or service to be cheap?
– The product or service to be expensive?
– 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 that you
would question the quality?
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Other Pricing Considerations
Price Spread Effect
– “The highest price menu item should not be
more the 2.5 times the price of the lowest”
Price Points
©2006 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Marketing for Hospitality and Tourism, 4th edition
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Kotler, Bowen, and Makens
Initiating Price Cuts
• Excess capacity
• Dominate market
• Increase market share
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Initiating Price Increases
• Increase profits
• Cost inflation
• Excess demand
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Reactions to Prices Changes
• Buyer’s reaction
• Competitor’s reaction
• Trade Ally’s reaction
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Responding to Price Changes
• Why did competitor change price?
– To gain market share? Use excess capacity?
• Where is my product in its life cycle?
• What is its importance in the company’s
product mix?
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Best Practices
• Royal Caribbean Cruises revenue
management department
• La Colombe D’Or cross-selling
strategies
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Discussion Questions
• Choose a large hotel in a city of your choice.
Do an internet search to see how many
different prices you can find for the same type
of room. Write up your findings.
• Enter some of the airlines’ web pages and
analyse, compare and comment their pricing
strategies
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End of chapter
slides
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