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Chapter Fifteen
The Pricing Decision
Pricing Practices
Hotel room pricing
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Evolved from tactical to strategic
Most practice some form of revenue
management
Most fall between revenue per available
room and value pricing
Restaurant pricing
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Evolution from cost-based pricing of the
1970’s
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Exhibit 15-1; Hotel room pricing
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What is Price?
Definition
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Depends on viewpoint
What the customer is willing to give up
in exchange for the product or service
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What is Price?
The firm has multiple ways to change price:
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By the quality of good or services
By the acceptable form of payment
By the time or place of transfer of ownership
By the quantity of money or goods or services to
be paid by the buyer
By the quantity of goods or services offered by the
seller
By the premium or discounts according to quantity
By the time or place of payment
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What is price?
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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What is price?
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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Types of Costs:
Semivariable costs
Costs that are somewhat
fixed but at times
can vary to some
degree
Variable costs
Costs that vary directly
with a unit of item
sold
Fixed costs
Costs that exist regardless of the level of activity
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Exhibit 15-4; Drivers of profit
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Cost-Based Pricing
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Cost-plus pricing
Cost percentage (markup pricing)
Break even pricing
Contribution margin pricing
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Cost-Plus Pricing
Establishing the total cost of a product
including a portion of overhead and a
predetermined profit margin
Drawbacks
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Ignores the combined effort of profit
generation of all products
Misallocation of costs
Inflexible
Ignores demand
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Cost Percentage
Markup on variable ingredient cost, a
percentage based on the ingredient cost
percentage, or a combination of both
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Common in restaurant and beverage industry
Drawbacks
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Totally cost oriented
Ignores customer perception of value
Tends to price high-cost items to a level
customers are unwilling to pay
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Break-Even Pricing
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A formula used to determine at what sales
volume and price the product cost will be
equal to sales
Break-even = Fixed costs
Price – variable cost
Fairly efficient if price levels and sales volume
can be predicted at different price levels
Requires knowledge of customer perception
and demand
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Contribution Margin Pricing
Pricing is used to help cover fixed
costs
Very useful for hotels in soft periods
of demand
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No profit, but fixed costs for the room
are covered
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Value-Based Pricing
Determining price after estimating
market demand and customers
perceived value
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Quantified as what is received divided by
what was paid
Cost is irrelevant
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Value-Based Pricing
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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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
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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
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Customer experiences should be
managed
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Other Components of Value
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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Value-Based Pricing
Trust is a major antecedent to loyalty
Identification with the organization
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Relate so strongly to the organization
that price is removed from consideration
set
Tactics to increase customers’ feeling of
affiliation
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Reference Price
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The price range
anticipated by the
consumer based on
prior experience or
knowledge
The price for which
consumers believe
the product should
sell
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Based on
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Price last paid
Price of similar items
Price considering the
brand name
Real or imagined
cost to produce the
item
Perceived cost of
product failure
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Reservation Price
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The maximum price a customer is
willing to pay for a product
Should be built into the pricing decision
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Psychological Pricing
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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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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 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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Generic Pricing Strategies
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Basic strategies used to compete in
the market
Can be used in combination to achieve
different goals
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Generic Pricing Strategies
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Skim Pricing
Penetration Pricing
Match Pricing
Neutral Pricing
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Skim Pricing
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Capture high price margins at the
expense of high sales volume
Make the product appear special and
new to command a higher price
“Skimming” the cream off the top
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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
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Penetration 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
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
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Match Pricing
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 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
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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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Generic Pricing Strategies
Market share and fair share
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Actual figures of occupancy or covers
Usually compared to fair share, or the expected
occupancy or covers if you received your
proportional share of business in your
competitive set
Fair market share = Firm’s capacity
Total capacity in market
class
Goal is for market share to exceed fair share
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Generic Pricing Strategies
REVPAR
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Calculation of revenue per available room
REVPAR =
Room revenue
Number of rooms available
for sale
REVPAR= Average daily rate (ADR) x
Occupancy percentage
Essentially controls for pricing decisions
Most widely used method today
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Generic Pricing Strategies
Measuring the impact
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Yield index =
Property REVPAR
Market REVPAR
Yield index =
Share of revenue
Share of supply
Greater than 1.0 indicates the hotel is
outperforming the market
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Revenue Management
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Began in late 1980’s as yield
management
Prices change under fluctuating
demand and advance bookings
Creates an enormous competitive
advantage
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Revenue Management Is…
A systematic approach to matching demand
for services with an appropriate supply in
order to maximize revenues
Appropriate in hotels
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Hotel room is a perishable product
Capacity is fixed and cannot flex to meet demand
Different market segments have different lead
times to purchase
Hotels have great flexibility in varying their prices at
any given time
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Revenue Management
Practices
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Set most effective pricing structure
Limit the number of reservations accepted
on any given night or room type based on
profit potential
Negotiate volume discounts with groups
Match market segments with room type
and price needs
Be consistent across channels and
intermediaries
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Yield
The ratio between actual sales and
potential sales forecasted over a given
period of time
Have to have realistic potential sales
forecasting
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Hotels must be able to forecast demand for
each room category from each of its market
segments, for any date in the future
Customer purchase behavior must be well
understood
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Discussion
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Do you believe that every type of
business (goods and services) can
benefit from revenue management?
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