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Competitors Prices and Offers - Competitor’s prices and their possible reactions to a company’s own pricing moves are other external factors affecting pricing decisions - A meeting planner scheduling a meeting in Sydney will check the price and value of competitive hotels - A hotel salesperson must learn the price, quality and features of each competitors offer - Once they aware, can use this info as a starting point for deciding their own pricing Other External Elements - Inflation, boom or recession and interest rates affect pricing decisions - Recessions force restaurants to reduce their prices, but most cannot offer the same product at a lower price and still survive so they create new menus or lower-cost items at a lower price - All areas of the environment can affect pricing - Meeting new regulations can cause costs to increase - Governments can streamline processes, reducing costs - If pro environmental groups succeed in getting all pesticides banned, good prices may increase - Marketers must know the laws concerning price and make sure their pricing policies are legal General Pricing Approaches - Price is somewhere between one that is too low to produce a profit and one too high to produce demand - The cost based approach (cost-plus pricing, break even analysis and target profit pricing) - The value based approach (perceived value pricing) - The competition based approach (going rate) Cost Based Pricing - Cost-based pricing- Adding a standard mark up to the cost of the product - F&B managers use this method to decide wine prices. Cost as a percentage of selling price is another commonly used pricing techniques in the restaurant industry - Some restaurants target a certain food cost then price their menu items accordingly - The adjustment figure varies depending on the volume and efficiency of the operation - In high volume, limited menu operations, it is lower - Using this technique it is advisable to use prime cost, the cost of labor and food when determining menu prices - Does using standard mark-ups to set prices make logical sense? Generally No. any pricing method that ignores current demand and competition is not likely to lead to the best price. - Most managers use cost as a % of selling price to determine menu prices. Break-Even Analysis and Target Profit Pricing - Firm tries to determine the price at which it will break even - E.g. need to sell this much at this price to break even - Target profit pricing- we want to sell this much, so need to charge this much to achieve that Value based pricing - Uses the buyer’s perceptions of value, not the seller’s cost as the key to pricing - Find out what buyers are willing to pay and then set it at that price - This means you cannot design a product and marketing programs and then set the price - Price is considered along with the other marketing mix variables before the marketing program is set - The company uses non price variables in the marketing mix to build perceived value in the buyers’ mind, setting price to match the perceived value - If the seller charges more than the buyers’ perceived value, its sales will suffer Value based pricing - The price of a hotel room may vary according to the type of customer - A rate for individual business guests, a group rate for ten or more, a convention rate for large functions - A successful guest price mix depends on study of the behaviour profiles of major guest segments - The most distinguishing profile characteristics of these two major segments is that: - Business travellers exhibit inelastic price behaviour - Leisure travellers show an elastic price response Competition-based pricing - A strategy of going-rate pricing is the establishment of price based largely on those of competitors, with less attention paid to costs or demand - A firm might charge the same, more, or less than major competitors - When elasticity is hard to measure, firms feel that the going price represents the collective wisdom of the industry concerning the price that will yield a fair return - They feel that holding to the going price will avoid harmful price wars Introductory pricing strategies - Prestige pricing- hotels or restaurants seeking to position themselves as luxurious and elegant enter the market with high prices to support this position - Market-skimming pricing- setting a high price when the market is price insensitive - Market-penetration pricing- set a low initial price to penetrate the market quickly and deeply, attracting many buyers and winning a large market share - Several conditions favour setting a low price: - The market must be highly price-sensitive so that a low price produces more market growth - There should be economics that reduce costs as sales volume increases - The low price must help keep out competition Existing product pricing strategies - Product—bundling pricing- combine several products and offer the bundle at a reduced price. E.g. hotels sell specially priced weekend packages - Consumers can promote the sales of products that consumers might not otherwise buy. E.g. 3 park pass, wet and wild wasn’t popular so they put it in a bundle to force people to go to the least popular park - Has two major benefits to hospitality and travel organisations: - Customers have different maximum prices or reservation prices they will pay for a product - The price of the core product can be hidden to avoid price wars or the perception of having a low quality product Price adjustment strategies - Volume Discounts - most hotels have special rates to attract customers who are likely to purchase a large quantity of hotel rooms. - Discounts Based on Time of Purchase - seasonal discounts allow the hotel to keep demand steady during the year. - (IMPORTANT)Discriminatory pricing refers to segmentation of the market & pricing differences based on price elasticity characteristics of these segments. E.g. a museum who charges a student, adult, pension and child price. - The company sells a product or service at two or more prices, although the difference is not based on costs - It works to maximise the amount that each customer pays - Price discrimination discriminates in favour of the price sensitive customer- e.g. pensioners and students don’t have as much money as adults therefore they get cheaper - Low variable costs combined with fluctuations in demand make price discrimination a useful tool for smoothing demand and bringing additional revenue and profits Discriminatory pricing (Important) - To price-discriminate successfully the follow criteria must be met: - Different groups of consumers must have different responses to price; they must value the service differently - Different segment must be identifiable and a mechanism must exist to price them differently - There should be no opportunity for persons in one segment to sell their lower priced purchases to other segments - A segment should be large enough to make it worthwhile - The cost of running the price discrimination strategy should not exceed the incremental revenues obtained - Customers should not become confused by different prices Revenue Management (important) - Involves upselling, cross-selling, and analysis of profit margins and sales volume for each product line. - Concept is to manage revenue and inventory effectively by pricing differences based on the elasticity of demand for selected segments