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Chapter 12
Pricing Products: Pricing
Considerations, Approaches, and
Strategy
“There are two fools in every market;
one asks too little, one asks too much.”
Russian Proverb
Price
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Definition: “The amount of money charged
for a product or service.”
Most flexible element of marketing mix
Attitudes hard to change
Price is dynamic because of environmental
influences
Gets us into the most trouble
– Charging too much chases away potential customers
– Charging too little leave company in a poor position
Factors to Consider when Setting Prices
Internal Factors
Pricing
Decisions
External Factors
Internal Factors Affecting Pricing
Decisions
Marketing
Objectives
Marketing-Mix*
Strategy
Costs
Organizational
Considerations
Marketing Objectives that Affect
Pricing Decisions
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Marketing
Choose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.
Objectives
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Quality and Guest Service Levels
Marketing Mix Strategy
Marketing Mix Variables Affecting Pricing Decisions
Companies Will Consider Price Along With All the Other Marketing-Mix
Elements When Developing the Marketing Program.
Price Must be Coordinated With:
Product Design
Non-Price
Factors
Marketing-Mix
Strategy
Promotion
Costs
Distribution
Channels
Costs, Effecting Pricing Decisions
Fixed Costs
(Overhead)
Costs that don’t
vary with sales or
production levels.
Variable Costs
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Insurance
Raw Materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Organizational Considerations
Affecting Pricing
Management must
decide who within the
organization will set
prices
– Small companies – Top
management
– Large companies –
Corporate or Regional
Managers
Management’s
Responsibility
Yield (Revenue)
Management
Applications
External Factors
Market and Demand
Costs set lower limits of prices
Market and demand set upper limits
Marketers must understand the relationship
between price and demand for a product
External Factors
Cross Selling and Upselling
Cross selling
Upselling
– When the company
– Occurs through training
promotes & sells other
or sales reservations
products to the guests
Example: Room service,
fax, or retail products
employees to suggest a
higher priced product
Examples: Offering after
dinner coffee
External Factors
Consumer Perceptions of Price and Value
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In the end, it is the consumer who decides whether a
product’s price is right.
Pricing decisions must be buyer oriented
Good pricing begins with analyzing consumer needs
Value is what compels the customer to buy.
So…pricing decisions require an:
– Awareness of the target market.
– A customer-oriented approach.
– A recognition of the differences in buyer’s
perceptions.
External Factors
Analyzing the Price Demand Relationship
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Demand & Price are inversely related.
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The demand curve for prestige goods is usually the
opposite of a typical demand curve.
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What are some factors that affect demand along with
price?
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How do these nonprice factors affect the demand
curve?
External Factors
Analyzing the Price Demand Relationship
Chapter 12: Figure 12-4: Inelastic and elastic demand
External Factors
Price Elasticity of Demand
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If demand hardly varies with a small change in price,
we say that demand is inelastic.
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If demand changes greatly, we say that the demand
is elastic.
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Buyers are less price sensitive when the product is
unique or when it is high in quality, prestige or
exclusiveness.
External Factors
Factors That Affect Price Sensitivity
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The Unique Value
Effect
The Substitute
Awareness Effect
Business
Expenditure Effect
The End-Benefit
Effect
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The Total
Expenditure Effect
The Shared Cost
Effect
The Sunk
Investment Effect
The Price Quality
Effect
External Factors
Competitor’s Prices & Offers
 A hotel’s salesperson must learn the price, quality,
and features of each competitor’s offer
 When competitors’ prices are known, this
information can be used as a starting point for your
own pricing & position yourself accordingly.
External Factors
Other External Elements
 Inflation
 Economic boom or recession,
 Interest rates & the birth of new technology
are examples of macroenvironmental factors that
affect pricing strategies.
General Pricing Approaches
Cost Based Pricing
Product
Cost
Price
Value
Customers
General Pricing Approaches
Cost - Based Pricing
*** Product costs set a floor for the price ***
– Cost Percentage
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Adding a standard markup to the cost
– $40 + 15% = $46
– Markup
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Cost as a percentage of selling price
– Cost = 40 percent of sales price
– Break-Even or Target Profit
– Rule-of-Thumb ($1 per $1000)
General Pricing Approaches
Example : Break Even Analysis
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BE= Fixed Costs/Contribution (SP-VC)
Example : Meal SP = $20, VC = $8
Contribution Margin (SP-VC)= $12
Fixed costs are $2400 a day
BE=$2400/$12 = 200
Need to sell 200 meals @ $20 to break-even
VC = 40%, contribution margin % = 60%
BE = $2400/.6 = $4000
Chapter 12: Figure 12-5: Break-even chart for determining target price
General Pricing Approaches
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Value-Based Pricing
– Uses the buyers’ perceptions of value
– Setting price to match the perceived value
– Consider the various prices different restaurants
charge for the same items
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Competition-Based Pricing (Going-Rate
Pricing)
– Same, more or less than the major competitors
– Charge what the traffic will bear
Pricing Strategies
New Products
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Prestige Pricing
– A hotel or restaurant
wanting to position
themselves as luxurious &
elegant enters the market
with a high price.
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Marketing Skimming
– When the market is priceinsensitive, a firm will set
high prices, taking
advantage of the market.
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Marketing Penetration
– Companies set a low initial
price to penetrate the
market quickly & deeply.
– Works best when:
 The market is highly
price sensitive.
 The low price minimizes
competition.
Pricing Strategies
Existing Products Pricing Strategies
Product-Bundle Pricing
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Sellers use bundling to combine several of their
products & offer them at a reduced price.
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This is a common practice to induce buyers of
products who otherwise might not buy the single
product.
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Hotels, cruise lines, car rental companies or
special attractions can be found packaged.
Existing Products Pricing Strategies
Price-Adjustment Strategies
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Volume Discounts
– Special rates for customers who are likely to
purchase a large quantity of hotel rooms
– Free room for every 20 room nights book for
associations or corporate meeting planners.
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Discounts based on Time of Purchase
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Price reduction when the demand is lower
Hotels, motels and airlines offer seasonal discounts
Early bird specials
Senior citizen discounts between (2:00 to 6:00 PM)
Existing Products Pricing Strategies
Price-Adjustment Strategies
Discriminatory Pricing
– Refers to segmentation and pricing differences
based on price elasticity.
– Same product or service at two or more prices.
– Use different prices for price sensitive and not
sensitive customers, such as coupon users,
retired people, business travelers etc.
– Price discrimination is a useful tool for smoothing
demand, bringing additional revenue and profits.
Existing Products Pricing Strategies
Price-Adjustment Strategies
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Yield Management (Revenue Management)
– Managing capacity by maximizing the revenue
based on elasticity of demand for selected
customer segments.
– Yield Management System Software
– In some YM systems, customers staying a longer
period can be charged more than those staying
only a few nights.
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Last Minute Pricing
– Unsold inventory creates a market for last-minute
inventory selling
Existing Products Pricing Strategies
Pricing Adjustment Strategies
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Psychological Pricing
– Consider the psychology of prices, not economics
– Reference prices – buyers carry in their minds
– Popular products often have reference prices, such as a
cup of coffee, a strip steak, or a hamburger.
– Uses aspects such as prestige, reference prices and
round figures.
– .99 ; 1.99; 9.99 cent pricing
Existing Products Pricing Strategies
Pricing Adjustment Strategies
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Promotional Pricing
(Below list price, or below cost price in special days, such
as Valentine’s Day, Mothers’ Day)
 Fast food restaurants will price a few products as loss
leader to attract customers, such as a coffee for 25
cents, or 3 hamburgers for a dollars
 Hotels may offer special promotional rates, such as
Valentine’s weekend special.
 In casino hotels the main product is gaming, so they offer
very low room prices to customers in low seasons.
Existing Products Pricing Strategies
Pricing Adjustment Strategies
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Value Pricing: Everyday Low Prices (EDLP)
 Offering a price below competitors on a permanent basis.
 Anytime a product/service is purchased, at any price, the
buyer must have perceived value in that product.
 Value pricing is risky if a company does not have the
ability to cut costs significantly.
 A marketing strategy – Taco Bell, Southwest Airlines
Skip Pages 484 – 489
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Other Pricing Considerations
 Price changes