Download 1. Definition

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Chapter 7 Pricing Strategies for Tourist
Products
Learning objectives :
1. To grasp major factors that affect the pricing for tourist
products;
2. To grasp the price difference system and the target of
pricing the tourist goods;
3. To master the steps in pricing tourist products;
4. To master the methods for pricing tourist products;
5. To have the ability to analyze competitor’s pricing
strategy to make coping pricing for tourist enterprises
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Section 1 Introduction to the Pricing of the
Tourist Products
Ⅰ. Concept of the price of tourist products
Price of tourist products, determined by the social necessary labor time
needed in producing similar tourist goods, is the value form of the
tourist products purchased by the tourists to meet their own demands in
traveling .
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current profit广maximization
术 应 用 课 程
Satisfying profit
Ⅱ.objectives of pricing the
tourist goods
Invest beneficiary rate
Maximum qualities of sales
Market share maximization
Maintaining relationship with
distribution channel
To guarantee survival
To stabilize price
To cope and avoid competition
Quality leadership
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Ⅲ. The Three C’s Model for Price Setting
Low Price
No possible
profit at
this price
Costs
Competitors’
prices and
prices of
substitutes
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Customers’ High Price
assessment
of unique
No possible
product
demand at
features
this price
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Section 2 Pricing Methods for Tourist
Products
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Ⅰ. Cost-plus Pricing
1. Definition
Cost-plus pricing is a pricing method in which one first calculates the cost of the product,
then includes an additional amount to represent profit to decide the sales.
For example:
assume variable unit cost is $10 , the total fixed costs are $300000 ,
and the estimated sales volume is 50000;
then, the unit cost is: 10 + 300000/50000 = $16
2. Formula
product price per unit = total price per unit （1 + percentage markup ）
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3. Advantages and disadvantages of cost-plus pricing
1.It directly links cost to price to simplify procedures;
2.It can relax price competition if adopted by enterprises of the same trade for the
selling prices differ a little ;
3.It’s generally accepted that cost-plus pricing method is reasonable and fair to sellers
as well as buyers. Sellers can obtain proper profit, and buyers with eager demand would
not pay high price ;
But this pricing method ignores social value of the goods and market supply-demand
situation while considering only component costs of the enterprise marketing. It is hard
for this inflexible pricing method to adjust to competitive marketing situation.
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Ⅱ. Variable Cost Pricing (marginal cost
pricing )
1. Definition
Variable cost pricing is a pricing method with which a price is
set in relation to the variable costs of production while
ignoring fixed costs . Generally the cheap price goods will
adopt this pricing method in fierce marketing competition.
2. Calculating formula
Unit price =variable price per unit + marginal price per unit
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Ⅲ. Target-profit pricing
1. Definition
Target-profit pricing is a pricing method which decides the selling price on estimated sales
volume and target profit.
For example：
unit variable cost is $10 ；total fixed costs are $300000 ；
estimated sales volume is 50000 ；
assume the target profit of the enterprise is $ 100,000,
then, selling price= (fixed cost+ target profit)/estimated sales volume
Unit variable cost = (300000+100000)/50000 + 10 = 18
2. Formula
Product price per unit = （total cost + target profit）\ estimated sales volume
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Ⅳ. Demand-oriented Pricing
1. Definition
Demand-oriented pricing is a pricing method that establishes the price for a product or
service based on the demand of the customers. While setting the price, the enterprise
considers not only its own cost, but also the density of market demand and
customer’s values before deciding an acceptable price.
2. Categories
1) Customary pricing
• Customary pricing refers to the enterprise establishing a price for a product or service
according to the price admitted and accepted by the customers over a relatively long
time.
2) Perceived—Value Pricing
Perceived—Value pricing is a pricing method of a product or a service based on its
value as perceived by its buyers. This pricing is based on buyers’ demands and
regarding of the goods values than seller’s cost. Producing unique character, the rarer
a thing is, the more it is worth.
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3. Tourists’ Process of Cognizing and Accepting
a Price
Tourists’ desire to apperceive
product
competitors’ product
marketing behaviors
and price
competitors’ cognitive
values
Ads, promotion and other
marketing behaviors
Cognitive utility of the product
Tourists’ cognitive values
highest price willing to pay
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Ⅴ. Competition-orientated Pricing
1. Definition
Competition-orientated pricing is to set the price mainly
based on the same product price of the competitors and
fully take its own product competitive power into
consideration .
2. Categories
1) Initiative pricing——compete initiatively
2) Core-pursued pricing——follow the herd
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Section 3 Strategies and Skills of
Pricing Tourist Products
Guiding ideology and principles for tourist
enterprises to set product price
New product pricing strategy
Psychological pricing strategy
Price discounts strategy
Price-drumming up strategy
Distinguishing -demands Pricing strategy
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Ⅰ. New Product Pricing Strategy
There are three new product pricing strategies as follows:
1. Market-skimming pricing strategy
1) Definition
It is a high price strategy which set a high price for a
new product to maximize revenues from the target
market. It got the name for the similarity with
skimming cream from milk.
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2) Features
Market –skimming pricing can, in short time, let the enterprise obtain
larger profit that then can be used to explore new products. Through this
strategy, the marketer sets a relatively high price for a product or service at
first leaving a certain leeway. It can also improve product price.
This pricing strategy is suited to the patent-protected and unique product
which is willingly bought at high price .Furthermore, it’s not easy for
competitors to enter into this product market in short period of time.
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2. Penetration Pricing
1) Definition
It’s a low price policy which is to set a low price for a new product in order
to attract a large number of buyers and obtain a larger market share.
2) Characters
This strategy is suited to the following markets: the target market must be
sensitive to price; cost of production and distribution can decrease with the
enlarged sales
The merit of this pricing strategy is that it can be easier to work up the product
market and enlarge sales. But its demerit is that it’s a long-term pricing
strategy for it will take long time to get investment revenue. What’s more,
this pricing strategy is only appropriate for product needed simple
technology with mass production.
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3. Satisfying pricing strategy
1) Definition:
It is a pricing strategy that lies between the above
two pricing strategies. It often can not only ensure
the initial profit of the enterprise , but also be
accepted by customers.
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Ⅱ. Psychological Pricing Strategy
1. mantissa pricing strategy—precised to 0.01; mantissa preference or
abstaining
E.g.3.99yuan，applied to small articles
2. integral number pricing strategy—making up the number；customers get
what they pay for.
E.g.900yuan，not895yuan，applied to top grade commodities.
3. class-division pricing strategy
E.g. prices of hotel rooms, prices of travel routes in travel agencies
4. prestige pricing strategy——high price with high quality; brand
5. self pricing strategy of customers
Customers decide how much to pay
6. seeking novelty pricing strategy
Prison hotel, ancient mountains imitating
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Brand
value
culture
characteristic
林
Demonstration of taste
Embodiment of spirit
Symbol of identity
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Ⅲ . Discount Strategy
• 1. Cash Discounts——encouraging customers to pay loan quickly
• Cash discount is a kind of discount for purchasers who can pay off in
time.
• 2. Quantity Discounts —encouraging customers to buy more
products.
• It means that enterprises make different discounts according to the
purchasing quantity and sum of money. It can be divided into
“accumulating quantity discount” and “non-accumulating quantity
discount”.
• 3. Seasonal Discounts ——encouraging customers to buy products
in off-season.
• This is a kind of discount that sellers offer to buyers who buy products
or services in off-season. It can make sellers to keep production stable
in a year.
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4. Functional Discounts—discount for the same trade
It is a kind of discount that sellers offer to trading
channel members who fulfill certain functions, such as
promotion, reservation and service after sales.
5. Trade-in Allowances
That is replacement of old ones for new.
6. Promotional Allowances
It is a kind of allowances that channel members promote
products of producers.
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Ⅳ. Price-drumming up Strategy
1. Definition：
A strategy of drumming up business. It cuts down
the price of several commodities, using customers’
psychology of searching cheap things. Customers
purchase cheap commodities, as well as they shop
the ones of original prices.
2. Categories
1) price of deficit
2) price of special events
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Ⅴ. Pricing Strategy of
Distinguishing Demanding
1. Definition
It is a strategy of selling the same tourist products or
services at different prices. Its purpose is to expand the
marketing and to increase the profit source of tour
enterprises by forming the partial tourism market.
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2. Categories
Strategy of geography--price differences
Strategy of time--price differences
Strategy of object--price differences
Strategy of product--price differences
Mixed pairing of selling
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3. Precondition of practicing this strategy
– First, the market should be fractionized，and degrees of different
market demanding should be showed by subdivisions.
– Second, fractionized market staff who pay low price shouldn’t
change hand or sell to the fractionized market staff who pay high
price.
– Third, in the fractionized market of high price, competitors can’t
sell it at the price of lower than that of the company.
– Forth, fees of fractionized and controlled markets should be no
more than the extra income of the distinct pricing.
– Fifth, the “practice” pricing should not make customers have
antipathy or hostility.
– Sixth, specially fixed form of distinct pricing shouldn’t be illegal.
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Ⅵ. Price Adjustment
1. Initiating Price Cuts
2. Initiating Price Increases
3. Reaction to Price Change
4. Responding to Competitor´s Price Changes
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1. Initiating Price Cuts
1) reasons
Even if enterprises may consider cutting down prices in several
circumstances, price wars may still happen.
– Producing abilities of enterprises overmuch.
– Under the pressure of great competitors, market share of
enterprises become smaller.
– Cost is less than competitors’, and enterprises control or increase
the market share by cutting down prices to get the dominating
position in the market.
– During the period of economic recession, prices have to be cut
down.
– Purpose of cut-throat competition
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2) risks of launching the Initiating Price Cuts strategy
– low-Quality Trap：customers may think the product
quality worse than those of high prices.
– Fragile-Market-Trap：market share can be got at low
price, but the market loyalty can’t. Another low-pricecompany can also attract customers.
– Shallow-Pockets Trap：competitors who sell products
at high price have abundant reserved funds, so they
can make the state of low price last for a long time.
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2. Initiating Price Increases
1) reasons
– Inflation, price raising
– Over demand
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3. Reaction to Price Change
1) reasons
Any price change will influence the benefit of buyers,
competitors, sub sellers and the manufacturers, and it
may attract governments’ attention. Therefore, when
adjust prices, enterprises have to think over the
reaction of these factors.
– Customers’ Reaction to Price Changes
– Competitors’ Reaction to Price Changes
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Reaction of customers
• (1) reaction of customers toward price cutting down
•
•
•
•
•
Product patterns are old, and it’s replaced by new ones;
Product has some disadvantages, and it doesn’t sell well;
It is difficult for enterprises’ management;
Price is still on the decline;
Descending of the product quality.
• (2) reaction of customers toward price increasing
• Products sell well, so customers make hay while the sun shines to buy
• Products are valuable;
• Sellers want to get as much profit as they can.
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Reaction of competitors
(1) in the competing market, the effect of enterprises setting certain level of prices
and adopting certain price strategy depends on the reaction of competitors.
(2) on the occasion that competitors do not adjust any strategies, if enterprises cut
down prices, the market share may be extended.
(3) at the time of enterprises cutting down prices, if competitors do so, and even
they cut down prices to a much lower level, the effect of enterprises cutting
down prices will be counteracted, and the selling and profit may be worse than
that of before adjustment.
(4) if enterprises increase prices, while competitors do not, to enterprises, the
market of supply falling short of demand may turn to the market of supply
exceeding demand.
therefore，before adjusting prices, enterprises have to analyze the quantity,
measures they may carry out and its reaction of competitors.
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4. Responding to Competitor's Price Changes
1) Homogeneous-Product Market （ price increase or
decline）
2) Non-homogeneous-Product Market（less sensitivity to
the changes of prices, and more degrees of reaction ）
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Price-Reaction Program for Meeting a
Competitor’s Price Cut
No
Has competitor
cut his price?
Yes
Is the price
likely to
significantly
hurt our sales?
Hold our price
at present level;
continue to watch
competitor’s
price
No
No
Is it likely to be
How much has
Yes a permanent Yes his price been
price cut?
cut?
By less than 2%
By 2-4%
By more than 4%
Include a
cents-off coupon
for the next
purchase
Drop price by
half of the
competitor’s
price cut
Drop price to
competitor’s
price
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Reaction of market dominators
• Several choices for market dominators：
• Making prices maintained. Dominators think decline of prices
will reduce profits. Although it may affect the market share,
making prices maintained can rebound to the market. When prices
are made maintained, non-price ways should be used to hit back,
such as improving product quality and service and enhancing
sales promotion.
• Cutting down prices. cutting down prices can make output and
sales increased so as to lower the cost; market is sensitive to price,
market share may be reduced without price decline ; market share
is difficult to resume.
• Increasing prices. at the same time of increasing prices, product
quality or new brand producing should also be paid attention so as
to compete market with competitors.
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Ⅶ. Instructions of Using Pricing
Strategies
• Making benefit of customers and enterprises balanced.
Both the low-price sales promotion and the profit making
activities should be proposed.
• Making adjustment accordingly so as to adapt the changes
of market and improve attack of competitors.
• Paying much attention to monitor the effect of price
flexibility or strategy, and the scientific analysis of pricing
strategy.
• Maintaining favored price level, making use of other
factors of marketing mix.
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