Download Pricing Products

Chapter 12
Pricing Products:
Pricing Considerations,
Approaches, and Strategy
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Price
• Definition: The amount of money
charged for a product.
• Most flexible element of marketing mix
• Gets us into the most trouble
• Attitudes hard to change
• Price is dynamic because of
environmental influences
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Factors to consider when setting prices
Internal Factors
Pricing
Decisions
External Factors
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Internal Factors Affecting Pricing
Decisions
Marketing
Objectives
Marketing-Mix
Strategy
Costs
Organizational
Considerations
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Marketing Objectives that Affect
Pricing Decisions
Survival
Survival
Low Prices
Prices to
to Cover
Cover Variable
Variable Costs
Costs and
and
Low
Some Fixed
Fixed Costs
Costs to
to Stay
Stay in
in Business.
Business.
Some
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 for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Marketing Mix Variables that Affect 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
Distribution
Promotion
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Types of Cost Factors that Effect Pricing Decisions
Fixed Costs
(Overhead)
Variable Costs
Costs that don’t
vary with sales or
production levels.
Costs that do vary
directly with the
level of production.
Executive Salaries
Rent
Raw materials
Total Costs
Sum of the Fixed and Variable Costs for a Given
Level of Production
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Organizational Considerations That Effect Pricing Decisions
Who sets prices
Many hospitality and travel companies now
use revenue management departments
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Market and Demand Factors that
Affect Pricing Decisions
Costs set lower limits
Market and demand set upper limits
Marketers must understand the
relationship between
price and demand for a product
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Price
Price Elasticity of Demand
A. Inelastic Demand Demand Hardly Changes With
a Small Change in Price.
P2
P1
Price
Q2 Q1
Quantity Demanded per Period
B. Elastic Demand Demand Changes Greatly With
a Small Change in Price.
P’2
P’1
Q2
Q1
Quantity Demanded per Period
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Factors Affecting Price Sensitivity
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The unique value effect
The substitute awareness affect
End-benefit effect
The total expenditure effect
The shared cost effect
The sunk investment effect
The price quality effect
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Competition
Competitors’ prices and their
possible reactions need to be
considered when setting prices
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Cost Based Pricing
Product
Cost
Price
Value
Customers
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Break-even
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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/.6 = $4000
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Break-even Analysis or Target Profit
Pricing
Cost in Dollars (millions)
Tries to Determine the Price at Which a Firm Will
Break Even or Make a Target Profit
Total Revenue
Target Profit
($2 million)
12
10
8
6
4
2
0
Total Cost
Fixed Cost
200
400
600
800
1,000
Sales Volume in Meals Served (thousands)
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Value-based Pricing
Customer
Value
Price
Cost
Product
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Competition-Based Pricing
Product
Cost
Price
Value
Customer
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
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
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
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
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Setting Initial Product Prices
Product-Bundling Pricing
Price-Adjustment Strategies
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
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
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Discount Pricing
Discounts Based
On
Discounts Based
On
Volume
Time of Purchase
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Price Discrimination
• Discrimination in favor of the price
sensitive
• Same product to different markets - at
same price
• Build fences to separate market
segments
• Useful to create demand for down
periods
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Yield Management
• Manages revenue and inventory by effectively
pricing differences based on elasticity of
demand for customer segments
• Uses price discrimination techniques by
setting fences that prohibit customers from
one segment from receiving prices for
another segment
– Airlines require a Saturday stay to keep business
travelers from taking advantage of low fares
• Yield management should be based on sound
marketing and maintaining a long-term
relationship with desired customers
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Psychological Pricing
Prestige prices
Reference prices
Ignoring end figures
The length of the field
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Promotional Pricing
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Loss-leader pricing
Special-event pricing
Cash rebates
Low-interest financing
Longer payment terms
Warranties & service contracts
Psychological discounting
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
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?
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Other Pricing Consideration
• Price Spread Effect
• Price Points
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Price Changes
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Initiating Price Cuts
Initiating Price Increases
Buyers Reactions to Price Changes
Competitor Reactions to Price Changes
Trade Ally Reactions to Price Changes
Responding to Price Changes
Marketing for Hospitality and Tourism, 3e
Philip Kotler, John Bowen, James Makens
©2003 Pearson Education, Inc.
Upper Saddle River, NJ 07458