Tourism Marketing for small businesses Chapter 8 Pricing Tourism Services

Chapter learning aims To enhance your understanding of:   pricing as a marketing function the key internal factors and external forces influencing pricing decisions the use of dynamic pricing for effective yield management

Key terms Value Value is co-created, by the service provider, who offers a value proposition, and the customer who decides the extent to which the service is providing a benefit to meet a need, at a fair price.   Price Price is the foundation in the relationship between supply and demand, and is what is exchanged by the customer in return for a product or service that offers perceived value. Yield management Dynamic (constantly changing) markets necessitate pricing decision making that is flexible to meet fluctuating levels of demand and to maximise yield (return on investment).

Pricing Price plays a major role in consumers’ perceptions of value, and their purchase decisions Pricing is a marketing function, influenced by other elements in the marketing mix eg distribution, promotion Pricing is one of the most flexible elements in the marketing mix

Internal factors influencing pricing decisions Financial the business’ current financial situation the current occupancy rate relative to the level of capacity the fixed costs of the business the variable costs of providing the service the distribution methods and commission levels brand equity value, particularly in terms of customer loyalty

Internal factors influencing pricing decisions Strategy the market positioning strategy and value proposition the marketing objectives the product life-cycle stage

External forces influencing pricing the level of market demand the intensity of the competition the prices of competitors being considered by the consumer in their decision set the extent of substitutability of competing businesses, based on consumers perceptions of value the current going rate price for the service category seasonality and the timing of the offer

External forces influencing pricing the competitiveness of the destination at the time destination package prices play a major role macro-environment forces at the time, particularly economic conditions such as bank interest rates, currency exchange rates, and consumer confidence levels the potential for retaliation by competitors

Influences on consumers’ perceptions of price attractiveness the travel situation the relative size of the purchase in their overall holiday experience or package bundle their level of experience with the service category the importance of the purchase decision for them the benefit(s) they seek to meet their wants

Influences on consumers’ perceptions of price attractiveness their current capacity to pay (eg business travellers versus families, international versus domestic visitors) the level of perceived risk their life-cycle stage their perceptions of the value propositions of the brands being considered in their decision set

Pricing objectives To generate immediate cash flow, in situations where the business’ financial survival is at risk due to external forces such as economic recession or a natural disaster at the destination. To achieve market share, which is particularly important for new businesses. To a achieve product-quality leadership position, particularly in luxury markets To maximise current profit, which has a focus on short term return on investment.

Cost-volume-profit analysis Determining the break even point Break even occurs when a product’s income and costs are equal, and there is neither a profit or a loss Break even point for number of pax: FC/SP-VC per unit Break even point in sales revenue: FC/((SP-VC))*SP) FC = fixed costs for the year SP = Selling price VC = variable cost per unit

Fixed costs Remain relatively constant over time, regardless of level of sales Tourism industry tends to have a high level of fixed costs in service delivery eg rent, CEO salary, printing, bank interest

Variable costs Cost per unit of output Total cost depends on total output Economies of scale eg petrol, raw materials

Contribution The difference between the selling price and the unit variable cost (SP-VC per unit) Contribution towards fixed costs High contribution in many tourism services due low variable costs/high fixed costs

Video link Breakeven and cost-volume-profit analysis https://www.coursera.org/learn/accounting-for- managers/lecture/pZNJj/cost-volume-profit-analysis-example-1

Pricing approaches Cost-plus pricing Going-rate pricing Auctions Simply adding a mark up to the cost of producing the service Going-rate pricing Basing prices on what competitors are doing Auctions Last minute online initiatives to fill excess capacity and minimise perishability Consumers offered chance to bid Dynamic pricing Dynamic (constantly changing) markets necessitate pricing decision making that is flexible to meet fluctuating levels of demand and to maximise yield (return on investment).

Pricing mistakes Too internally cost-oriented rather than based on what the market will bear Not sufficiently cost-oriented, such as not factoring in costs for repairs and maintenance Being too slow to adapt and react to changing market conditions and demand levels Being overly greedy with price increases for a future peak period, such as during a major event, when actual demand might not meet projections. Pricing is not congruent with the market positioning strategy, such as in the case of a high quality position competing on price. A lack of understanding of tourism distribution channels and the need to factor in provision for different commission costs payable to travel trade intermediaries.

“Why discounting doesn’t work” http://www.hotelschool.cornell.edu/chr/ Study of 6,000 hotels over a two year period Recommended = holding prices constant when competitors are discounting A hotel will lose occupancy But make more money than competitors

Discussion questions Summarise the key advantage and disadvantage for an accommodation supplier considering using an online travel agency specialising in last minute discounts. Why is yield a more important marketing focus than growth in numbers of visitors?   On what basis will a customer decide whether a tourism service price represented good value?