Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Chapter 12 Pricing Products: Pricing Considerations, Approaches, and Strategy

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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 Price

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Internal Factors Pricing Decisions Pricing Decisions External Factors Factors to consider when setting prices

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations Internal Factors Affecting Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Marketing Objectives Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Current Profit Maximization Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Product Quality Leadership High Prices to Cover Higher Quality and Guest Service Levels Product Quality Leadership High Prices to Cover Higher Quality and Guest Service Levels Marketing Objectives that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Marketing-Mix Strategy Product Design Distribution Promotion Non-Price Factors Non-Price Factors Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be Coordinated With: Marketing Mix Variables that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production. Raw materials Variable Costs Costs that do vary directly with the level of production. Raw materials Types of Cost Factors that Effect Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Who sets prices Many hospitality and travel companies now use revenue management departments Many hospitality and travel companies now use revenue management departments Organizational Considerations That Effect Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Costs set lower limits Market and demand set upper limits Marketers must understand the relationship between price and demand for a product Market and Demand Factors that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Price Quantity Demanded per Period A. Inelastic Demand - Demand Hardly Changes With a Small Change in Price. P2P2 P1P1 Q1Q1 Q2Q2 Price Quantity Demanded per Period P’ 2 P’ 1 Q1Q1 Q2Q2 B. Elastic Demand - Demand Changes Greatly With a Small Change in Price. Price Elasticity of Demand

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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 Factors Affecting Price Sensitivity

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Competitors’ prices and their possible reactions need to be considered when setting prices Competition

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Product Cost Price Value Customers Cost Based Pricing

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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 $20 to break-even VC = 40%, contribution = 60% BE = $2400/.6 = $4000 Break-even

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ ,000 Total Revenue Total Cost Fixed Cost Target Profit ($2 million) Sales Volume in Meals Served (thousands) Cost in Dollars (millions) Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit 0 Break-even Analysis or Target Profit Pricing

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Customer Value Price Cost Product Value-based Pricing

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Customer Product Price Cost Value Competition-Based Pricing

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Market Skimming Market Penetration >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 > 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 Setting Initial Product Prices

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Product-Bundling Pricing Price-Adjustment Strategies Setting Initial Product Prices

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Discount Pricing Discounts Based On Volume Discounts Based On Volume Discounts Based On Time of Purchase Discounts Based On Time of Purchase

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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 Price Discrimination

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Psychological Pricing Prestige prices Reference prices Ignoring end figures The length of the field

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Promotional Pricing 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©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ 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©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Other Pricing Consideration Price Spread Effect Price Points

Marketing for Hospitality and Tourism, 3e©2003 Pearson Education, Inc. Philip Kotler, John Bowen, James MakensUpper Saddle River, NJ Price Changes 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