Chapter Copyright © 2009 by Nelson Education Limited. PRICING Prepared by Simon Hudson, Haskayne School of Business University of Calgary and Marion Joppe, University of Guelph

Chapter Copyright © 2009 by Nelson Education Limited. Topics Key factors determining pricing decisions Contribution of economics to pricing Specific characteristics of the tourism and hospitality industry that affect pricing policy Key approaches that companies take towards pricing in tourism How prices are calculated for new products Yield management as it applies to tourism Strategic versus tactical pricing in tourism 6 Pricing 6-2

Chapter Copyright © 2009 by Nelson Education Limited. Pricing Most flexible but least understood element of marketing mix Gets us into the most trouble price-quality trade-offNeed to understand the price-quality trade-off –acceptance of the higher cost of a better quality product Price is dynamic because of environmental influences Only marketing mix element that directly affects revenues 6 Pricing 6-3

Chapter Copyright © 2009 by Nelson Education Limited. Factors Affecting Pricing Decisions 6 Pricing 6-4

Chapter Copyright © 2009 by Nelson Education Limited. Organizational and Marketing Objectives Profit maximizationProfit maximization –corporate objective that causes managers in organizations to make decisions in such a way as to maximize profits Target rate of returnTarget rate of return –corporate objective that aims to achieve a particular return on the assets employed in an organization… continued 6 Pricing 6-5

Chapter Copyright © 2009 by Nelson Education Limited. Market shareMarket share –the percentage relationship of an organization’s sales to total industry sales –clear pricing objectives should be established before price levels are set –Key factors determining pricing decisions are shown in Figure Pricing 6-6 Organizational and Marketing Objectives

Chapter Copyright © 2009 by Nelson Education Limited. Holiday Costs in Europe Table Pricing

Chapter Copyright © 2009 by Nelson Education Limited. The Interaction of Supply and Demand 6 Pricing 6-8

Chapter Copyright © 2009 by Nelson Education Limited. Elasticity of Demand The sensitivity of customer demand to changes in the prices of services Price elasticity of demand = % change in quantity demanded % change in price 6 Pricing 6-9

Chapter Copyright © 2009 by Nelson Education Limited. Elastic and Inelastic Demand Curves 6 Pricing 6-10

Chapter Copyright © 2009 by Nelson Education Limited. Assessing Demand The two most common methods of assessing demand are: willingness-to-pay assessment –asking potential customers what they would be willing to pay (willingness-to-pay assessment) for the service; and –test marketing the product at different prices in different regions. 6 Pricing 6-11

Chapter Copyright © 2009 by Nelson Education Limited. Pricing & Positioning Three strategic approaches: –premium pricing –value-for-money pricing –undercut pricing Basic approaches to setting prices: –cost-based methods –demand-based methods –competition-oriented pricing 6 Pricing 6-12

Chapter Copyright © 2009 by Nelson Education Limited. Cost-Based Methods Break-even analysisBreak-even analysis –a pricing technique that considers fixed and variable costs, customer volumes, and profit margins Fixed costsFixed costs –costs that do not vary with the amount of the product or service provided Variable costsVariable costs –costs that increase as more of a product or service is provided 6 Pricing 6-13

Chapter Copyright © 2009 by Nelson Education Limited. Break-Even Point for a Hypothetical Hotel 6 Pricing 6-14

Chapter Copyright © 2009 by Nelson Education Limited. Cost-plus pricing adding a standard markup to the cost of the product or service to arrive at the final price Cost-Based Methods 6 Pricing 6-15

Chapter Copyright © 2009 by Nelson Education Limited. Buyer-based pricing (sensitivity pricing)Buyer-based pricing (sensitivity pricing) –adjusting to high prices when the demand is high and lower prices when the demand is low, regardless of the cost of the product or service Psychological pricingPsychological pricing –using slightly lower prices to give consumers the perception of added value Demand-Based Methods 6 Pricing 6-16 continued...

Chapter Copyright © 2009 by Nelson Education Limited. Price liningPrice lining –pre-establishing price levels that the organization is confident will attract customers NegotiatingNegotiating –a price-setting technique involving two or more parties with a conflict of interest regarding aspects of the product or service Demand-Based Methods 6 Pricing 6-17

Chapter Copyright © 2009 by Nelson Education Limited. Competition-oriented pricingCompetition-oriented pricing going-rate pricing –an organization fixes the price of its product or service in relation to competitors’ prices; this is often also called going-rate pricing –advantage of giving the organization the opportunity to increase sales or market share, but it is a dangerous approach to pricing, as it does not focus on either costs or the consumer Competition-Based Methods 6 Pricing 6-18

Chapter Copyright © 2009 by Nelson Education Limited. Pricing Strategies for New Products Prestige pricingPrestige pricing –setting prices high to position a product at the upper or luxury end of the market Market skimmingMarket skimming –setting high prices at the launch stage and progressively lowering them as the product becomes better established continued... 6 Pricing 6-19

Chapter Copyright © 2009 by Nelson Education Limited. Pricing Strategies for New Products Penetration pricingPenetration pricing –pricing at a lower level to get maximum sales and market share –used when an organization is trying to get maximum distribution for the product or service in the initial stages 6 Pricing 6-20

Chapter Copyright © 2009 by Nelson Education Limited. Other Pricing Techniques Promotional pricing Product-bundling pricing Price spread and price points Discriminatory pricing Discounting Yield management 6 Pricing 6-21

Chapter Copyright © 2009 by Nelson Education Limited. Promotional Pricing Promotional pricingPromotional pricing –used by companies when they temporarily sell products below their normal list price (or rack rate) usually done for a short period of time, often to introduce new or revamped products. 6 Pricing 6-22

Chapter Copyright © 2009 by Nelson Education Limited. Product-Bundle Pricing Product-bundle pricingProduct-bundle pricing –grouping together a company’s products to promote them as a package –Example: hotel offering a weekend special that includes a room, dinner in a restaurant, valet parking, room-service breakfast, and late checkout for a set price. 6 Pricing 6-23

Chapter Copyright © 2009 by Nelson Education Limited. Price Spread and Price Points Price spreadPrice spread –a range of products and prices that will suit the budget of all target markets Example: holiday park offering campsites with tents, standard cabins, en suite cabins, and family units, each different from the other in terms of size, location, types of fittings and furnishings. Price pointsPrice points –the number of “stops” along the way between the lowest-priced item and the highest-priced item 6 Pricing 6-24

Chapter Copyright © 2009 by Nelson Education Limited. Discriminatory Pricing and Volume Discounting Discriminatory pricingDiscriminatory pricing –selling a product at two or more prices, despite the fact that the product costs are the same Volume discountingVolume discounting –offering special prices to attract customers who agree to major purchases –Example: hotels and airlines offer special prices to corporate clients to encourage volume business 6 Pricing 6-25

Chapter Copyright © 2009 by Nelson Education Limited. Yield Management YieldYield –profit made on sales of goods and service calculated based on the number of customers, how much they spend, and the number of products they buy Yield managementYield management –developing strategies to maximize opportunities for the sale of an organization’s perishable products 6 Pricing 6-26

Chapter Copyright © 2009 by Nelson Education Limited. Strategic and Tactical Pricing Strategic pricingStrategic pricing –prices are determined early on in the planning of the marketing strategy e.g., all-inclusive or bait pricing Tactical pricingTactical pricing –relates to day-to-day techniques in pricing, which can be rapidly altered to suit changing conditions in the marketplace, e.g., discounting 6 Pricing 6-27

Chapter Copyright © 2009 by Nelson Education Limited. Other Popular Pricing Strategies All-in pricing all-inclusive pricingAll-in pricing or all-inclusive pricing –charging consumers a single price for the various products or services on offer –Example: Club Med Off-set pricing (bait pricing)Off-set pricing (bait pricing) –charging a low basic price and charging for extra services 6 Pricing 6-28

Chapter Copyright © 2009 by Nelson Education Limited. Tourism and Hospitality Characteristics that Affect Pricing Policy Highly segmented industry Variability of demand Perishable nature of the product High fixed costs Cost fluctuations Vulnerability to demand changes High level of customers’ psychological involvement continued... 6 Pricing 6-29

Chapter Copyright © 2009 by Nelson Education Limited. Tourism and Hospitality Characteristics that Affect Pricing Policy Seasonal demand Tactical price-cutting and price wars Low prices Fixed capacity The customer’s total purchases Increased use of the Internet Late booking 6 Pricing 6-30