1. Pricing Products: Pricing Considerations, Approaches, and Strategy
Marketing for Hospitality and Tourism
Kotler, Bowen and Makens
Pricing Products: Pricing Considerations, Approaches, and Strategy
Chapter 11

2. Learning Objectives
Outline the internal factors affecting pricing decisions, especially marketing objectives, marketing mix strategy, costs, and organizational considerations.
Identify and define the external factors affecting pricing decisions, including the effects of the market and demand, competition, and other environmental elements.
Contrast the differences in general pricing approaches, and be able to distinguish among cost-plus, target profit pricing, value-based pricing, and going rate.

3. Learning Objectives (cont.)
Identify the new product pricing strategies of market-skimming pricing and market-penetration pricing.
Understand how to apply pricing strategies for existing products, such as price bundling and price adjustment strategies.
Understand and be able to implement a revenue management system.
Discuss the key issues related to price changes, including initiating price cuts and price increases, buyer and competitor reactions to price changes, and responding to price changes.

4. Price
Simply defined:
Price is the amount of money charged for a product or service
Broadly defined:
Price is the sum of values consumers exchange for the benefits of having or using the product or service
Price is the only marketing mix element that produces revenue
All others represent cost
Simply defined, price is the amount of money charged for a good or service
More broadly, price is the sum of the values consumers exchange for the benefits of having or using the product or service

5. Common Pricing Mistakes
Mistakes Include Pricing That:
Is Too Cost-Oriented
Fails to Reflect Market Changes
Does Not Account for the Marketing Mix
Is Not Varied Enough
The most common mistakes include pricing that:
Is too cost oriented
Fails to reflect market changes
Does not take the rest of the marketing mix into account
Is not varied enough for different product items and market segments

6. Factors to Consider When Setting Prices
Factors that Affect Pricing Decisions
Internal Factors
External Factors
Internal and external company factors affect a company’s pricing decisions
Internal factors include the company’s marketing objectives, marketing mix strategy, costs, and organizational considerations (See Slide 6)
External factors include the nature of the market, demand competition, and other environmental elements (See Slide 7)

7. Internal Factors Organizational Considerations Marketing Mix Marketing
Objectives
Marketing Mix
Strategies
Organizational
Considerations
Costs
Internal Factors
Internal factors include the company’s marketing objectives, marketing mix strategy, costs, and organizational considerations
Marketing Objectives
Before establishing price, a company must select a product strategy
If the company has selected a target market and positioned itself carefully, its marketing mix strategy, including price, will be more precise
Marketing Mix Strategy
Price is only one of many marketing mix tools that a company uses to achieve its marketing objectives
Price must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program
Decisions made for other marketing mix variables may affect pricing decisions
A firm’s promotional mix also influences price
Companies often make pricing decisions first
Other marketing mix decisions are based on the price a company chooses to charge
Costs
Costs set the floor for the price a company can charge for its product
A company wants to charge a price that covers its costs for producing, distributing, and promoting the product
Beyond covering these costs, the price has to be high enough to deliver a fair rate of return to investors
Total costs are the sum of the fixed and variable costs for any given level of production
In the long run, management must charge a price that will at least cover total costs at a given level of sales
Organizational Considerations
Management must decide who within the organization should set prices
Companies handle pricing in a variety of ways
In small companies, top management, rather than the marketing or sales department, often sets the prices
In large companies, pricing is typically handled by a corporate department or by regional or unit managers, under guidelines established by corporate management
Many corporations within the hospitality industry now have a revenue management department with responsibility for pricing and coordinating with other departments that influence price

8. Marketing Objectives Current Profit Maximization
Survival
Current Profit Maximization
Market-Share Leadership
Product-Quality Leadership
Other Objectives
Before establishing price, a company must select a product strategy
Pricing may play an important role in helping accomplish the company’s objective at many levels
Survival
Companies troubled by too much capacity, heavy compensation, or changing consumer wants set survival as their objective
In the short run, survival is more important than profit
This strategy directly affects immediate competitors and sometimes the entire industry
Current profit maximization
Many companies want to set a price that will maximize current profits
They estimate what demand and costs will be at different prices and choose the price that will produce the maximum current profit, cash flow, or return on investment, seeking current financial outcomes rather than long-run performance
Market-share leadership
Some companies want to obtain a dominant market-share position
They believe that a company with the largest market share will eventually enjoy low costs and high long-run profit
Thus prices are set as low as possible
Product-quality leadership
For example: Groen, a manufacturer of food-service equipment, is known for its high-quality steam-jacketed kettles
Kitchen designers specify Groen equipment because of its known quality, enabling the company to demand a high price for its equipment
To maintain its quality, Groen must have a well-engineered product comprised of high-quality materials
It also must have the budget to ensure that it maintains its position as a quality leader
Other objectives
A company also might use price to attain other, more specific objectives
For example, a restaurant may set low prices to prevent competition from entering the market or set prices at the same level as its competition to stabilize the market

9. External Factors The Nature of Market & Demand Consumer Perceptions
of Price &
Value
Competition
External factors that affect pricing decisions include:
The Nature of the Market and Demand
Competition
Other environmental elements
Market and Demand
Although costs set the lower limits of prices, the market and demand set the upper limit
Both consumer and channel buyers such as tour wholesalers balance the product’s price against the benefits it provides
Thus, before setting prices, a marketer must understand the relationship between price and demand for a product
Cross-Selling and Upselling
Cross-selling opportunities abound in the hospitality industry
For example, a hotel can cross-sell food and beverage (F&B), exercise room services, and executive support services, and it can even sell retail products ranging from hand-dipped chocolates to terry-cloth bathrobes
Upselling involves training sales and reservations employees to continuously offer a higher-priced product, rather than settling for the lowest price
Consumer Perceptions of Price and Value
In the end, it is the consumer who decides whether a product’s price is right
When setting prices, management must consider how consumers perceive price and the ways that these perceptions affect consumers’ buying decisions
Like other marketing decisions, pricing decisions must be buyer oriented
Consumers tend to look at the final price and then decide whether they received a good value

10. Price-Demand Relationship
Each price a company can charge leads to a different level of demand
The demand curve illustrates the relationship between price charged and the resulting demand
It shows the number of units the market will buy in a given period at different prices that might be charged
In the normal case, demand and price are inversely related:
The higher the price, the lower the demand
Most demand curves slope downward in either a straight or a curved line
For prestige goods, the demand curve sometimes slopes upward

11. Determinants of Price Elasticity
Buyers are Less Price Sensitive When:
The Product is Unique
The Product is High in Quality, Prestige or Exclusiveness
Substitute Products are Hard to Find
Marketers also need to understand the concept of price elasticity, how responsive demand will be to a change in price
If demand hardly varies with a small change in price, we say that the demand is inelastic
If demand changes greatly, we say the demand is elastic
% Change in Quantity Demand = % Change in Price
Price Elasticity of Demand
What determines the price elasticity of demand?
Buyers are less price-sensitive when:
The product is unique
The product is high in quality, prestige, or exclusiveness
Substitute products are hard to find

12. Factors Affecting Price Sensitivity
Unique Value Effect
Substitute Awareness Effect
Business Expenditure Effect
End-Benefit Effect
Total Expenditure Effect
Price Quality Effect
Factors that affect price sensitivity:
Unique value effect
Creating the perception that your offering is different from those of your competitors avoids price competition. In this way the firm lets the customer know it’s providing more benefits and offering a value that is superior to that of competitors, one that will either attract a higher price or more customers at the same price
Substitute awareness effect
The existence of alternatives of which buyers are unaware cannot affect their purchase behavior
When consumers discover products offering a better value, they switch to those products
Business expenditure effect
When someone else pays the bill, the customer is less price-sensitive
When setting rates, management needs to know what the market is willing to pay
End-benefit effect
Customers are more price-sensitive when the price of the product accounts for a large share of the total cost of the end benefit
The end-benefit price identifies price-sensitive markets and provides opportunities to overcome pricing objections when the product being sold is a small cost of the end benefit
Total expenditure effect
The more someone spends on a product, the more sensitive they are to the product’s price
The total expenditure effect is useful in selling lower-price products or products that offer cost savings to volume users
Price quality effect
Consumers tend to equate price with quality, especially when they lack any prior experience with the product

13. Competition-Based Pricing
Approaches to Pricing
Cost-Base Pricing
Break-Even Pricing
Value-Based Pricing
Competition-Based Pricing
The price the company charges is somewhere between one that is too low to produce a profit and one that is too high to produce sufficient demand
Product costs set a floor for the price, while consumer perceptions of the product’s value set the ceiling
The company must consider competitors’ prices and other external and internal factors to find the best price between these two extremes.
Companies set prices by selecting a general pricing approach that includes one or more of these sets of factors
Cost-Based Pricing
The simplest pricing method is cost-plus pricing, which is adding a standard markup to the cost of the product
Markup pricing remains popular for many reasons
Sellers are more certain about costs than about demand
Tying the price to cost simplifies pricing
Managers do not have to adjust prices as demand changes
Break-Even Pricing
The firm tries to determine the price at which it will break even
Target Profit Pricing
A variation of break-even pricing
Targets a certain return on investment
Value-Based Pricing
An increasing number of companies are basing their prices on the products’ perceived value
Value-based pricing uses the buyers’ perceptions of value, not the seller’s cost, as the key to pricing
Value-based pricing means that the marketer cannot design a product and marketing program and then set the price
Price is considered along with other marketing mix variables before the marketing program is set
The company uses the non-price variables in the marketing mix to build perceived value in the buyers’ minds, setting price to match the perceived value
Competition-Based Pricing
A strategy of going-rate pricing is the establishment of price based largely on those of competitors, with less attention paid to costs or demand
The firm might charge the same, more, or less than its major competitors

14. New Product Pricing Strategies
Prestige
Pricing
Market-
Penetration
Pricing
Market-
Skimming
Pricing
Several options exist for pricing new products: prestige pricing, market-skimming pricing, and market-penetration pricing
Prestige Pricing
For example, hotels or restaurants seeking to position themselves as luxurious and elegant enter the market with a high price to support this position
Market-Skimming Pricing
Price skimming is setting a high price when the market is price-insensitive
Price skimming can make sense when lowering the price will create less revenue
Price skimming can be an effective short-term policy
However, one danger is that competition will notice the high prices that consumers are willing to pay and enter the market, creating more supply and eventually reducing prices
Market-Penetration Pricing
Rather than setting a high initial price to skim off small but profitable market segments, other companies set a low initial price to penetrate the market quickly and deeply, attracting many buyers and winning a large market share
Several conditions favor setting a low price
The market must be highly price-sensitive so that a low price produces more market growth
There should be economics that reduce costs as sales volume increases
The low price must help keep out competition

15. Existing Product Pricing Strategies
Product-Bundle Pricing
Price-Adjustment Strategies
Product-Bundle Pricing
Sellers who use product-bundle pricing combine several of their products and offer the bundle at a reduced price
Price bundling has two major benefits to hospitality and travel organizations
Customers have different maximum prices or reservation prices they will pay for a product
The price of the core product can be hidden to avoid price wars or the perception of having a low-quality product
Price-Adjustment Strategies
Companies usually adjust their basic prices to account for various customer differences and changing situations (See Slide 15)

16. Price-Adjustment Strategies
Discount Pricing and Allowances
Discriminatory Pricing
Revenue Management
Companies usually adjust their basic prices to account for various customer differences and changing situations
Discount pricing and allowances
Volume discounts
Most hotels have special rates to attract customers who are likely to purchase a large quantity of hotel rooms, either for a single period or throughout the year
Discounts based on time of purchase
Seasonal discounts allow the hotel to keep demand steady throughout the year
Discriminatory pricing
Discriminatory pricing refers to segmentation of the market and pricing differences based on price elasticity characteristics of these segments
Price discrimination as used in this chapter is legal and viewed by many as highly beneficial to the consumer
In discriminatory pricing, the company sells a product or service at two or more prices, although the difference in price is not based on differences in cost
Price discrimination works to maximize the amount that each customer pays
Revenue Management
One application of discriminatory pricing is revenue management
Revenue management involves upselling, cross-selling, and analysis of profit margins and sales volume for each product line
Revenue management system is used to maximize a hospitality company’s yield or contribution margin
An effective revenue management system establishes fences to prohibit customers from one segment receiving prices intended for another

17. Psychological Pricing
Promotional Pricing
Value Pricing
Psychological pricing considers the psychology of prices, not simply the economics
Prestige can be created by selling products and services at a high price.
Another aspect of psychological pricing is reference prices
Reference Prices are prices that buyers carry in their minds and refer to when they look at a given product
A buyer’s reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation
Promotional Pricing
When companies use promotional pricing, they temporarily price their products below list price and sometimes even below cost
Value Pricing
Value pricing means offering a price below competitors permanently, which differs from promotional pricing, in which price may be temporarily lowered during a special promotion
Value pricing is risky if a company does not have the ability to cut costs significantly
It is usually most appropriate for companies able to increase long-run market share through low prices (Taco Bell) or niche players with a lower-cost operating basis who use price to differentiate their product (Southwest Airlines)

18. Initiating Price Changes
Price Increases
Price Cuts
Initiating Price Changes
After developing their price structures and strategies, companies may face occasions when they want to cut or raise prices
Initiating Price Cuts
Several situations may lead a company to cut prices – one is excess capacity
Companies may also cut prices in a drive to dominate the market or increase market share through lower costs
Either the company starts with lower costs than its competitors, or it cuts prices in the hope of gaining market share through larger volume
Initiating Price Increases
Inevitably many companies must eventually raise prices
They do this knowing that price increases may be resented by customers, dealers, and their own sales force
However, a successful price increase can greatly increase profits
In passing price increases on to customers, the company should avoid the image of price gouger
It is best to increase prices when customers perceive the price increase to be justified
Price increases should be supported with a company communication program informing customers and employees why prices are being increased

19. Key Terms
Cost-plus pricing Adding a standard markup to the cost of the product.
Cross-selling The company’s other products that are sold to the guest.
Discriminatory pricing Refers to segmentation of the market and pricing differences based on price elasticity characteristics of the segments.
Fixed costs Costs that do not vary with production or sales level.
Going-rate pricing Setting price based largely on following competitors’ prices rather than on company costs or demand.
Price The amount of money charged for a product or ser-vice, or the sum of the values that consumers exchange for the benefits of having or using the product or service.
Revenue management Forecasting demand to optimize profit. Demand is managed by adjusting price. Fences are often built to keep all customers from taking advantage of lower prices. For example, typical fences include making a reservation at least two weeks in advance or staying over a Saturday night.

20. Key Terms (cont.)
Survival A technique used when a company’s or business unit’s sales slump, creating a loss that threatens its existence. Because the capacity of a hotel or restaurant is fixed, survival often involves cutting prices to increase demand and cash flow. This can disrupt the market until the firm goes out of business or the economy improves.
Upselling Training sales and reservation employees to offer continuously a higher-priced product that will better meet the customers’ needs, rather than settling for the lowest price.
Value-based pricing Uses the buyer’s perceptions of value, not the seller’s cost, as the key to pricing.