Chapter Title

Pricing Products: Pricing Considerations, Approaches, and StrategyChapter 11Kotler, Bowen and MakensMarketing for Hospitality and TourismMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights Reserved1Learning ObjectivesOutline 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.Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights Reserved2Learning 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.Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights Reserved3PriceSimply 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

Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedPrice is the only marketing mix element that produces revenueAll others represent cost

Simply defined, price is the amount of money charged for a good or serviceMore broadly, price is the sum of the values consumers exchange for the benefits of having or using the product or service4Common Pricing MistakesDoes Not Account for the Marketing MixIs Not Varied EnoughIs Too Cost-OrientedFails to Reflect Market ChangesMistakes Include Pricing That:Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedThe most common mistakes include pricing that:Is too cost orientedFails to reflect market changesDoes not take the rest of the marketing mix into accountIs not varied enough for different product items and market segments5Factors to Consider When Setting PricesInternal FactorsExternal FactorsFactors that Affect Pricing DecisionsMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedInternal and external company factors affect a companys pricing decisionsInternal factors include the companys 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)6Internal FactorsMarketing MixStrategiesMarketingObjectivesCostsOrganizationalConsiderationsInternal FactorsMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedInternal factors include the companys marketing objectives, marketing mix strategy, costs, and organizational considerationsMarketing ObjectivesBefore establishing price, a company must select a product strategyIf the company has selected a target market and positioned itself carefully, its marketing mix strategy, including price, will be more precise

Marketing Mix StrategyPrice is only one of many marketing mix tools that a company uses to achieve its marketing objectivesPrice must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing programDecisions made for other marketing mix variables may affect pricing decisionsA firms promotional mix also influences priceCompanies often make pricing decisions firstOther marketing mix decisions are based on the price a company chooses to charge

CostsCosts set the floor for the price a company can charge for its productA company wants to charge a price that covers its costs for producing, distributing, and promoting the productBeyond covering these costs, the price has to be high enough to deliver a fair rate of return to investorsTotal costs are the sum of the fixed and variable costs for any given level of productionIn the long run, management must charge a price that will at least cover total costs at a given level of sales

Organizational ConsiderationsManagement must decide who within the organization should set pricesCompanies handle pricing in a variety of waysIn small companies, top management, rather than the marketing or sales department, often sets the pricesIn large companies, pricing is typically handled by a corporate department or by regional or unit managers, under guidelines established by corporate managementMany corporations within the hospitality industry now have a revenue management department with responsibility for pricing and coordinating with other departments that influence price7Marketing ObjectivesOther ObjectivesProduct-Quality LeadershipSurvivalCurrent Profit MaximizationMarket-Share LeadershipMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedBefore establishing price, a company must select a product strategyPricing may play an important role in helping accomplish the companys objective at many levels

SurvivalCompanies troubled by too much capacity, heavy compensation, or changing consumer wants set survival as their objectiveIn the short run, survival is more important than profitThis strategy directly affects immediate competitors and sometimes the entire industry

Current profit maximizationMany companies want to set a price that will maximize current profitsThey 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 leadershipSome companies want to obtain a dominant market-share positionThey believe that a company with the largest market share will eventually enjoy low costs and high long-run profitThus prices are set as low as possible

Product-quality leadershipFor example: Groen, a manufacturer of food-service equipment, is known for its high-quality steam-jacketed kettlesKitchen designers specify Groen equipment because of its known quality, enabling the company to demand a high price for its equipmentTo maintain its quality, Groen must have a well-engineered product comprised of high-quality materialsIt also must have the budget to ensure that it maintains its position as a quality leader

Other objectivesA company also might use price to attain other, more specific objectivesFor 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 market8External FactorsThe Nature ofMarket & DemandCompetitionConsumerPerceptionsof Price &ValueMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedExternal 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 limitBoth consumer and channel buyers such as tour wholesalers balance the products price against the benefits it providesThus, before setting prices, a marketer must understand the relationship between price and demand for a product

Cross-Selling and UpsellingCross-selling opportunities abound in the hospitality industryFor 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 bathrobesUpselling 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 ValueIn the end, it is the consumer who decides whether a products price is rightWhen setting prices, management must consider how consumers perceive price and the ways that these perceptions affect consumers buying decisionsLike other marketing decisions, pricing decisions must be buyer orientedConsumers tend to look at the final price and then decide whether they received a good value9Price-Demand Relationship

Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedEach price a company can charge leads to a different level of demand

The demand curve illustrates the relationship between price charged and the resulting demandIt 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 lineFor prestige goods, the demand curve sometimes slopes upward10Determinants of Price ElasticitySubstitute Products are Hard to FindThe Product is UniqueThe Product is High in Quality, Prestige or ExclusivenessBuyers are Less Price Sensitive When:Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedMarketers also need to understand the concept of price elasticity, how responsive demand will be to a change in priceIf demand hardly varies with a small change in price, we say that the demand is inelasticIf 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 uniqueThe product is high in quality, prestige, or exclusivenessSubstitute products are hard to find11Factors Affecting Price SensitivityPrice Quality EffectTotal Expenditure EffectUnique Value EffectSubstitute Awareness EffectBusiness Expenditure EffectEnd-Benefit EffectMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedFactors that affect price sensitivity:Unique value effectCreating the perception that your offering is different from those of your competitors avoids price competition. In this way the firm lets the customer know its 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 effectThe existence of alternatives of which buyers are unaware cannot affect their purchase behaviorWhen consumers discover products offering a better value, they switch to those products

Business expenditure effectWhen someone else pays the bill, the customer is less price-sensitiveWhen setting rates, management needs to know what the market is willing to pay

End-benefit effectCustomers are more price-sensitive when the price of the product accounts for a large share of the total cost of the end benefitThe 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 products priceThe 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 product12Approaches to PricingCost-Base PricingBreak-Even PricingValue-Based PricingCompetition-Based PricingMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedThe 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 demandProduct costs set a floor for the price, while consumer perceptions of the products 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 PricingThe simplest pricing method is cost-plus pricing, which is adding a standard markup to the cost of the productMarkup pricing remains popular for many reasonsSellers are more certain about costs than about demandTying the price to cost simplifies pricingManagers do not have to adjust prices as demand changes

Break-Even PricingThe firm tries to determine the price at which it will break evenTarget Profit PricingA variation of break-even pricingTargets a certain return on investment

Value-Based PricingAn increasing number of companies are basing their prices on the products perceived valueValue-based pricing uses the buyers perceptions of value, not the sellers cost, as the key to pricingValue-based pricing means that the marketer cannot design a product and marketing program and then set the pricePrice is considered along with other marketing mix variables before the marketing program is setThe 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 PricingA strategy of going-rate pricing is the establishment of price based largely on those of competitors, with less attention paid to costs or demandThe firm might charge the same, more, or less than its major competitors13New Product Pricing StrategiesPrestigePricingMarket-SkimmingPricingMarket-PenetrationPricingMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedSeveral options exist for pricing new products: prestige pricing, market-skimming pricing, and market-penetration pricingPrestige PricingFor 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 PricingPrice skimming is setting a high price when the market is price-insensitivePrice skimming can make sense when lowering the price will create less revenuePrice skimming can be an effective short-term policyHowever, 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 PricingRather 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 shareSeveral conditions favor setting a low priceThe market must be highly price-sensitive so that a low price produces more market growthThere should be economics that reduce costs as sales volume increasesThe low price must help keep out competition14Existing Product Pricing StrategiesProduct-Bundle PricingPrice-Adjustment StrategiesExisting Product Pricing StrategiesMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedProduct-Bundle PricingSellers who use product-bundle pricing combine several of their products and offer the bundle at a reduced pricePrice bundling has two major benefits to hospitality and travel organizationsCustomers have different maximum prices or reservation prices they will pay for a productThe price of the core product can be hidden to avoid price wars or the perception of having a low-quality product

Price-Adjustment StrategiesCompanies usually adjust their basic prices to account for various customer differences and changing situations (See Slide 15)15Price-Adjustment StrategiesDiscount Pricing and AllowancesDiscriminatory PricingRevenue ManagementMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedCompanies usually adjust their basic prices to account for various customer differences and changing situationsDiscount pricing and allowancesVolume discountsMost 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 yearDiscounts based on time of purchaseSeasonal discounts allow the hotel to keep demand steady throughout the year

Discriminatory pricingDiscriminatory pricing refers to segmentation of the market and pricing differences based on price elasticity characteristics of these segmentsPrice discrimination as used in this chapter is legal and viewed by many as highly beneficial to the consumerIn 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 costPrice discrimination works to maximize the amount that each customer pays

Revenue ManagementOne application of discriminatory pricing is revenue managementRevenue management involves upselling, cross-selling, and analysis of profit margins and sales volume for each product lineRevenue management system is used to maximize a hospitality companys yield or contribution marginAn effective revenue management system establishes fences to prohibit customers from one segment receiving prices intended for another16Psychological PricingPromotional PricingValue PricingPsychological PricingMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedPsychological pricing considers the psychology of prices, not simply the economicsPrestige can be created by selling products and services at a high price.Another aspect of psychological pricing is reference pricesReference Prices are prices that buyers carry in their minds and refer to when they look at a given productA buyers reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation

Promotional PricingWhen companies use promotional pricing, they temporarily price their products below list price and sometimes even below cost

Value PricingValue pricing means offering a price below competitors permanently, which differs from promotional pricing, in which price may be temporarily lowered during a special promotionValue pricing is risky if a company does not have the ability to cut costs significantlyIt 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)17Price IncreasesPrice CutsPrice ChangesInitiating Price ChangesMarketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights ReservedInitiating Price ChangesAfter developing their price structures and strategies, companies may face occasions when they want to cut or raise prices

Initiating Price CutsSeveral situations may lead a company to cut prices one is excess capacityCompanies may also cut prices in a drive to dominate the market or increase market share through lower costsEither 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 IncreasesInevitably many companies must eventually raise pricesThey do this knowing that price increases may be resented by customers, dealers, and their own sales forceHowever, a successful price increase can greatly increase profitsIn passing price increases on to customers, the company should avoid the image of price gougerIt is best to increase prices when customers perceive the price increase to be justifiedPrice increases should be supported with a company communication program informing customers and employees why prices are being increased18Key TermsCost-plus pricing Adding a standard markup to the cost of the product.Cross-selling The companys 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.Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights Reserved19Key Terms (cont.)Survival A technique used when a companys or business units 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 buyers perceptions of value, not the sellers cost, as the key to pricing.Marketing for Hospitality and Tourism, 6eKotler, Bowen and Makens 2014 by Pearson Higher Education, IncUpper Saddle River, New Jersey 07458 All Rights Reserved20