Chapter Copyright © 2009 by Nelson Education Limited. PRICING 6 6-1 Prepared by Simon Hudson, Haskayne School of Business University of Calgary and Marion

Copyright © 2009 by Nelson Education Limited.

Chapter

PRICING

6

6-1

Prepared by

Simon Hudson, Haskayne School of BusinessSimon Hudson, Haskayne School of Business

University of CalgaryUniversity of Calgary

andand

Marion Joppe, University of GuelphMarion Joppe, University of Guelph


Chapter

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

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Pricing

• Most flexible but least understood element of marketing mix

• Gets us into the most trouble• Need to understand the price-quality trade-offprice-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

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Factors Affecting Pricing Decisions

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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

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• 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 6.1

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Organizational and Marketing Objectives


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Holiday Costs in Europe

Table 6.16-7

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The Interaction of Supply and Demand

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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

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Elastic and Inelastic Demand Curves

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Assessing Demand

• The two most common methods of assessing demand are:– asking potential customers what they

would be willing to pay (willingness-to-pay willingness-to-pay assessmentassessment) for the service; and

– test marketing the product at different prices in different regions.

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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

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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

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Break-Even Point for a Hypothetical Hotel

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Cost-plus pricingCost-plus pricing

• adding a standard markup to the cost of the product or service to arrive at the final price

Cost-Based Methods

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• 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

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continued...


Chapter

• 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

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• Competition-oriented pricingCompetition-oriented pricing– an organization fixes the price of its product

or service in relation to competitors’ prices; this is often also called going-rate pricinggoing-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

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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...

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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

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Other Pricing Techniques

• Promotional pricing

• Product-bundling pricing

• Price spread and price points

• Discriminatory pricing

• Discounting

• Yield management

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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.

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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.

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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

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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

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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

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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

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Other Popular Pricing Strategies

• All-in pricing All-in pricing or all-inclusive pricingall-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

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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

involvementcontinued...

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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

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Documents

Chapter Copyright © 2009 by Nelson Education Limited. PRICING 6 6-1 Prepared by Simon Hudson, Haskayne School of Business University of Calgary and Marion