pricing objectives financial performance – profit, cash flow, return on investment volume –...

Pricing Objectives

• Financial performance – profit, cash flow, return on

investment

• Volume – sales/revenue, market share

• Competition – leader, follower, parity

• Image – positioning, quality

Consumer Price Sensitivity

• Price-quality effect

• Unique value effect

• Perceived substitutes effect

• Difficult comparison effect

• Shared cost effect

• Expenditure effect

• End-benefit effect

Environmental Factors Affecting Price

• Economic

• Social

• Political

• Technological

• Competitive

Broad Pricing Strategies

• Skim Pricing – high price, exclusive market, unique product

• Penetration Pricing – low price, high volume, economies of scale,

price sensitive consumers

• Neutral Pricing – moderate price, value conscious consumers

Economic Value and PriceRelative Price

low high

Neutral

Neutral

low

high

Economic Value

Skim Pricing

Penetration Pricing

Pricing Techniques

• Cost-Oriented Pricing– Break-even pricing– Cost-plus pricing– Target-return pricing

• Demand-Oriented Pricing– Prestige pricing– Odd/even pricing– Price lining

• Competitive Pricing

Breakeven Analysis

Dollars

Total revenue

Total costs

Losses Profits

Fixed costs

BEPunits Volume

Price Elasticity of Demand

Price

P2 P2 P2

P1 P1 P1

Q2 Q1 Q2 Q1 Q2 Q1 Quantity

a. Elastic Demand b. Inelastic Demand c. Unitary Demand

Table 15.2 Segmented Pricing Examples across Industry Segments

Segmentation Strategy

Lodging Food Service Travel Leisure

Buyer Identification Business vs. leisure

Seniors and children Seniors, students Golf memberships for ladies, children, seniors

Purchase Location City, suburban, airport, resort

Mall, airport, corporate dining

Online vs. calling or using a travel agent

Theme parks on-site vs. off-site

Time of Purchase Weekend vs. weekday

Peak hours vs. early-bird (before 6 p.m.)

Peak business travel vs. leisure

Theme parks and golf courses with twilight discounts

Purchase Volume Meetings and corporate contracts vs. transient

Banquets vs. restaurants in hotels

Airlines and rental car companies that offer corporate rates

Golf course discounts for tournaments

Product Design Concierge or business level

Corporate dining facilities often have fine dining and cafeterias

Southwest Airlines “business select” and airline first class seats

Country clubs offer social memberships and full memberships

Product Bundling Overnight stay with champagne brunch and/or theater tickets

“Value” meals or combos (e.g., meal deal at Subway)

Cruise lines offer airline tickets and online travel agents package hotels, airlines, and rental cars

Grouping museum admissions (e.g., Ripley’s Believe It Or Not and Guinness World Records)

Segmented Pricing

• Segmenting by buyer identification

• Segmenting by purchase location

• Segmenting by time of purchase

• Segmenting by purchase volume

• Segmenting by product design

• Segmenting by product bundling

Yield Management

Yield management refers to a technique used to maximize the

revenue, or yield, obtained from a services operation, given limited

capacity and uneven demand.

Reasons for Yield Management

• Perishable inventory

• Fluctuating demand

• Ability to segment customers

• Low variable costs

Historical Booking Analysis% of Rooms Sold

100%

75% reduce discounts

50%

25% increase discounts

10 20 30 40

Weeks Prior to Date

Legal Issues in Pricing

• Explicit Agreements

• Nonexplicit Agreements

• Price Discrimination

• Tie-in Sales

Ethical Restraints in Pricing 

   Level of Ethical Restraint

  1 2 3 4 5

 Price is paid voluntarily 

 X

 X

 X

 X

 X

Price is based on equal information 

   X

 X

 X

 X

Price is not exploiting buyers essential needs 

     X

 X

 X

 Price is justified by costs 

       X

 X

Price provides equal access to goods regardless of one’s ability to cover the cost

         X

© 2010 John Wiley & Sons, Inc.