chapter fifteen the pricing decision. © 2008 pearson education, upper saddle river, nj 07458. all...

Chapter Fifteen

The Pricing Decision

© 2008 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw

Pricing Practices Hotel room pricing

Evolved from tactical to strategic Most practice some form of revenue

management Most fall between revenue per

available room and value pricing Restaurant pricing

Evolution from cost-based pricing of the 1970’s




Exhibit 15-1; Hotel room pricing




What is Price? Definition

Depends on viewpoint What the customer is willing to give

up in exchange for the product or service




What is Price? The firm has multiple ways to change

price: By the quality of good or services By the acceptable form of payment By the time or place of transfer of ownership By the quantity of money or goods or

services to be paid by the buyer By the quantity of goods or services offered

by the seller By the premium or discounts according to

quantity By the time or place of payment




What is price? Price is important to marketers

It is the only revenue producing part of the mix It is used to match supply to demand so

financial objectives can be achieved It is a powerful force in attracting attention

and increasing sales It establishes the market positioning of the

product The pricing practice can have a major impact

on customer loyalty




What is price? Price should be arrived at after a

thorough decision making process Pricing is ultimately customer

driven Unique hospitality implications

Set physical facilities may require marketing to a new target that will accept the price rather than setting the price to the target market




Types of Costs:Variable costs

Costs that vary directly with a unit of item sold

Semivariable costsCosts that are somewhat

fixed but at times can vary to some degree

Fixed costsCosts that exist regardless of the level of activity




Exhibit 15-4; Drivers of profit




Cost-Based Pricing Cost-plus pricing Cost percentage (markup pricing) Break even pricing Contribution margin pricing




Cost-Plus Pricing Establishing the total cost of a product

including a portion of overhead and a predetermined profit margin

Drawbacks Ignores the combined effort of profit

generation of all products Misallocation of costs Inflexible Ignores demand




Cost Percentage Markup on variable ingredient cost, a

percentage based on the ingredient cost percentage, or a combination of both

Common in restaurant and beverage industry Drawbacks

Totally cost oriented Ignores customer perception of value Tends to price high-cost items to a level

customers are unwilling to pay




Break-Even Pricing A formula used to determine at what sales

volume and price the product cost will be equal to sales

Fairly efficient if price levels and sales volume can be predicted at different price levels

Requires knowledge of customer perception and demand

Break-even = Break-even = Fixed costsFixed costsPrice – variable costPrice – variable cost




Contribution Margin Pricing Pricing is used to help cover

fixed costs Very useful for hotels in soft

periods of demand No profit, but fixed costs for the

room are covered




Value-Based Pricing Determining price after

estimating market demand and customers perceived value

Quantified as what is received divided by what was paid

Cost is irrelevant




Value-Based Pricing Forces management to:

Review objectives in marketing the product

Keep in touch with customer wants and needs




Components of Value

Financial Value

TemporalValue

Functional Value

Experiential Value

EmotionalValue

SocialValue




Financial Value Role of the firm is to make customers

less price sensitive and thus pay more for a product

Buyers are more price sensitive when the cost is large in relation to their household income or budget

End-benefit effect Fairness effect Price quality




Temporal Value Saving time will be worth money

to the customer Research shows that business

travelers feel their time is worth an average $150 per hour




Functional Value Product or service does what it

was designed to do Main components are RATER

Customer experiences should be managed




Other Components of Value

Experiential value Guests are active participants rather

than passive observers in the service Emotional value

Catering to the customers’ need to feel special

Social value Celebration of special occasions with

friends and family




Value-Based Pricing Trust is a major antecedent to

loyalty Identification with the

organization Relate so strongly to the organization

that price is removed from consideration set

Tactics to increase customers’ feeling of affiliation




Reference Price The price range

anticipated by the consumer based on prior experience or knowledge

The price for which consumers believe the product should sell

Based on Price last paid Price of similar

items Price considering

the brand name Real or imagined

cost to produce the item

Perceived cost of product failure




Reservation Price

The maximum price a customer is willing to pay for a product

Should be built into the pricing decision




Psychological Pricing Prices cause psychological

reactions in the consumerPrices may imply quality

High price = high qualityHigh price = high quality

Low price = low qualityLow price = low quality

Higher priced items may sell betterHigher priced items may sell better




Psychological Pricing Includes the visibility of the consumer

and product Buyers and non-buyers may have

different impressions Price lining clumps prices together so the

perception of increased quality is created Marketer must be aware of how the

customer uses price to differentiate products




Generic Pricing Strategies Basic strategies used to compete

in the market Can be used in combination to

achieve different goals




Generic Pricing Strategies Skim Pricing Penetration Pricing Match Pricing Neutral Pricing




Skim Pricing Capture high price margins at

the expense of high sales volume

Make the product appear special and new to command a higher price

“Skimming” the cream off the top




Skim Pricing Works best when:

Customers are price insensitive Customers place a high value on the

product’s differentiating attributes There is value attached to prestige and

exclusivity The price is not important in relation to

the benefits derived The firms has no real competition for the

product offer




Penetration Pricing Generate sales volume even if it

means lower margins relative to the competition

The opposite of skim pricing




Penetration Pricing Works best when:

A large share of the market is willing to change suppliers in response to the price differential

Customers look only at price and not at other features

Price is not a trivial matter to customers

Customers are brand insensitive




Penetration Pricing Only works long term if the firm

has lower costs than competitors Does not generate new demand,

but takes market share from others

Often used when a new hotel opens




Match Pricing One firms matches the price of firms

that are in direct competition Works best when:

Customer perceives no difference in the competition

Cost structure allows pricing near the competition

Assumes competitors have made the correct pricing decision

Market must be able to buy at this level Market must be totally concerned about

price




Match Pricing Drawbacks

Product is rarely the exact same as the competition

Firms usually do not have the same goals




Neutral Pricing Using market variables other

than price to gain market share Firm believes that the customer

wants a coherent pricing strategy

Firm believes the customer wants choice or added value




Neutral Pricing Value added services

Added on to the basic product to enhance the perception of value

A part of loyalty marketing Fails when firm adds services the

customer does not want or need Solution is flexible service offerings

tailored to the customer




Neutral Pricing Value added services

Determine which services are of value to your customer and:

Do not offer the service Give the service away at no charge Raise the price equal to the cost of the service Raise the price less than the cost of the service Raise the price slightly higher than the cost of

the service to camouflage a price increase on the standard product




Generic Pricing Strategies Market share and fair share

Actual figures of occupancy or covers Usually compared to fair share, or the

expected occupancy or covers if you received your proportional share of business in your competitive set

Fair market share = Firm’s capacity Total capacity in

market class Goal is for market share to exceed fair share




Generic Pricing Strategies REVPAR

Calculation of revenue per available room

REVPAR =Room revenue Number of rooms

available for sale REVPAR= Average daily rate (ADR) x

Occupancy percentage Essentially controls for pricing decisions Most widely used method today




Generic Pricing Strategies Measuring the impact

Yield index = Property REVPARMarket REVPAR

Yield index = Share of revenueShare of supply

Greater than 1.0 indicates the hotel is outperforming the market




Revenue Management Began in late 1980’s as yield

management Prices change under fluctuating

demand and advance bookings Creates an enormous competitive

advantage




Revenue Management Is… A systematic approach to matching

demand for services with an appropriate supply in order to maximize revenues

Appropriate in hotels Hotel room is a perishable product Capacity is fixed and cannot flex to meet

demand Different market segments have different lead

times to purchase Hotels have great flexibility in varying their

prices at any given time




Revenue Management Practices Set most effective pricing structure Limit the number of reservations

accepted on any given night or room type based on profit potential

Negotiate volume discounts with groups

Match market segments with room type and price needs

Be consistent across channels and intermediaries




Yield The ratio between actual sales and

potential sales forecasted over a given period of time

Have to have realistic potential sales forecasting

Hotels must be able to forecast demand for each room category from each of its market segments, for any date in the future

Customer purchase behavior must be well understood




Discussion Do you believe that every type of

business (goods and services) can benefit from revenue management?

chapter fifteen the pricing decision. © 2008 pearson education, upper saddle river, nj 07458. all...

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