Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Chapter 12

Pricing Products:

Pricing Considerations, Approaches, and Strategy

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

• Definition: The amount of money charged for a product.

• Most flexible element of marketing mix

• Gets us into the most trouble

• Attitudes hard to change

• Price is dynamic because of environmental influences

Price

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Internal FactorsInternal Factors

PricingDecisions

PricingDecisions

External FactorsExternal Factors

Factors to consider when setting prices

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Marketing Objectives

Marketing-MixStrategy

Costs

OrganizationalConsiderations

Internal Factors Affecting PricingDecisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Marketing

Objectives

Marketing

Objectives

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Current Profit Maximization

Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.

Current Profit Maximization

Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership

Low as Possible Prices to Becomethe Market Share Leader.

Market Share Leadership

Low as Possible Prices to Becomethe Market Share Leader.

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

SurvivalLow Prices to Cover Variable Costs andSome Fixed Costs to Stay in Business.

Product Quality Leadership

High Prices to Cover Higher Quality and Guest Service Levels

Product Quality Leadership

High Prices to Cover Higher Quality and Guest Service Levels

Marketing Objectives that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Marketing-Mix Strategy

Product DesignProduct Design

DistributionDistribution

PromotionPromotion

Non-Price Factors

Non-Price Factors

Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be

Coordinated With:

Marketing Mix Variables that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Total CostsSum of the Fixed and Variable Costs for a Given

Level of Production

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Fixed Costs(Overhead)

Costs that don’tvary with sales or production levels.

Executive SalariesRent

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Variable Costs

Costs that do varydirectly with the

level of production.

Raw materials

Types of Cost Factors that Effect Pricing Decisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Who sets pricesWho sets prices

Many hospitality and travel companies now use revenue management departments

Many hospitality and travel companies now use revenue management departments

Organizational Considerations That Effect Pricing Decisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Costs set lower limitsMarket and demand set upper limits

Marketers must understand the relationship between

price and demand for a product

Market and Demand Factors that Affect Pricing Decisions

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Pri

ce

Quantity Demanded per Period

A. Inelastic Demand - Demand Hardly Changes Witha Small Change in Price.

P2

P1

Q1Q2

Pri

ce

Quantity Demanded per Period

P’2

P’1

Q1Q2

B. Elastic Demand -Demand Changes Greatly Witha Small Change in Price.

Price Elasticity of Demand

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

• The unique value effect

• The substitute awareness affect

• End-benefit effect

• The total expenditure effect

• The shared cost effect

• The sunk investment effect

• The price quality effect

Factors Affecting Price Sensitivity

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Competitors’ prices and their possible reactions need to be

considered when setting prices

Competition

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

ProductProduct

CostCost

PricePrice

ValueValue

CustomersCustomers

Cost Based Pricing

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

• BE= Fixed Costs/Contribution (SP-VC)• Example - Meal - SP = $20, VC = $8• Fixed costs are $2400 a day• BE=$2400/$12 = 200• Need to sell 200 meals @ $20 to break-even• VC = 40%, contribution = 60%• BE = $2400/.6 = $4000

Break-even

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

2

4

6

8

10

12

200 400 600 800 1,000

Total Revenue

Total Cost

Fixed Cost

Target Profit($2 million)

Sales Volume in Meals Served (thousands)

Co

st i

n

Do

llar

s (m

illi

on

s)

Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit

0

Break-even Analysis or Target Profit Pricing

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

CustomerCustomer

ValueValue

PricePrice

CostCost

ProductProduct

Value-based Pricing

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Customer

Product

Price

Cost

Value

Competition-Based Pricing

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Market SkimmingMarket Skimming Market PenetrationMarket Penetration

> Setting a high price for a new product to skim maximum revenues from the target market.

> Results in fewer, more profitable sales.

> Popular night club charges a high cover charge

> Setting a low price for a new product in order to attract a large number of guests.

> Results in a larger market share.

> New Marriott

Setting Initial Product Prices

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Product-Bundling Pricing

Price-Adjustment Strategies

Setting Initial Product Prices

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Product-Bundling Pricing

• Transfer surplus reservation price (the maximum price a customer will pay for a product)– Customer A will pay $60 for a Disney pass and and

$120 for a hotel room,Customer B will pay $95 for the Disney pass and $80 for the hotel room – A hotel selling a two night package with pass for $350 will get both customer

• Price-bundling also reduces price competition – by making it hard to figure price of components – In an airline and hotel package it is difficult to

determine the price of the room

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Discount Pricing

Discounts BasedOn

Volume

Discounts BasedOn

Volume

Discounts BasedOn

Time of Purchase

Discounts BasedOn

Time of Purchase

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

• Discrimination in favor of the price sensitive

• Same product to different markets - at same price

• Build fences to separate market segments

• Useful to create demand for down periods

Price Discrimination

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Yield Management

• Manages revenue and inventory by effectively pricing differences based on elasticity of demand for customer segments

• Uses price discrimination techniques by setting fences that prohibit customers from one segment from receiving prices for another segment – Airlines require a Saturday stay to keep business

travelers from taking advantage of low fares

• Yield management should be based on sound marketing and maintaining a long-term relationship with desired customers

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Psychological Pricing

Prestige prices

Reference prices

Ignoring end figures

The length of the field

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Promotional Pricing

• Loss-leader pricing

• Special-event pricing

• Cash rebates

• Low-interest financing

• Longer payment terms

• Warranties & service contracts

• Psychological discounting

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Price Sensitivity Measurement

• Price Sensitivity Measurement (PSM) helps to establish a balance of price with product or service value based on consumer’s perceptions of that value.– The product or service to be cheap?– The product or service to be expensive?– The product or service to be too expensive, so

expensive that you will not consider buying it?– The product or service to be too cheap, so cheap

that you would question the quality?

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Other Pricing Consideration

• Price Spread Effect

• Price Points

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Price Changes

• Initiating Price Cuts

• Initiating Price Increases

• Buyers Reactions to Price Changes

• Competitor Reactions to Price Changes

• Trade Ally Reactions to Price Changes

• Responding to Price Changes