Price

Chapter 7: Pricing Products: Pricing Considerations, Approaches, and Strategy

There are two fools in every market; one asks too little, one asks too much.
Russian Proverb

What roles does price play in hospitality industry? What should you consider in pricing a product? Customer Characteristics

Cost Company Objectives Company Image Consistency with Marketing Mix Elements

Customer Demand Volumes Competition Company Environment Channels of Distribution Company Alliances

Value - matters more than price

Value Value

Pricing Approaches

is low price is whatever I want in a product Value is the quality I get for the price I pay Value is what I get for what I give
Value is the difference between the customers perceived benefits and customers perceived costscosts include: costs money, time, and effort.

Cost - Based Pricing

Cost Percentage Markup Break-Even or Target Profit Break Rule-of-Thumb ($1 per $1000) Rule-of-

Competition Pricing (Going-Rate Pricing) (Going Price Leadership Follower of Leader Charge what the traffic will bear

Price Modification Strategies

PRICING IN THE HOSPITALITY INDUSTRY Price captures the consumers perception of value

Discounts
Cash, Volume, Functional, Seasonal

Promotional Psychological Discriminatory

The concept of the marketing mix as a set of inter-related strategies is clearly illustrated by efforts to enhance value relative to price in the hospitality industry Price-value equation Product+Service+Location+Ambience+Image=Value Price

Customer-based, Time-based, Place-based CustomerTimePlace

Yield (Revenue) Management

VALUE AND CONSUMER PERCEPTION Product enhancements such as guest room amenities, or the artistic arrangements of the garnish on a plate + Service enhancements due to well-trained staff or a high degree of personal attention + Extra location appeal and social prestige + An ambience designed to be current and that captures the aspirations for speed, modernity, luxury or some other value of the target market + An image supported by advertising and promotion =ENHANCED VALUE

PRICING OBJECTIVES 1. Sales oriented pricing goals Sales volume of the property and maintenance of market share In a highly competitive market, prices are set principally by market forces What management can control to a significant degree are sales levels 2. Profit oriented pricing objectives Target rate of return on investment. Price levels are expected to support an operation that generates enough sales revenue to Cover the companys operating format (e.g. luxury, mid range or budget) And meet the companys profit target

3. Personal pricing goals Many independent operations are viewed by the owners as a Pricing methods in foodservice source of living Enough to survive on, enough to accumulate an estate to Cost based restaurant pricing Selling price Food cost=Price margin (a) Contribution pricing-focuses on dollar profit level rather than just food cost percentage Margin left after variable costs have been received (b) Break-even pricing BEP=TFC/Contribution size and with its current clientele Contribution=S-VC

leave for their children Pricing armed at supporting the operation at its current

Assessment of cost based pricing

Characteristics of travel and tourism services that influence pricing (1) High price elasticity in the discriminatory segments of leisure, recreation and vacation travel markets (2) Long lead times between price decisions and product sales e.g. pricing a tour around 12 months before brochures are distributed (3) No possibility of stockholding for service products (4) High probability of unpredictable but major short run fluctuations in cost elements such as oil prices and currency exchange rates

Runs the danger of ignoring the consumer It assumes the market or competitive level of pricing and accurately reflects what people are willing to pay

Tactical price cutting

(5)Tactical price-cutting by major pricecompetitors if supply exceeds demand (6) Price wars in sectors as transport, accommodation, tour operation and travel agencies in which short run profitability may disappear

(7) Extensive official regulation in sectors such as transport, which includes elements of price control (8)Necessity of seasonal pricing to cope with short-run fixed capacity INFLUENCES ON PRICE SETTING Corporate strategy and positioning Marketing objectives for the period over which prices are set Segments with which a business is concerned (e.g. senior citizen railcards to promote cheap travel on railways outside peak times Operating costs constraints Competitors actions

WIDER INFLUENCES Characteristics of products and capacity (when products have close substitutes, secure a niche position) Non price options (frequent user card schemes for frequent travellers) Legal and regulatory constraints for public health and safety and consumer protection, govt intervene in or influence pricing decisions PRICING STRATEGIES (1) Premium pricing E.g. up market, specialist tour operators, hotel and resort complexes who trade on reputation, excellent service and exclusivity luxury cruises and highly rated restaurants

(2) Skimming pricing When tourism offering is relatively new to the market and level of competition low e.g. introduction of new villas at newly developing resorts Setting a high, introductory price aimed at attracting the cream of the market E.g. fashion market OR when demand exceeds supply accommodation pricing in Edinburgh during the Edinburgh festival or the luxury worldwide cruises

(3) Market penetration New wine bars, visitor attractions, resort complexes when new to the market price to attract trial purchase and to establish strong word of mouth marketing Numerous direct and indirect substitutes When repeat business and customer loyalty are key elements OR many competitive substitutes (bed and breakfast hotels) OR product differentiation is small (sea, sun and sand packages in Spain, Turkey or Greece) OR when the product is inferior to substitutes (e.g. coaches v/s air/rail)

(4) Differential pricing Different market segments will pay different prices for a similar bundle of core benefits (in flight/on board service) (5) Survival pricing When competitive or market circumstances dictate that pricing had to maximize cash flow in the short term e.g. Gulf War and bombing of World Trade Centre (Sept 11,2001) affected many airline business (6) Harvesting pricing Reaps benefits of previous marketing investment as a service offering reaches its decline stage E.g. traditional hotel, which has managed to maintain a clientele without upgrading or investment

(7) Preventing market entry Pricing artificially low (even below break even point) to prevent a rival or potential competitor seeking entry into a particular market e.g. Virgin Airlines have used short term predatory pricing (8) Tactical pricing Volatility of tourism markets frequently demand short-term tactical adjustments Seasonality prices have to be reduced during off season (off capacity) Sudden market fluctuations-terrorism, ecological disasters/Competitive activity-e.g. discounts and special offer to counteract activities of competitors

SPECIAL PRICING TECHNIQUES 1. Camouflage pricing Differential itemizing of services offered so that it is difficult for the customer to make direct price comparisons E.g. self-catering cottages may charge a price per person or charge a weekly or fortnightly price per unit 2. Decoy pricing Offering two or more priced offers which includes one, which is of demonstrably poorer value, and to make customers adopt the higher priced one 3.

Two part pricing

NON-PRICE REVENUE Public sector tourism such as parks, gardens, musuems and galleries as there is a traditional commitment to make such products free of charge generation for museums Admission free Paid admission to special events Filming and TV facilities fees Hire of facilities for specific functions e.g. conference Loan on collection items Use of research and library facilities Consultancy, advice or valuation services Non-price revenue

Charge a low basic price or none at all and then charge for additional services once the customer has purchased the basic product E.g. a funfairs entry is free but the rides and amusements are charged individually

on Tourism

CROSS SELLING AND UPSELLING Cross selling- one of the basics of effective revenue management A hotel can cross sell F&B, exercise room services, executive support services such as FAX or terry cloth bathrobes Part of effective yield management Training of sales and reservations employees to continuously offer a higher priced product rather than settling for the lowest price A hotel can increase up to 50% of its revenue thru upselling E.g. offering after dinner coffee can be turned into an upselling opportunity by offering high image upgraded presentations of coffee and tea rather than standard pot of coffee and price changes are easy to make

Revenue generation by upselling A tourism organization, instead of just selling its own products, sells ancillary products provided by other organizations E.g. travel agents and tour operators offer a range of complimentary products (insurance, car hire, guide books, attractions vouchers) Large hotels have their own retail outlets or feature display cases of merchandise (cosmetics, antiques, jewellery from which they derive a mark up) As in all marketing activities there is always a need for judgement and improvisation for achieving an optimum pricing mix

Selecting the final price for restaurants 1.Price points Odd cents pricing in restaurants: lies in the customers perception of a discount e.g. $ 7.95 is viewed as a discount from $8.00 2.Price range E.g. a coffee shop chain may eliminate entrees that are priced below $2.50 and above $7.50 3.Changing prices Due to inflation in the cost of food or labour

Demand based pricing Where demand justifies charging what the traffic will bear Chain food service operations, can, thru test marketing, get a clearer picture of what price will maximize revenues, that is, to determine what the demand curve for the product is E.g. rare wines carry a mark on (increase over selling price) of 100% of cost based on scarcity

PACKAGE PRICES
Package pricing by lodging and food service operator Used in the recreation side of lodging e.g weekend hotel rates include some meals and a free cocktail Packaging makes a greater total volume of sales