Chapter 12 Pricing Products: Pricing Considerations, Approaches, and Strategy “There are two fools in every market; one asks too little, one asks too much.” Russian Proverb Price Definition: “The amount of money charged for a product or service.” Most flexible element of marketing mix Attitudes hard to change Price is dynamic because of environmental influences Gets us into the most trouble – Charging too much chases away potential customers – Charging too little leave company in a poor position Factors to Consider when Setting Prices Internal Factors Pricing Decisions External Factors Internal Factors Affecting Pricing Decisions Marketing Objectives Marketing-Mix* Strategy Costs Organizational Considerations Marketing Objectives that Affect Pricing Decisions Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business. Current Profit Maximization Marketing Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI. Objectives Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Quality and Guest Service Levels Marketing Mix Strategy Marketing Mix Variables Affecting Pricing Decisions Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program. Price Must be Coordinated With: Product Design Non-Price Factors Marketing-Mix Strategy Promotion Costs Distribution Channels Costs, Effecting Pricing Decisions Fixed Costs (Overhead) Costs that don’t vary with sales or production levels. Variable Costs Costs that do vary directly with the level of production. Executive Salaries Rent Insurance Raw Materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production Organizational Considerations Affecting Pricing Management must decide who within the organization will set prices – Small companies – Top management – Large companies – Corporate or Regional Managers Management’s Responsibility Yield (Revenue) Management Applications External Factors Market and Demand Costs set lower limits of prices Market and demand set upper limits Marketers must understand the relationship between price and demand for a product External Factors Cross Selling and Upselling Cross selling Upselling – When the company – Occurs through training promotes & sells other or sales reservations products to the guests Example: Room service, fax, or retail products employees to suggest a higher priced product Examples: Offering after dinner coffee External Factors Consumer Perceptions of Price and Value In the end, it is the consumer who decides whether a product’s price is right. Pricing decisions must be buyer oriented Good pricing begins with analyzing consumer needs Value is what compels the customer to buy. So…pricing decisions require an: – Awareness of the target market. – A customer-oriented approach. – A recognition of the differences in buyer’s perceptions. External Factors Analyzing the Price Demand Relationship Demand & Price are inversely related. The demand curve for prestige goods is usually the opposite of a typical demand curve. What are some factors that affect demand along with price? How do these nonprice factors affect the demand curve? External Factors Analyzing the Price Demand Relationship Chapter 12: Figure 12-4: Inelastic and elastic demand External Factors Price Elasticity of Demand If demand hardly varies with a small change in price, we say that demand is inelastic. If demand changes greatly, we say that the demand is elastic. Buyers are less price sensitive when the product is unique or when it is high in quality, prestige or exclusiveness. External Factors Factors That Affect Price Sensitivity The Unique Value Effect The Substitute Awareness Effect Business Expenditure Effect The End-Benefit Effect The Total Expenditure Effect The Shared Cost Effect The Sunk Investment Effect The Price Quality Effect External Factors Competitor’s Prices & Offers A hotel’s salesperson must learn the price, quality, and features of each competitor’s offer When competitors’ prices are known, this information can be used as a starting point for your own pricing & position yourself accordingly. External Factors Other External Elements Inflation Economic boom or recession, Interest rates & the birth of new technology are examples of macroenvironmental factors that affect pricing strategies. General Pricing Approaches Cost Based Pricing Product Cost Price Value Customers General Pricing Approaches Cost - Based Pricing *** Product costs set a floor for the price *** – Cost Percentage Adding a standard markup to the cost – $40 + 15% = $46 – Markup Cost as a percentage of selling price – Cost = 40 percent of sales price – Break-Even or Target Profit – Rule-of-Thumb ($1 per $1000) General Pricing Approaches Example : Break Even Analysis BE= Fixed Costs/Contribution (SP-VC) Example : Meal SP = $20, VC = $8 Contribution Margin (SP-VC)= $12 Fixed costs are $2400 a day BE=$2400/$12 = 200 Need to sell 200 meals @ $20 to break-even VC = 40%, contribution margin % = 60% BE = $2400/.6 = $4000 Chapter 12: Figure 12-5: Break-even chart for determining target price General Pricing Approaches Value-Based Pricing – Uses the buyers’ perceptions of value – Setting price to match the perceived value – Consider the various prices different restaurants charge for the same items Competition-Based Pricing (Going-Rate Pricing) – Same, more or less than the major competitors – Charge what the traffic will bear Pricing Strategies New Products Prestige Pricing – A hotel or restaurant wanting to position themselves as luxurious & elegant enters the market with a high price. Marketing Skimming – When the market is priceinsensitive, a firm will set high prices, taking advantage of the market. Marketing Penetration – Companies set a low initial price to penetrate the market quickly & deeply. – Works best when: The market is highly price sensitive. The low price minimizes competition. Pricing Strategies Existing Products Pricing Strategies Product-Bundle Pricing Sellers use bundling to combine several of their products & offer them at a reduced price. This is a common practice to induce buyers of products who otherwise might not buy the single product. Hotels, cruise lines, car rental companies or special attractions can be found packaged. Existing Products Pricing Strategies Price-Adjustment Strategies Volume Discounts – Special rates for customers who are likely to purchase a large quantity of hotel rooms – Free room for every 20 room nights book for associations or corporate meeting planners. Discounts based on Time of Purchase – – – – Price reduction when the demand is lower Hotels, motels and airlines offer seasonal discounts Early bird specials Senior citizen discounts between (2:00 to 6:00 PM) Existing Products Pricing Strategies Price-Adjustment Strategies Discriminatory Pricing – Refers to segmentation and pricing differences based on price elasticity. – Same product or service at two or more prices. – Use different prices for price sensitive and not sensitive customers, such as coupon users, retired people, business travelers etc. – Price discrimination is a useful tool for smoothing demand, bringing additional revenue and profits. Existing Products Pricing Strategies Price-Adjustment Strategies Yield Management (Revenue Management) – Managing capacity by maximizing the revenue based on elasticity of demand for selected customer segments. – Yield Management System Software – In some YM systems, customers staying a longer period can be charged more than those staying only a few nights. Last Minute Pricing – Unsold inventory creates a market for last-minute inventory selling Existing Products Pricing Strategies Pricing Adjustment Strategies Psychological Pricing – Consider the psychology of prices, not economics – Reference prices – buyers carry in their minds – Popular products often have reference prices, such as a cup of coffee, a strip steak, or a hamburger. – Uses aspects such as prestige, reference prices and round figures. – .99 ; 1.99; 9.99 cent pricing Existing Products Pricing Strategies Pricing Adjustment Strategies Promotional Pricing (Below list price, or below cost price in special days, such as Valentine’s Day, Mothers’ Day) Fast food restaurants will price a few products as loss leader to attract customers, such as a coffee for 25 cents, or 3 hamburgers for a dollars Hotels may offer special promotional rates, such as Valentine’s weekend special. In casino hotels the main product is gaming, so they offer very low room prices to customers in low seasons. Existing Products Pricing Strategies Pricing Adjustment Strategies Value Pricing: Everyday Low Prices (EDLP) Offering a price below competitors on a permanent basis. Anytime a product/service is purchased, at any price, the buyer must have perceived value in that product. Value pricing is risky if a company does not have the ability to cut costs significantly. A marketing strategy – Taco Bell, Southwest Airlines Skip Pages 484 – 489 Other Pricing Considerations Price changes