Chapter 11: Pricing product; Pricing considerations, approaches, and strategy
Price: price is the amount of money charged for a product. It is the only marketing
mix element that produces revenues. More broadly price is the sum of the values
consumers exchange for the benefits of having or using the product or service.
Factors to consider when setting prices
Internal factors (4 factors)
Pricing Decision
External factors
Internal factors affecting pricing decisions
1. Market objectives
2. Market mix strategy
3. Costs
4. Organization for pricing (organization considerations)
1. Market objectives: before establishing price, a company must select a product
strategy. If the company has selected a target market and positioned itself carefully,
its marketing mix strategy, including price, will be more precise. There are four
Objectives.
1. Survival; Low prices to cover variable costs and some fixed cost to stay in
business
2. Current profit maximization; choose the price that produces the maximum
current profit
3. Market shared leadership; Low as possible prices to become the market share
leader.
4. Product Quality leadership; increase the price to cover the higher quality and
guest service level.
2. Marketing mix variables that affect pricing decisions
Company will consider price along with all the others marketing mix elements when
developing the marketing program. Price must be coordinated with
Product Design
Non-Price Factors
-free green tea,
free fruits
Marketing mix strategy
Promotion
Distribution
3. Type of cost factors that affect pricing decision
Costs set the floor for the price company can charge for its products costs
take two forms; fixed costs and variable costs
Fixed costs; cost that don’t vary sales or production levels
Variable costs; costs that do vary directly with the level of production for
example, raw materials
Total costs; sum of the fixed cost and variable costs for a given level of
production.
4. Organizational considerations that effect pricing strategy
Who set prices?
In small companies; top management
In large companies; corporate department.
However, many hospitality and travel companies now use revenue management
departments.
External Factors Affecting Pricing Decision
1. The market and demand
While costs set the lower limits of prices, the market and demand set the
upper limit.
- Before setting prices, a marketer must understand the relationship
between price and demand for a product.
o Cross-selling; when the company any promotes and sells
other products to guest.
o Up selling; occurs through training of sales and reservation to
offer a higher price product.
 Consumer perception of price and value
When setting the price management must consider how summers perceive
price and the ways that the perceptions affect consumers’ buying decision.
 Analyzing the price-demand relationship
Each price leads to a different level of demand; the demand curve shows the
relationship between prices and resulting demand
 Price elasticity of demand
 Factor affecting price sensitivity
 The unique value effect; your offering is different
 The substitute awareness effect; hotel restaurant, often charge more for
meals based on the substitute awareness effect

Business expenditure effect; company pay for bill, so you will be less
price sensitive.
 End-benefit effect
 The total expenditure effect


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The shared cost effect; when someone else shares for the bill.
The sunk investment effect; Purchasers with an investment in
products they are using are less likely to charge for price reasons
The price quality effect; similar to prestige product.
2. Competition
Competitors’ prices and their possible reactions to a company’s own pricing
moves are
other external factors affecting pricing decisions. Therefore, it needs to be
considered when setting prices.
3. Other environment
-For example, economic factors; economic factors such as inflation, boom or
recession
and interest rates affect pricing decisions.
-Marketers must know the laws concerning price and make sure that their
pricing
policies are legal.
General Price approaches
1. Cost-based pricing; is cost plus pricing adding a standard mark up to the cost of
the product.
2. The value-based approach; base their prices on the products’ perceived value
3. Competition-based approach; a strategy of going rate pricing is the
establishment of price based largely on those of competitions, with less attention
paid to costs or demand
Break-even analysis or target profit pricing
Tries to determine the price at which a firm will break even or make a target profit.
Pricing strategies
New product pricing strategies, setting initial product prices.
1. Prestige product; hotels or restaurants seeking to position themselves
luxurious and elegant enter the market with a high price to support this position.
2. Market-skimming pricing; setting a high price when the market is price
sensitive.
3. Market-penetration pricing; other companies set a low initial price penetrate
the market quickly and deeply attracting many buyers and wining a large market
share.