Chapter
6
PRICING
Prepared by
Simon Hudson, Haskayne School of Business
University of Calgary
and
Marion Joppe, University of Guelph
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Copyright © 2009 by Nelson Education Limited.
Pricing
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6
Topics
• Key factors determining pricing decisions
• Contribution of economics to pricing
• Specific characteristics of the tourism and hospitality
industry that affect pricing policy
• Key approaches that companies take towards
pricing in tourism
• How prices are calculated for new products
• Yield management as it applies to tourism
• Strategic versus tactical pricing in tourism
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6
Pricing
• Most flexible but least understood element of
marketing mix
• Gets us into the most trouble
• Need to understand the price-quality trade-off
– acceptance of the higher cost of a better quality
product
• Price is dynamic because of environmental
influences
• Only marketing mix element that directly affects
revenues
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6
Factors Affecting Pricing Decisions
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Organizational and Marketing
Objectives
• Profit maximization
– corporate objective that causes managers
in organizations to make decisions in such
a way as to maximize profits
• Target rate of return
– corporate objective that aims to achieve a
particular return on the assets employed
in an organization
…continued
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Organizational and Marketing
Objectives
• Market share
– the percentage relationship of an
organization’s sales to total industry sales
– clear pricing objectives should be
established before price levels are set
– Key factors determining pricing decisions
are shown in Figure 6.1
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Holiday Costs in Europe
Table 6.1
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The Interaction of Supply and
Demand
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Elasticity of Demand
• The sensitivity of customer demand to
changes in the prices of services
• Price elasticity of demand
= % change in quantity demanded
% change in price
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Elastic and Inelastic Demand
Curves
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Assessing Demand
• The two most common methods of
assessing demand are:
– asking potential customers what they
would be willing to pay (willingness-to-pay
assessment) for the service; and
– test marketing the product at different
prices in different regions.
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Pricing & Positioning
• Three strategic approaches:
– premium pricing
– value-for-money pricing
– undercut pricing
• Basic approaches to setting prices:
– cost-based methods
– demand-based methods
– competition-oriented pricing
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Cost-Based Methods
• Break-even analysis
– a pricing technique that considers fixed and
variable costs, customer volumes, and profit
margins
• Fixed costs
– costs that do not vary with the amount of the
product or service provided
• Variable costs
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– costs that increase as more of a product or
service is provided
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Break-Even Point for
a Hypothetical Hotel
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Cost-Based Methods
Cost-plus pricing
• adding a standard markup to the cost
of the product or service to arrive at the
final price
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Demand-Based Methods
• Buyer-based pricing (sensitivity pricing)
– adjusting to high prices when the demand
is high and lower prices when the demand
is low, regardless of the cost of the
product or service
• Psychological pricing
– using slightly lower prices to give
consumers the perception of added value
continued...
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Demand-Based Methods
• Price lining
– pre-establishing price levels that the
organization is confident will attract
customers
• Negotiating
– a price-setting technique involving two or
more parties with a conflict of interest
regarding aspects of the product or
service
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Competition-Based Methods
• Competition-oriented pricing
– an organization fixes the price of its
product or service in relation to
competitors’ prices; this is often also
called going-rate pricing
– advantage of giving the organization the
opportunity to increase sales or market
share, but it is a dangerous approach to
pricing, as it does not focus on either
costs or the consumer
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Pricing Strategies for New Products
• Prestige pricing
– setting prices high to position a product at
the upper or luxury end of the market
• Market skimming
– setting high prices at the launch stage and
progressively lowering them as the
product becomes better established
continued...
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Pricing Strategies for New Products
• Penetration pricing
– pricing at a lower level to get maximum
sales and market share
– used when an organization is trying to get
maximum distribution for the product or
service in the initial stages
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Other Pricing Techniques
•
•
•
•
•
•
Promotional pricing
Product-bundling pricing
Price spread and price points
Discriminatory pricing
Discounting
Yield management
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Promotional Pricing
• Promotional pricing
– used by companies when they temporarily
sell products below their normal list price
(or rack rate)
• usually done for a short period of time, often to
introduce new or revamped products.
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Product-Bundle Pricing
• Product-bundle pricing
– grouping together a company’s products
to promote them as a package
– Example: hotel offering a weekend special that
includes a room, dinner in a restaurant, valet parking,
room-service breakfast, and late checkout for a set
price.
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Price Spread and Price Points
• Price spread
– a range of products and prices that will
suit the budget of all target markets
• Example: holiday park offering campsites with tents,
standard cabins, en suite cabins, and family units,
each different from the other in terms of size,
location, types of fittings and furnishings.
• Price points
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– the number of “stops” along the way
between the lowest-priced item and the
highest-priced item
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Discriminatory Pricing and
Volume Discounting
• Discriminatory pricing
– selling a product at two or more prices,
despite the fact that the product costs are
the same
• Volume discounting
– offering special prices to attract customers
who agree to major purchases
– Example: hotels and airlines offer special prices to
corporate clients to encourage volume business
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Yield Management
• Yield
– profit made on sales of goods and service
• calculated based on the number of customers,
how much they spend, and the number of
products they buy
• Yield management
– developing strategies to maximize
opportunities for the sale of an
organization’s perishable products
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Strategic and Tactical Pricing
• Strategic pricing
– prices are determined early on in the
planning of the marketing strategy e.g.,
all-inclusive or bait pricing
• Tactical pricing
– relates to day-to-day techniques in
pricing, which can be rapidly altered to
suit changing conditions in the
marketplace, e.g., discounting
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Other Popular Pricing Strategies
• All-in pricing or all-inclusive pricing
– charging consumers a single price for the
various products or services on offer
– Example: Club Med
• Off-set pricing (bait pricing)
– charging a low basic price and charging
for extra services
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Tourism and Hospitality Characteristics
that Affect Pricing Policy
•
•
•
•
•
•
•
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Highly segmented industry
Variability of demand
Perishable nature of the product
High fixed costs
Cost fluctuations
Vulnerability to demand changes
High level of customers’ psychological
involvement
continued...
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Tourism and Hospitality Characteristics
that Affect Pricing Policy
•
•
•
•
•
•
•
Seasonal demand
Tactical price-cutting and price wars
Low prices
Fixed capacity
The customer’s total purchases
Increased use of the Internet
Late booking
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