Chapter 12

Pricing Products: Pricing Considerations, Approaches, and Strategy Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Price

• 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 Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Factors to consider when setting prices

Internal Factors Pricing Decisions External Factors

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

Upper Saddle River, NJ 07458

Internal Factors Affecting Pricing Decisions

Marketing Objectives Marketing-Mix Strategy Costs Organizational Considerations

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

Upper Saddle River, NJ 07458

Marketing Objectives that Affect Pricing Decisions

Marketing Objectives Survival Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business.

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

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 for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Marketing Mix Variables that Affect 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 Distribution Promotion

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

Upper Saddle River, NJ 07458

Types of Cost Factors that Effect Pricing Decisions

Fixed Costs (Overhead) Costs that don’t vary with sales or production levels.

Executive Salaries Rent Variable Costs Costs that do vary directly with the level of production.

Raw materials Total Costs Sum of the Fixed and Variable Costs for a Given Level of Production

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

Upper Saddle River, NJ 07458

Organizational Considerations That Effect Pricing Decisions

Who sets prices Many hospitality and travel companies now use revenue management departments

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

Upper Saddle River, NJ 07458

Market and Demand Factors that Affect Pricing Decisions

Costs set lower limits Market and demand set upper limits Marketers must understand the relationship between price and demand for a product

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

Upper Saddle River, NJ 07458

P 2 P 1

Price Elasticity of Demand

A. Inelastic Demand Demand Hardly Changes With a Small Change in Price.

P’ 2 P’ 1 Q 2 Q 1

Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price.

Q 2

Quantity Demanded per Period

Q 1

Marketing for Hospitality and Tourism, 3e ©2003 Pearson Education, Inc.

Philip Kotler, John Bowen, James Makens Upper Saddle River, NJ 07458

Factors Affecting Price Sensitivity

• 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 Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Competition

Competitors’ prices and their possible reactions need to be considered when setting prices

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

Upper Saddle River, NJ 07458

Cost Based Pricing

Product Cost Price Value Customers

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

Upper Saddle River, NJ 07458

Break-even

• 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 Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Break-even Analysis or Target Profit Pricing

Tries to Determine the Price at Which a Firm Will Break Even or Make a Target Profit 12 10 8 6 4 2 0 Total Revenue Target Profit ($2 million) Total Cost Fixed Cost 200 400 600 800 1,000 Sales Volume in Meals Served (thousands)

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

Upper Saddle River, NJ 07458

Value-based Pricing

Customer Value Price Cost Product

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

Upper Saddle River, NJ 07458

Competition-Based Pricing Product Cost Price Value

Customer

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

Upper Saddle River, NJ 07458

Setting Initial Product Prices

Market Skimming

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

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Results in fewer, more profitable sales.

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Popular night club charges a high cover charge

Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens

Market Penetration

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

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Results in a larger market share.

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New Marriott

©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Setting Initial Product Prices

Product-Bundling Pricing Price-Adjustment Strategies

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

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 Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Discount Pricing

Discounts Based On Volume Discounts Based On Time of Purchase

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

Upper Saddle River, NJ 07458

Price Discrimination

• 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 Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

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 Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

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 Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

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 Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

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 Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

Upper Saddle River, NJ 07458

Other Pricing Consideration

• Price Spread Effect • Price Points Marketing for Hospitality and Tourism, 3e Philip Kotler, John Bowen, James Makens ©2003 Pearson Education, Inc.

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

Upper Saddle River, NJ 07458