1. Pricing Products: Pricing Considerations, Approaches, and Strategy
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

2. 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

3. Factors to Consider when Setting Prices
Internal Factors
Factors to Consider when Setting Prices
Pricing
Decisions
External Factors

4. Internal Factors Affecting Pricing Decisions
Marketing
Objectives
Internal Factors Affecting Pricing Decisions
Marketing-Mix*
Strategy
Costs
Organizational
Considerations

5. Marketing Objectives that Affect Pricing Decisions
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.
Marketing
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

6. Marketing Mix Strategy

7. 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
Marketing-Mix
Strategy
Non-Price
Factors
Distribution
Channels
Promotion
Costs

8. Costs, Effecting Pricing Decisions
Fixed Costs
(Overhead)
Costs that don’t
vary with sales or
production levels.
Executive Salaries
Rent
Insurance
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

9. 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

10. Costs set lower limits of prices Market and demand set upper limits
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

11. Cross Selling and Upselling
External Factors
Cross Selling and Upselling
Cross selling
– When the company promotes & sells other products to the guests
Example: Room service, fax, or retail products
Upselling
– Occurs through training or sales reservations employees to suggest a higher priced product
Examples: Offering after dinner coffee

12. 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.

13. 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?

14. External Factors Analyzing the Price Demand Relationship
Chapter 12: Figure 12-4: Inelastic and elastic demand

15. 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.

16. Factors That Affect Price Sensitivity
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
skipped

17. 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.

18. Other External Elements
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.

19. General Pricing Approaches
Product
Cost
Price
Value
Customers
Cost Based Pricing

20. General Pricing Approaches
Cost - Based Pricing
*** Product costs set a floor for the price ***
Cost Percentage
Adding a standard markup to the cost
$ % = $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)

21. 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 $20 to break-even
VC = 40%, contribution margin % = 60%
BE = $2400/.6 = $4000

22. Chapter 12: Figure 12-5: Break-even chart for determining target price

23. 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

24. Pricing Strategies New Products Prestige Pricing Marketing Skimming
A hotel or restaurant wanting to position themselves as luxurious & elegant enters the market with a high price.
Marketing Skimming
When the market is price-insensitive, 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.

25. 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.

26. Price-Adjustment Strategies
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)

27. Price-Adjustment Strategies
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.

28. Price-Adjustment Strategies
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

29. Pricing Adjustment Strategies
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; cent pricing

30. Pricing Adjustment Strategies
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.

31. Pricing Adjustment Strategies
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

32. Other Pricing Considerations
Skip Pages 484 – 489
Other Pricing Considerations
Price changes