Chapter Fifteen The Pricing Decision

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 2 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Pricing Practices Hotel room pricing Evolved from tactical to strategic Most practice some form of revenue management Most fall between revenue per available room and value pricing Restaurant pricing Evolution from cost-based pricing of the 1970’s

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 3 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Exhibit 15-1; Hotel room pricing

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 4 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw What is Price? Definition Depends on viewpoint What the customer is willing to give up in exchange for the product or service

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 5 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw What is Price? The firm has multiple ways to change price: By the quality of good or services By the acceptable form of payment By the time or place of transfer of ownership By the quantity of money or goods or services to be paid by the buyer By the quantity of goods or services offered by the seller By the premium or discounts according to quantity By the time or place of payment

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 6 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw What is price? Price is important to marketers It is the only revenue producing part of the mix It is used to match supply to demand so financial objectives can be achieved It is a powerful force in attracting attention and increasing sales It establishes the market positioning of the product The pricing practice can have a major impact on customer loyalty

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 7 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw What is price? Price should be arrived at after a thorough decision making process Pricing is ultimately customer driven Unique hospitality implications Set physical facilities may require marketing to a new target that will accept the price rather than setting the price to the target market

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 8 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Types of Costs: Variable costs Costs that vary directly with a unit of item sold Semivariable costs Costs that are somewhat fixed but at times can vary to some degree Fixed costs Costs that exist regardless of the level of activity

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 9 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Exhibit 15-4; Drivers of profit

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 10 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Cost-Based Pricing Cost-plus pricing Cost percentage (markup pricing) Break even pricing Contribution margin pricing

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 11 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Cost-Plus Pricing Establishing the total cost of a product including a portion of overhead and a predetermined profit margin Drawbacks Ignores the combined effort of profit generation of all products Misallocation of costs Inflexible Ignores demand

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 12 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Cost Percentage Markup on variable ingredient cost, a percentage based on the ingredient cost percentage, or a combination of both Common in restaurant and beverage industry Drawbacks Totally cost oriented Ignores customer perception of value Tends to price high-cost items to a level customers are unwilling to pay

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 13 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Break-Even Pricing A formula used to determine at what sales volume and price the product cost will be equal to sales Fairly efficient if price levels and sales volume can be predicted at different price levels Requires knowledge of customer perception and demand Break-even = Fixed costs Break-even = Fixed costs Price – variable cost

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 14 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Contribution Margin Pricing Pricing is used to help cover fixed costs Very useful for hotels in soft periods of demand No profit, but fixed costs for the room are covered

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 15 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Value-Based Pricing Determining price after estimating market demand and customers perceived value Quantified as what is received divided by what was paid Cost is irrelevant

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 16 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Value-Based Pricing Forces management to: Review objectives in marketing the product Keep in touch with customer wants and needs

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 17 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Components of Value Financial Value Temporal Value Functional Value Experiential Value Emotional Value Social Value

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 18 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Financial Value Role of the firm is to make customers less price sensitive and thus pay more for a product Buyers are more price sensitive when the cost is large in relation to their household income or budget End-benefit effect Fairness effect Price quality

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 19 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Temporal Value Saving time will be worth money to the customer Research shows that business travelers feel their time is worth an average $150 per hour

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 20 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Functional Value Product or service does what it was designed to do Main components are RATER Customer experiences should be managed

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 21 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Other Components of Value Experiential value Guests are active participants rather than passive observers in the service Emotional value Catering to the customers’ need to feel special Social value Celebration of special occasions with friends and family

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 22 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Value-Based Pricing Trust is a major antecedent to loyalty Identification with the organization Relate so strongly to the organization that price is removed from consideration set Tactics to increase customers’ feeling of affiliation

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 23 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Reference Price The price range anticipated by the consumer based on prior experience or knowledge The price for which consumers believe the product should sell Based on Price last paid Price of similar items Price considering the brand name Real or imagined cost to produce the item Perceived cost of product failure

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 24 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Reservation Price The maximum price a customer is willing to pay for a product Should be built into the pricing decision

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 25 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Psychological Pricing Prices cause psychological reactions in the consumer Prices may imply quality High price = high quality Low price = low quality Higher priced items may sell better

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 26 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Psychological Pricing Includes the visibility of the consumer and product Buyers and non-buyers may have different impressions Price lining clumps prices together so the perception of increased quality is created Marketer must be aware of how the customer uses price to differentiate products

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 27 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Generic Pricing Strategies Basic strategies used to compete in the market Can be used in combination to achieve different goals

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 28 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Generic Pricing Strategies Skim Pricing Penetration Pricing Match Pricing Neutral Pricing

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 29 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Skim Pricing Capture high price margins at the expense of high sales volume Make the product appear special and new to command a higher price “ Skimming ” the cream off the top

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 30 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Skim Pricing Works best when: Customers are price insensitive Customers place a high value on the product’s differentiating attributes There is value attached to prestige and exclusivity The price is not important in relation to the benefits derived The firms has no real competition for the product offer

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 31 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Penetration Pricing Generate sales volume even if it means lower margins relative to the competition The opposite of skim pricing

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 32 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Penetration Pricing Works best when: A large share of the market is willing to change suppliers in response to the price differential Customers look only at price and not at other features Price is not a trivial matter to customers Customers are brand insensitive

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 33 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Penetration Pricing Only works long term if the firm has lower costs than competitors Does not generate new demand, but takes market share from others Often used when a new hotel opens

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 34 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Match Pricing One firms matches the price of firms that are in direct competition Works best when: Customer perceives no difference in the competition Cost structure allows pricing near the competition Assumes competitors have made the correct pricing decision Market must be able to buy at this level Market must be totally concerned about price

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 35 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Match Pricing Drawbacks Product is rarely the exact same as the competition Firms usually do not have the same goals

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 36 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Neutral Pricing Using market variables other than price to gain market share Firm believes that the customer wants a coherent pricing strategy Firm believes the customer wants choice or added value

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 37 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Neutral Pricing Value added services Added on to the basic product to enhance the perception of value A part of loyalty marketing Fails when firm adds services the customer does not want or need Solution is flexible service offerings tailored to the customer

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 38 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Neutral Pricing Value added services Determine which services are of value to your customer and: Do not offer the service Give the service away at no charge Raise the price equal to the cost of the service Raise the price less than the cost of the service Raise the price slightly higher than the cost of the service to camouflage a price increase on the standard product

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 39 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Generic Pricing Strategies Market share and fair share Actual figures of occupancy or covers Usually compared to fair share, or the expected occupancy or covers if you received your proportional share of business in your competitive set Fair market share = Firm’s capacity Total capacity in market class Goal is for market share to exceed fair share

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 40 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Generic Pricing Strategies REVPAR Calculation of revenue per available room REVPAR =Room revenue Number of rooms available for sale REVPAR=Average daily rate (ADR) x Occupancy percentage Essentially controls for pricing decisions Most widely used method today

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 41 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Generic Pricing Strategies Measuring the impact Yield index =Property REVPAR Market REVPAR Yield index =Share of revenue Share of supply Greater than 1.0 indicates the hotel is outperforming the market

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 42 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Revenue Management Began in late 1980’s as yield management Prices change under fluctuating demand and advance bookings Creates an enormous competitive advantage

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 43 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Revenue Management Is… A systematic approach to matching demand for services with an appropriate supply in order to maximize revenues Appropriate in hotels Hotel room is a perishable product Capacity is fixed and cannot flex to meet demand Different market segments have different lead times to purchase Hotels have great flexibility in varying their prices at any given time

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 44 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Revenue Management Practices Set most effective pricing structure Limit the number of reservations accepted on any given night or room type based on profit potential Negotiate volume discounts with groups Match market segments with room type and price needs Be consistent across channels and intermediaries

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 45 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Yield The ratio between actual sales and potential sales forecasted over a given period of time Have to have realistic potential sales forecasting Hotels must be able to forecast demand for each room category from each of its market segments, for any date in the future Customer purchase behavior must be well understood

© 2008 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 46 Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw Discussion Do you believe that every type of business (goods and services) can benefit from revenue management?