1. Pricing Considerations, Approaches and Strategies Chapter 12

2. 2 In the Marketing Mix, Price…. Is the only “P” that directly produces revenue Be aware of “break even” May be largest problem for marketing executives Most easily changed of the 4 Ps Is the amount of money charged for a good or service Includes cash, but may also include other considerations of value, including time, convenience, etc. One size does not fit all

3. 3 Internal Factors Influencing Price Marketing objectives Marketing-mix strategy Costs Organizations for pricing

4. 4 Marketing Objectives Accurate segmentation facilitates pricing Survival – often used when business slumps Economic downturn, oversupply, competition Hotel can’t easily reduce inventory Current price maximization May be computed on demand / price analysis Market share leadership These companies believe in economies of scale Product-quality leadership High quality requires high prices Other – create barriers for competition, increase short- term sales, introduce new products

5. 5 Marketing Mix Strategy Manipulation of other 3 “P”s affects price “Place” - Distribution channels Wholesale, retail, internet, etc Location such as urban, resort, airport, etc “Product” – hotel rooms, menu items, etc Property renovation, changes in menu items Development of various property types “Promotion” - advertising costs, media Must be able to reach market segments

6. 6 Costs Establish the minimum level of price Includes Return on Investment (ROI) Low-cost leadership May be cheapest price, but includes preservation of capital via cost savings Fixed costs – constant, regardless of sales Rent, interest, salaries Not directly related to sales Variable costs – change with level of sales Employee payroll, utilities, supplies, etc

7. 7 Organizational Considerations Who sets prices in an organization? In small properties set by top management Larger companies are joint decisions Sales, Marketing, CFO’s managers Occupancy forecasts, economic outlook Pricing strategies passed down to properties Yield Management strategies Supply / demand management Professional fund management

8. 8 External Factors Influencing Price Market & Demand Cross-selling & up-selling Pricing in different markets Consumer perceptions of price/value Price-demand analysis Elasticity Price sensitivity

9. 9 Market & Demand Costs set lower price limits Survival requires at least break-even Revenue = Expenses Demand determines top end prices Good economy can command higher prices Mgrs must be aware of acceptable price ranges Loss-leaders can generate overall profit

10. 10 Cross-selling & Up-selling Cross-selling Promoting sales of additional products Business services, restaurants, spa, retail, etc. Employees must promote in-house venues Training, knowledge of property amenities Incentive programs Up-selling Selling same product, but higher level Clerks selling more expensive rooms Creating value-added packages Requires training and motivation

11. 11 Pricing in Different Markets Pure competition Many buyers & sellers trading in a uniform commodity Pure monopoly One seller of a product Government (post office), public utility, unique product provider Monopolistic competition Many buyers & sellers trading over a range of prices with differentiated products Oligopolistic competition Few major players highly sensitive to competitors Barriers to entry

12. 12 Consumer Perceptions of Price/Value Value is in the eyes of the customer Managers must recognize customer wants Consumers purchase product that best meets needs Price may not be primary determinant Benefit, convenience may be more important Exchange process – trading one thing of value for something else of value Segment demographics / psychographics critical

13. 13 Price-Demand Relationship Mathematical modeling of demand at various prices (see exhibits on pgs. 457 - 459 of text) Normal demand curve As price goes up, demand goes down Limited resources in most users Prestige products Increased prices may result in increased sales Esteem level of Mazlow’s H.O.N. (non-price related) Even this has acceptable “range”

14. 14 Elasticity Relationship between price & demand Dependent on consumer resources Leisure travelers use discretionary income More sensitive to price changes In economic downturn, travel is first to go Business travelers are less sensitive The Company is paying Short-term OK, but long-term demand may decline

15. 15 Price Sensitivity Unique Value Effect Perception of bigger, better, cheaper, etc Substitute Awareness Will pay more if unaware of substitutes, alternatives, Business Expenditure / Shared Cost Effect Company (or someone else) pays Discretionary income not a consideration End-benefit Long-term benefits justify high initial cost Sunk-investment Effect Its easier to endure current situation than to change it Efforts required to change and not felt to be worth the trouble Price Quality Effect Perception is that high prices result in high quality

16. 16 General Pricing Approaches Cost based pricing - adding a standard markup to production costs Break-even analysis Revenue must at least = fixed & variable costs Value-based pricing Product developed based on what customer will pay Competition based pricing Going-rate based on what direct competitors charge for similar products New Products “Skimming” or “Penetration” Existing Product pricing Product bundling

17. 17 Price Adjustment Strategies Volume discounts Economies of scale concept Discounts based on time or purchase Seasonal, or place in demand curve Discriminatory pricing Prices adjusted for differences of segment characteristics Frequent-flyer miles, frequent users, etc Yield management Getting highest prices possible based on demand

18. 18 More Pricing Considerations Psychological pricing Price / quality perception Reference pricing Comparison of prices on similar products Price simplification Ignoring end numbers (.67 to.69 seen as less than.69 to.71) Rounding numbers (for example gas prices 3.99 is 3.00, not 4) Length of field / number of digits Promotional pricing Stimulate sales, promote new products, value-pricing Price points – stimulate higher sales

19. 19 Price Change Considerations Excess supply / capacity Reduce price until sales occur Market domination Increased market share based on # of sales Competition Must understand why competitors change price Avoid perception of “gouging” Legitimate reason for price changes Be aware of price / value perceptions Is this price too high? too low?