1. Tourism Marketing for small businesses
Chapter 8 Pricing Tourism Services

2. Chapter learning aims To enhance your understanding of:
pricing as a marketing function
the key internal factors and external forces influencing pricing decisions
the use of dynamic pricing for effective yield management

3. Key terms
Value
Value is co-created, by the service provider, who offers a value proposition, and the customer who decides the extent to which the service is providing a benefit to meet a need, at a fair price.
Price
Price is the foundation in the relationship between supply and demand, and is what is exchanged by the customer in return for a product or service that offers perceived value.
Yield management
Dynamic (constantly changing) markets necessitate pricing decision making that is flexible to meet fluctuating levels of demand and to maximise yield (return on investment).

4. Pricing
Price plays a major role in consumers’ perceptions of value, and their purchase decisions
Pricing is a marketing function, influenced by other elements in the marketing mix
eg distribution, promotion
Pricing is one of the most flexible elements in the marketing mix

5. Internal factors influencing pricing decisions
Financial
the business’ current financial situation
the current occupancy rate relative to the level of capacity
the fixed costs of the business
the variable costs of providing the service
the distribution methods and commission levels
brand equity value, particularly in terms of customer loyalty

6. Internal factors influencing pricing decisions
Strategy
the market positioning strategy and value proposition
the marketing objectives
the product life-cycle stage

7. External forces influencing pricing
the level of market demand
the intensity of the competition
the prices of competitors being considered by the consumer in their decision set
the extent of substitutability of competing businesses, based on consumers perceptions of value
the current going rate price for the service category
seasonality and the timing of the offer

8. External forces influencing pricing
the competitiveness of the destination at the time
destination package prices play a major role
macro-environment forces at the time, particularly economic conditions such as bank interest rates, currency exchange rates, and consumer confidence levels
the potential for retaliation by competitors

9. Influences on consumers’ perceptions of price attractiveness
the travel situation
the relative size of the purchase in their overall holiday experience or package bundle
their level of experience with the service category
the importance of the purchase decision for them
the benefit(s) they seek to meet their wants

10. Influences on consumers’ perceptions of price attractiveness
their current capacity to pay (eg business travellers versus families, international versus domestic visitors)
the level of perceived risk
their life-cycle stage
their perceptions of the value propositions of the brands being considered in their decision set

11. Pricing objectives
To generate immediate cash flow, in situations where the business’ financial survival is at risk due to external forces such as economic recession or a natural disaster at the destination.
To achieve market share, which is particularly important for new businesses.
To a achieve product-quality leadership position, particularly in luxury markets
To maximise current profit, which has a focus on short term return on investment.

12. Cost-volume-profit analysis
Determining the break even point
Break even occurs when a product’s income and costs are equal, and there is neither a profit or a loss
Break even point for number of pax:
FC/SP-VC per unit
Break even point in sales revenue:
FC/((SP-VC))*SP)
FC = fixed costs for the year
SP = Selling price
VC = variable cost per unit

13. Fixed costs
Remain relatively constant over time, regardless of level of sales
Tourism industry tends to have a high level of fixed costs in service delivery
eg rent, CEO salary, printing, bank interest

14. Variable costs Cost per unit of output
Total cost depends on total output
Economies of scale
eg petrol, raw materials

15. Contribution
The difference between the selling price and the unit variable cost (SP-VC per unit)
Contribution towards fixed costs
High contribution in many tourism services due low variable costs/high fixed costs

16. Video link Breakeven and cost-volume-profit analysis
managers/lecture/pZNJj/cost-volume-profit-analysis-example-1

17. Pricing approaches Cost-plus pricing Going-rate pricing Auctions
Simply adding a mark up to the cost of producing the service
Going-rate pricing
Basing prices on what competitors are doing
Auctions
Last minute online initiatives to fill excess capacity and minimise perishability
Consumers offered chance to bid
Dynamic pricing
Dynamic (constantly changing) markets necessitate pricing decision making that is flexible to meet fluctuating levels of demand and to maximise yield (return on investment).

18. Pricing mistakes
Too internally cost-oriented rather than based on what the market will bear
Not sufficiently cost-oriented, such as not factoring in costs for repairs and maintenance
Being too slow to adapt and react to changing market conditions and demand levels
Being overly greedy with price increases for a future peak period, such as during a major event, when actual demand might not meet projections.
Pricing is not congruent with the market positioning strategy, such as in the case of a high quality position competing on price.
A lack of understanding of tourism distribution channels and the need to factor in provision for different commission costs payable to travel trade intermediaries.

19. “Why discounting doesn’t work”
Study of 6,000 hotels over a two year period
Recommended = holding prices constant when competitors are discounting
A hotel will lose occupancy
But make more money than competitors

20. Discussion questions
Summarise the key advantage and disadvantage for an accommodation supplier considering using an online travel agency specialising in last minute discounts.
Why is yield a more important marketing focus than growth in numbers of visitors?
On what basis will a customer decide whether a tourism service price represented good value?