pricing products: pricing considerations, approaches, and strategy

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Pricing Products:

Pricing Considerations,

Approaches, and Strategy

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

“The real issue is value, not price.”

-Robert T. Lindgren

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Chapter Objectives

• Outline the internal factors affecting pricing decisions, especially marketing objective, marketing-mix strategy, costs, and organizational considerations

• Identify and define the external factors affecting pricing decisions, including the effects of the market and demand, competition, and other environmental elements

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Chapter Objectives

• Contrast the differences in general pricing approaches, and be able to distinguish among cost-plus, target profit pricing, value-based pricing, and going rate

• Identify the new product pricing strategies of market-skimming pricing and market-penetration pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Chapter Objectives• Understanding how to apply pricing strategies

for existing products, such as price bundling and price adjustment strategies

• Discuss the key issues related to price changes, including initiating price cuts and price increases, buyer and competitor reactions to price changes, and responding to price changes

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Price• Price is the amount of money charged for a

good or service

• The only marketing mix element that produces revenue

• Changing too much chases away potential customers, charging too little cuts revenue

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Factors to Considerwhen Setting Prices

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Internal Factors

• Marketing Objectives– Survival

– Current Profit Maximization

– Market-Share Leadership

– Brad Equity Growth

– Product-Quality Leadership

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Internal Factors

• Marketing Mix Strategy

• Costs– Fixed vs. Variable Costs

• Organizational Considerations

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

External Factors Affecting Pricing Decisions

• Market and Demand

• Cross Selling and Upselling

• Consumer Perceptions of Price and Value

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

External Factors Affecting Pricing Decisions

• Analyzing the Price – Demand Relationship

• Price Elasticity of Demand

• Factors Affecting Price Sensitivity

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Price Elasticity of Demand

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Factors Affecting Price Sensitivity

• Unique Value Effect

• Substitute Awareness Effect

• Business Expenditure Effect

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Factors Affecting Price Sensitivity

• End-Benefit Effect

• Total Expenditure Effect

• Sunk Investment Effect

• Price Quality Effect

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

General Pricing Approaches

• Cost-Based Pricing

• Break-Even Analysis and Target Profit Pricing

• Value-Based Pricing

• Competition-Based Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

ProductProduct

CostCost

PricePrice

ValueValue

CustomersCustomers

Cost Based Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

• 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

Break-even

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Break-even Analysis or Target Profit Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

CustomerCustomer

ValueValue

PricePrice

CostCost

ProductProduct

Value-based Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Customer

Product

Price

Cost

Value

Competition-Based Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Pricing Strategies

• New-Product Pricing Strategies

• Existing-Product Pricing Strategies

• Psychological Pricing

• Promotional Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

New-ProductPricing Strategies

• Prestige Pricing

• Market-Skimming Pricing

• Market-Penetration Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Market SkimmingMarket Skimming Market PenetrationMarket Penetration

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

> Results in fewer, more profitable sales.

> Popular night club charges a high cover charge

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

> Results in a larger market share.

> New Marriott

Setting Initial Product Prices

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Existing-ProductPricing Strategies

• Product-Bundle Pricing• Price-Adjustment Strategies

– Volume Discounts – Discounts Based on Time of Purchase – Discriminatory Pricing – Yield Management

• Non-Use of Yield Management • Last-Minute Pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

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

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Psychological Pricing

• Price-quality relationship

• Reference prices

• Rounding

• Length of the field

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Promotional Pricing

• Temporary pricing of products below list price and sometimes below cost

– Value Pricing

– Price Sensitivity Measurement

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

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?

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Other Pricing Considerations

• Price Spread Effect – “The highest price menu item should

not be more the 2.5 times the price of the lowest”

• Price Points

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Initiating Price Cuts

• Excess capacity

• Dominate market

• Increase market share

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Initiating Price Increases

• Increase profits

• Cost inflation

• Excess demand

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Reactions to Prices Changes

• Buyer’s reaction

• Competitor’s reaction

• Trade Ally’s reaction

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Responding to Price Changes

• Why did competitor change price?

– To gain market share? Use excess capacity?

• Where is my product in its life cycle?

• What is its importance in the company’s product mix?

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Best Practices

• Boston Market

• Royal Caribbean Cruises revenue management department

• La Colombe D’Or cross-selling strategies

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Key Terms• Cost-plus pricing

• Cross-selling

• Discriminatory pricing

• Fixed costs

• Going-rate pricing

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Key Terms

• Price

• Survival

• Upselling

• Value-based pricing

• Yield management/Revenue management