chapter fifteen the pricing decision. © 2008 pearson education, upper saddle river, nj 07458. all...
TRANSCRIPT
Chapter Fifteen
The Pricing Decision
© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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 07458.
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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 07458.
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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
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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
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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
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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
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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 costsCosts that are somewhat
fixed but at times can vary to some degree
Fixed costsCosts that exist regardless of the level of activity
© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw
Exhibit 15-4; Drivers of profit
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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 07458.
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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
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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
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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 = Break-even = Fixed costsFixed costsPrice – variable costPrice – variable cost
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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
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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
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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
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Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw
Components of Value
Financial Value
TemporalValue
Functional Value
Experiential Value
EmotionalValue
SocialValue
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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
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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
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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
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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
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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
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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
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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
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Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw
Psychological Pricing Prices cause psychological
reactions in the consumerPrices may imply quality
High price = high qualityHigh price = high quality
Low price = low qualityLow price = low quality
Higher priced items may sell betterHigher priced items may sell better
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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 07458.
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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
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Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw
Generic Pricing Strategies Skim Pricing Penetration Pricing Match Pricing Neutral Pricing
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Marketing Essentials in Hospitality and Tourism: Foundations and Practices by Shoemaker & Shaw
Generic Pricing Strategies Measuring the impact
Yield index = Property REVPARMarket REVPAR
Yield index = Share of revenueShare of supply
Greater than 1.0 indicates the hotel is outperforming the market
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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
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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
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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
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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
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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?