Pricing Products, Considerations, Approaches, and strategy

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Pricing Products, Considerations, Approaches, and
strategy

• The real issue is value, not price.
• Robert T. Lindgren

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Objectives

• After reading this chapter, you should be able
  to
• Outline the internal factors affecting pricing
  decisions, especially marketing objectives,
  marketing mix strategy, cost, 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
• Contrast the differences in general pricing
  approaches, and be able to distinguish among
  cost-plus, target-profit pricing, value-based
  pricing, and going-rate pricing

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Objectives

• After reading this chapter, you should be able
  to
• Identify the new product pricing strategies of
  market-skimming pricing and market-penetration
  pricing
• Understand how to apply pricing strategies for
  existing products, such as price bundling and
  price adjustment strategies
• Understand and be able to implement a revenue
  management system
• 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

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Price

• Price is the amount of money charged for a good
  or service
• Price is the only marketing mix element that
  generates revenueall others represent costs
• The most common pricing mistakes are
• Pricing that is too cost oriented
• Prices not revised to reflect changes in the
  market
• Pricing that ignores the rest of the marketing
  mix
• Prices that are not varied enough between
  different products and market segments

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Setting Prices

• Factors to consider when setting prices
• Internal factors
• Company marketing objectives
• Marketing mix strategy
• Costs
• Organizational considerations
• External factors
• Nature of the market
• Demand competition
• Other environmental elements (economy, resellers,
  government, etc.)

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Setting Prices - Internal Factors

• Marketing objectives
• Strategic decisions on market positioning will
  have a major influence on price
• The more clear the objectives, the easier it is
  to set prices
• Some common objectives include
• Survival
• Short-run profit maximization
• Market-share maximization
• Product-quality leadership

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Setting Prices - Internal Factors

• Marketing mix strategy
• Price must be coordinated with product design,
  distribution, and promotion decisions
• Promotional mix also influences pricing

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Setting Prices - Internal Factors

• Costs
• Cost sets the floor for the price a company can
  charge for its products or services
• The price has to cover the cost of producing,
  distributing, and promoting the product as well
  as a fair rate of return for investors
• Costs take two forms
• Fixed costs, also known as overhead, are costs
  that do not vary with the volume of sales
• Variable costs vary directly with production or
  sales volume
• Total costs are the sum of fixed and variable
  costs

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Setting Prices - Internal Factors

• Organizational considerations
• Revenue management
• Many hospitality firms (i.e., restaurants) must
  set prices and keep them stable
• Other travel and tourism firms have more
  flexibility in changing prices in response to
  changing market conditions and demand (hotels,
  airlines, theme parks, cruise lines, etc.)

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Setting Prices - External Factors

• Market and Demand
• Costs set minimum prices the market and
  consumer demand establish maximum prices that can
  be charged
• As in all market transactions, demanders weigh
  the benefits expected from a purchase with the
  cost, primarily price. If the expected cost
  exceeds the expected benefit, ceteris paribus,
  the purchase is forgone.

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Setting Prices - External Factors

• Market and Demand
• Price versus value
• Value is determined by the purchaser
• Consumers tend to look at the final price and
  then decide whether they received a good value
• Different market segments evaluate products
  differently
• Marketing managers must seek to provide their
  target markets with product attributes that the
  target market will value and eliminate those
  features that do not create value

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Setting Prices - External Factors

• The price-demand relationship

• A demand curve shows the relationship between
  price and quantity demanded, ceteris paribus
• There is an inverse relationship between price
  and quantity demanded - as price rises, quantity
  demanded tends to fall

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Setting Prices - External Factors

• The price-demand relationship

• If the ceteris paribus assumption is relaxed, the
  entire demand curve shifts to the right or left
• A greater or lesser quantity will be demanded in
  the market at the same price

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Setting Prices - External Factors

• Price Elasticity of Demand
• If the price elasticity of demand is greater than
  1, a 1 decrease in price will generate a greater
  than 1 increase in quantity demanded (demand is
  elastic)
• If the price elasticity of demand is less than 1,
  a 1 decrease in price will generate a less than
  1 increase in quantity demanded (demand is
  inelastic)
• If the price elasticity of demand 1, a 1
  decrease in price will create a 1 increase in
  quantity demanded

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Setting Prices - External Factors

• Price Elasticity of Demand
• Price elasticity of demand measures the
  sensitivity of the quantity demanded to a change
  in the price of a good or service
• The greater the elasticity of demand (the more
  elastic the demand), the greater will be the
  change in quantity demanded resulting from a
  small change in price
• The smaller the elasticity of demand (the more
  inelastic the demand) the smaller will be the
  impact on quantity demanded resulting from a
  small change in price

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Setting Prices - External Factors
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Setting Prices - External Factors

• What determines price elasticity of demand?
• Existence of substitutes the greater the
  availability of substitutes the more elastic the
  demand
• Share of budget the greater the share of a
  persons budget represented by the price, the
  more elastic will be the demand
• Time for adjustment the longer the time frame
  for seeking acceptable substitutes, the more
  elastic will be the demand

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Setting Prices - External Factors

• Factors affecting price sensitivity
• Unique value effect Picasso print, Pebble Beach
  Golf Club, Disney World
• Substitute awareness effect the greater the
  difficulty finding information about available
  substitutes, the more inelastic will be the
  demand
• Business expenditure effect when someone else
  pays the bill, the less price-sensitive the
  customer will be
• End-benefit effect related to share of budget
  determinant identifies price-sensitive markets
  and may create opportunities to overcome some
  pricing objectives

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Setting Prices - External Factors

• Factors affecting price sensitivity
• Total expenditure effect also related to share
  of budget determinant can be useful in selling
  lower priced products or cost savings to volume
  users
• Sunk investment effect purchasers who have an
  investment in products they currently use will be
  less likely to change due to a small change in
  price
• Price quality effect consumers tend to equate
  price with quality

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Setting Prices - External Factors

• Other external factors
• Competitors prices and offers
• Economic factors such as recessions, booms,
  changes in interest rates (inflation), changes in
  government regulations and taxes, etc.

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Pricing Approaches

• Product costs set a floor for the price consumer
  perceptions of the products value set the
  ceiling
• The ultimate objective of the hospitality manager
  is to maximize profits
• Maximizing profits is not the same as maximizing
  revenues thus, the discussion of price
  elasticity of demand
• The real value (for you, the hospitality manager)
  in understanding price elasticity is
  understanding what price to charge to maximize
  profits!

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Pricing Approaches

• We will consider three general pricing
  approaches
• The cost-based approach
• Cost-plus pricing
• Break-even analysis
• Target profit pricing
• The value-based approach
• Perceived value pricing
• The competition-based approach
• Going rate pricing

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Pricing Approaches

• Cost-based pricing
• Simplest method involves cost plus a standard
  percentage markup
• Works best when the variety of products and/or
  services is small and/or costs are similar
• Break-even analysis and target profit pricing
• Firm tries to determine price and minimum sales
  volume necessary to break even and generate zero
  profit

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Pricing Approaches

• Some firms use a variation called target profit
  pricing, which targets a certain return on
  investment

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Pricing Approaches

• Break-even Analysis

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Pricing Approaches

• Value-based Pricing
• Uses the buyers perceptions of value, not the
  sellers cost, as the key to pricing
• The marketer cannot design a product and
  marketing program and then set priceprice is
  considered with the other marketing mix variables
  as part of the process
• Requires more comprehensive marketing research
  and analysis

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Pricing Approaches

• Competition-based Pricing
• Going-rate pricing is the establishment of price
  based largely on the prices being charged by
  competitors with less attention paid to costs or
  demand

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Pricing Strategies

• New product pricing strategies
• Prestige pricing
• Market-skimming pricing
• Market-penetration pricing

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Pricing Strategies

• Existing-product pricing strategies
• Product-bundle pricing offering several
  products at a discounted price
• Used effectively by theme parks, tour
  wholesalers, casinos
• Two benefits to hospitality and travel
  organizations
• Reservation prices of buyers
• Can help hide price of core product from
  competition

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Pricing Strategies

• Price-adjustment strategies
• Discount pricing reducing prices for volume
  purchasers or changes in demand or time of
  purchase
• Discriminatory pricing pricing based on
  charging a different price to one segment than
  others
• To price-discriminate successfully, the following
  basic criteria must be met
• The different segments must be identifiable and
  able to be segregated
• No opportunity for resellers to participate
• Must pass cost/benefit analysis

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Pricing Strategies

• Revenue Management
• An effective use of discriminatory pricing
• Revenue management involves upselling,
  cross-selling, and analysis of profit margins
  and sales volume
• The concept behind revenue management is to
  manage revenue and inventory effectively by
  pricing differences based on the elasticity of
  demand for selected customer segments

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Pricing Strategies

• BAR Pricing - best available rate
• Last minute pricing use it or lose it!
• Psychological pricing considers the psychology
  of pricing in addition to the economics of
  pricing
• Promotional pricing
• Value pricing