COLLEGE OF COMMERCE

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MODULE 5 PACKET
THM 6 – TOURISM AND HOSPITALITY MARKETING
MODULE 5 OVERVIEW:

Welcome to Module 5– PRICING IN TOURISM!

LECTURE DISCUSSIONS
5.1 GENERAL PRICING APPROACHES
WHAT IS PRICE?
Price is the amount that the
customer pays for the products; the
amount of money exchanged for
something of value. Price makes
products available to the target
market and reflects the value of the
product. It is the sum of values which
consumers exchange for the benefit
of having or using the product. It goes
by several other names such as rent,
professional fee, room rates, tuition,
fees, etc.

There are a few terms that need to be defined in order to easily understand concepts in
pricing. They are as follows:

Key Concepts Relevant to Pricing

1. Sales – total amount that a company gets based on quantity sold multiplied with selling price.
2. Revenue – total income/profit that the company keeps after all the expenses have been paid
for Simply put: sales minus expense equals revenue.

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3. Fixed Costs- costs incurred due to the operations of the business; do not fluctuate with
volume of sales.
4. Profit Margin- level of income that is desired by the company. This usually comes out in
percentage form as the amount of mark-up placed on top of the fixed and variable cost of a
product.
5. Variable Costs- costs that vary based on volume or quantity. Bigger quantities of the same
order will cost less than smaller quantities of the same specifications. This concept is
commonly known as economies of scale.
6. Break-even Point- the point wherein total cost is equal to total revenue. A company incurs a
loss if cost exceeds revenue and generates an income when revenue exceeds costs. It is
important to know the break-even point especially for a new product, so that it is clear to
management at what volume of sales is the company starting to earn an income.

Key Factors Affecting Price

1. Costs
The setting of prices should incorporate a
calculation of how much it costs the organization to
produce the product or the service (Hudson 2008).
Both variable and fixed costs should be included in the
price.

2. Organizational and Marketing Objectives

Companies get into business for survival, profit maximization, high rate of return of investment,
brand equity growth, and an adequate share of the market. Some organizations such as
foundations and national parks may set low fees mainly because they are not commercial in
nature.
3. Other Marketing Mix Variables
Price is affected by the interplay of the other variables in the marketing mix. High prices should
mean higher quality products and services, elite distribution channels, and more personalized
promotions. For products priced in the lower bracket, expectations on product and service

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quality, distribution channels, and promotional strategies need to be tempered relative to the
product's price.
4. Buyer Perceptions of Value and Price
Buyers have different perceptions of
product quality and value based on
branding and image. Price affects buyer
perceptions. The higher the price, the
higher the buyer's expectations of quality
are.
Image Source: https://www.thebalance.com/consumer-price-index-cpi-index-definition-and-calculation-3305735

5. Competition
Knowing what competition offers is an
important factor in the success of a
business. In highly price-sensitive markets,
companies try to win customers by setting
a lower price than that of competition.
Image Source: https://theregister.co.nz/2016/03/17/recent-price-competition-likely-continue/

6. Government Regulations and Taxes

Some government regulations and taxes can either cause a company to maintain its low prices
or increase its prices. There may be a government regulation or ordinance that prohibits a
company from increasing its prices. However, taxes and other governmental fees may be
charged by some local governments and prices should be increased to cover for such additional
expenses.

7. Nature of the Market and Demand

Tourism caters to a highly segmented marketplace. Pricing needs to address the differences in
the nature of such markets as well as the differences in the demand of each market segment.
8. Pricing in Different Markets
Different markets have different levels of price sensitivity. Hence, a one- price-fits-all market
would not be recommended. 9. Price Elasticity of Demand

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Price increases or decreases normally have an effect on the level of sales of the product. The
concept of elasticity of demand is shown in this formula: Price elasticity of demand = % change in
quantity demanded
% change in price
If demand increases when price decreases, then the product is elastic. If demand stays the
same even if there is a price cut, the product is inelastic. In the tourism industry, as prices fall,
demand increases; hence, products are elastic. Consumer demand is highly sensitive to price
changes. Price elasticity may be affected by customer's perception of product uniqueness,
availability of substitutes, and how consumers budget.
10. Other Environmental Factors

Other environmental factors that may be beyond the company's control can affect pricing. These
factors may include, but are not limited to, political instability, calamities, environmental issues,
etc.
Image Source: http://www.tempo.com.ph/2021/03/22/weekly-oil-price-hikes-profit-making-or-genuine-market-dynamics/

GENERAL PRICING APPROACHES

Aside from pricing strategies, this chapter also discusses some general pricing approaches that
will help marketers in determining the "right" price.
1. Cost-based Pricing. Cost-based pricing is an approach that aims to cover costs and make a
profit. When using cost-based pricing, the fixed and variable costs are computed and a mark-
up is added. This kind of pricing strategy, however, does not look into the price sensitivity of
its consumers nor the pricing scheme of its competitors.
2. Break-even Analysis and Target Profit Pricing. This kind of pricing approach is when price
is determined using break-even price and projecting a target profit.
3. Buyer-based Pricing (Value-based). Some companies base their prices on the product's
value as perceived by the consumers. Perceived-value pricing buyer's perceptions of value

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and not the seller's cost as the key to pricing (Kotler et al. 2010). The question marketer's
seek an answer to is, "At what price are buyers uses the willing to buy my product?"
4. Competition-based pricing. This approach looks at what price competitors are putting on
their products and services. Companies base their price mainly against the price pegged by
their main competitors. Less attention is paid on costs, margins, and demand.

All these pricing strategies are valid. Because of the changing market environments and high
degree of product perishability, successful pricing should be more scientifically determined.
Having the right price means that the price is acceptable to the buyers, captures the projected
market share, covers all fixed and variable costs, and provides an acceptable margin of profit.

5.2 PRICING STRATEGIES

Pricing strategies are ways by which tourism businesses offer products and services at the
"right" price. Some considerations in coming up with the right price include the stage in the
product life cycle, market demand, competition, and company objectives. For new product
pricing, strategies that can be employed include prestige pricing, market skimming, and market
penetration pricing.

Prestige Pricing

Image Source: https://travelprnews.com/the-pavilions-hotels-resorts-excited-to-announce-first-luxury-resort-brand-in-el-nido-palawan-island-philippines-

9326000/travel-press-release/2020/07/30/

Prestige pricing is used when the product or service is positioned to be luxurious and elegant.
Higher price (compared to prevailing market prices) projects that the product is high-end and
prestigious. This strategy seeks to attract a certain type of clientele and project a degree of

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exclusivity. By its high price, it seeks to position itself as elite and hopes to target the Class A
market.

For example, El Nido Resorts caters to the Class A market. It is a classic example of a
resort which uses prestige pricing with rates for a villa, pegged at P30,500+ per night for a
maximum of three persons.

Market Skimming Pricing

Image Source: https://www.investasian.com/2020/03/24/philippine-property-developers/

Companies employ the market skimming pricing strategy when the market is price insensitive.
Consumers become price insensitive when demand is high and supply is low. Hence, products
and services that have high demand usually set higher prices to achieve higher profit margins.
This is an effective short-term policy since competition can easily come in and provide more
supply.

For example, diving in the Philippines is considered to be a niche area in tourism, and the rates
when it started out were presumably very high. Nowadays, since the proliferation of a lot of dive
resorts and schools, diving has become more affordable.

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Market Penetration Pricing

Image Source: https://www.agoda.com/paradise-island-park-beach-resort/hotel/davao-city-ph.html?cid=1844104

Market penetration pricing is used when setting a low initial selling price to penetrate the market
quickly and to attract many buyers for a large market share. Some start-up companies use this
strategy since they have lower operating costs than bigger companies. It is an aggressive way of
attracting consumers to try your product because it is cheaper than the existing products in the
market. However, quality should be at par with competition to ensure repeat sales.

For example, Paradise Island Park & Beach Resort in Samal Island, Davao maintains relatively
lower rates compared to the more expensive Pearl Farm Resort, which is also on the island. This
is a strategy to attract a wider segment of the market. Pricing that considers market behavior and
demand include product bundling, volume discounts, discounts based on time of purchase, and
discriminatory pricing.

Product Bundling Pricing

Product bundling is a strategy used to attract buyers to
purchase because of the reduced rate of the bundle compared
to the total cost of the items if purchased individually. The
sellers using product-bundle pricing combine several of their
products and offer the bundle at a reduced price. A lot of fast-
food chains put together their burger, fries, and drinks into a
meal with reduced prices. This kind of strategy also attracts
customers to purchase a product that they may not purchase if

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it is not part of the bundle. Offering hotel rooms with breakfast and entertainment during
weekends is another example of a product bundle.

For example, Club Punta Fuego in Batangas has summer promos that bundle together different
activities for an attractive price. The amount is cheaper than if these activities are availed
individually.
Image Source: https://www.pinterest.ph/pin/507710557961937521/

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Volume Discounts
Volume discounts are rates given to frequent or high volume users to attract them to purchase
the products. Some companies have a demand for a product in large quantities through a single
purchase or for a continuous period of time throughout
the year. Hotels have special rates to attract customers
who are likely to purchase a large quantity of hotel
rooms (Kotler et al. 2010); hence, booking ten rooms
to earn one free room has become a popular way to
attract volume purchases. There are also accounts
which only book in small quantities but over a long
period of time. Such purchases are also given huge
discounts.
Hotels have special rates for long-staying guests.

Discounts Based on Time of Purchase

This strategy addresses the seasonality aspect of the tourism product. A price reduction is given
to buyers who purchase services out of season when the demand is lower (Kotler et al. 2010) or
when purchased way ahead of time. Early bird discounts and off-peak season discounts are
examples of this kind of strategy. Airline tickets use this kind of strategy wherein travelers can
purchase one-peso fares. Some will be paying discounted fares since purchase was made with
sufficient lead time while others would be paying the full fare. The pricing was totally dependent
on when they purchased their tickets.

For example, Cebu Pacific occasionally comes out with "piso fare" seat sales to entice the
market to buy air tickets during lean times of the year.
Image Source: https://wanderera.com/piso-fare-
andpromos/

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Discriminatory Pricing
Kotter et al. (2010) define discriminatory pricing as the
segmentation of the market and pricing differences based
on price elasticity characteristics of the segments. In this
strategy, the company sells a product or service at two or
more prices, although the difference in price is not based
on differences in cost but tries to maximize the amount
that each customer pays. This addresses the highly
pricesensitive market segment. Hotels have a special local
resident rate wherein a hotel room, which can be sold to a
foreigner at $100.00, is sold to a local resident for only
P2,000.00.
Image Source: https://www.ideastream.org/news/has-the-covid-19-pandemic-killed-buffets

Buffet restaurants also offer discriminatory pricing. They offer the same array of food choices
but with different rates for seniors, kids, and adults.
Other pricing strategies, which may influence purchase, include psychological pricing and
promotional pricing.
Psychological Pricing
Psychological aspects like prestige, reference prices,
round figures, and ignoring end figures are used in pricing.
This strategy plays on the psychology of the consumer.
The consumer defines the perceived value of the product.
The use of P999.00 instead of P1,000.00 gives an
impression that the price is less than one thousand pesos

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when it actually is just P1.00 less. In fact, the P1.00 is not of much value but it makes a lot of
difference in the mind of the buyer.
Image Source: https://mpk732t12016clusterb.wordpress.com/2016/05/02/psychology-behind-pricingsecret-to-sell-more/

Promotional Pricing
Promotional pricing offers discounts and short-term
incentives especially during the introductory stage of the
product or during special activities such as anniversaries
or festivals. It gives the guests a reason to avail the
product and promotes a positive image of the property.
This kind of pricing, however, may backfire on the product
since users might just wait for another promotional offer
for them to buy again.
Image Source: https://blog.udemy.com/promotional-pricing/

5.3 REVENUE MANAGEMENT

Revenue management is a systematic approach to
matching demand for services with an appropriate supply
in order to maximize revenues (Shoemaker et al. 2007).
With advancements in technology, revenue management
has become more scientific and less gut feel-based. Most
Image Source: https://www.hotelmanagement.net/revenue-management/from-revenue-manager-to-hotel-leader hospitality establishments are
able to juggle all bookings and rate quotations in a way that maximum revenue potential is
achieved at any given night. It plans out the ideal business mix (types of clients vary from
different industries, group size, length of stay, etc.) and adjusts rates on an ongoing basis as
reservations materialize.
.

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Shoemaker et al. (2007) cite that revenue management is beneficial to the hotel and air-
line industry in particular because of the following reasons:
1. Product is perishable; thus, it is better to sell the room/seat at a low price than have it empty.
2. Capacity is fixed daily. In no way can rooms or seats be increased at a specific day to meet
demand.
3. Demand fluctuates and is uncertain depending on days of the week and seasons of the year.
4. Different market segments have different lead times for purchase. Conventions and
conferences have longer preparation time that can span from anywhere between one year to
three years, while a business traveler can book even a week prior to travel.
5. Flexibility in pricing hotel rooms and airline seats. The market accepts that hotel room and
airline seat rates may vary depending on purchase lead time and seasonality.

Hence, a thorough knowledge of one's market segments, their purchase behavior, travel
motivations, and price acceptable to each market is important to ensure business success.
Forecasting demand is also crucial to the success of managing revenue.

Kotler et al. (2010) discuss a similar term known as yield management. Yield management is a
form of discriminatory pricing wherein some of the market segments pay higher or lower prices
than other tourists for the same tourism products and services in order to ensure optimal yield
from the available inventory. It aims to manage revenue by controlling prices and capacity. Yield
management addresses the perishability of tourism products and services. It entails a thorough
knowledge of the different market segments, demand, and booking patterns as well as price
sensitivity of each market segment. It enables organizations to sell possibly vacant rooms at
reduced rates during off-peak but also maximizes its revenue during peak periods.

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Market Recovery through Price

Image Source: https://www.bbc.com/news/world-asia-china-21680682

Some destinations that have lost market share through different external and internal reasons
may recover from their loss through price combined with effective promotions. Price can
represent a significant incentive to encourage visitors to offset their fears and to return (Hsu et
al. 2008).

During the outbreak of SARS in Hongkong, Cathay Pacific launched the use of a discount card
"Yum Sing" to encourage visitors to continue using Cathay Pacific, which is the major carrier to
Hong Kong. Thailand also launched price-discounted packages after the Tsunami tragedy.

Dealing with Price Changes

Know when to initiate a price cut or a price increase. When does a company change its prices?
Companies normally adopt a strategy that works well with their company. Companies need to be
careful to employ price cuts because doing so might lead to a price war where all the market
players are affected negatively. One major reason to cut prices is when there is excess capacity
or inventory. Despite promotional efforts, product improvements and better distribution systems,
a company may resort to lowering its prices in the hope that sales volume will increase. Another
reason for cutting price is to gain a higher market share. Amidst stiff competition, companies
may choose to reduce its price or come up with a lower market price than competitors with the
intention of gaining revenue through increase in volume.

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To illustrate the concept further, let's say a spa and wellness place offers massage at
P400.00/hour and has an average of 100 customers a day for a gross sale of P40,000.00 a day.
Its competitors may be offering its services for P350.00. In order to get a higher market share,
decide to bring down its rates to P300.00 and recover the P100.00-peso price the spa may
differential by acquiring more customers availing of their services. If the price cut would result to
doubling the volume of customers who avail of the services (by eating up market share of
customers, the lower prices may result to more frequent consumption). The gross sales would
be P60,000.00 a day (P300.00 multiplied by 200 customers a day). Hence, the P20,000.00
increase in sales was due to increased market share gained by cutting prices.

Image Source: https://nobullmarketing.com.au/how-to-communicate-a-price-increase/

Price increases, on the other

hand, become inevitable mainly
due to inflation. A price increase
should also be perceived by its
customers as justified. Customer
acceptance is crucial
in implementing a price
increase. Increasing prices should be timed strategically. Increase in food costs may be
acceptable especially when media attention is centered on the rising costs of food in the market.
Another good reason to increase prices is when minimum wage is increased or electricity costs
are rocketing.

Price increases are usually less welcomed than price cuts by customers. Customer perception
of the product plays a big role in the buyer's acceptance of price changes. Some price increases
can be viewed positively as a result of maintaining product quality. Price cuts may sometimes be
viewed negatively as it may imply poor quality of food or service. Competitors will also react to
price changes. Since price can easily be matched by competitors, a firm that lowers its price and
has it matched by competition loses both its competitive advantage and profit (Kotler 2010).

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Demand-based pricing
The principle is simple, driven by the demand-based pricing theory. The new pricing model (or
algorithm) takes into consideration the hotel's historical data, guest input, and level of
demanding order to propose the optimal price per day and per booking period (or lead time).
First, Accor Hotels launched a major survey with 40,000 respondents in 17 countries to assess
the price elasticity of demand. Through conjoint analysis, Accor Hotels teams were able to
assess guests' willingness to pay as well as optimal price range (or "price corridors") for its
brands. For example, in Brazil, for one night in an economy hotel, guests are willing to pay a rate
from €40 to €70 (price "corridor"). In addition, an optimal demand-based price is defined for each
day to maximize the RevPAR (revenue per available room = occupancy x price of the hotel) by
using extensive historical data from hotels.
As a result, a pricing algorithm was designed by the Accor Hotels data scientist team to
recommend prices per date of stay, level of demand, and lead time. The prices may vary every
day and several times for the same date. This is called dynamic pricing, which allows continuous
pricing adjustment depending on the level of demand.
The hotel prices change when calculated "triggers" are achieved: pick-up of the demand
(or level of the occupancy), the day before arrival. The number of price changes for a given
staying date depend on the dynamism of the market and the expertise of the revenue manager.
In other words, the more the market is dynamic and competitive, the greater the expertise of the
RM, the greater the number of changes in prices. We can see some hotels changing their prices
dozens of times for the same date of stay. Is this efficient and does that bring value? For
economy hotels, a maximum of five price changes for the same date of stay is already enough. It
is key to keep it simple both for quests and for the hotel staff.
Let's take some examples of possible recommendations to understand better the
algorithm principle. We are in a business-oriented city during the week end. The demand is low
and the elasticity is high, due to significant competition on the market. The pricing algorithm will
recommend lower rates to the hotel in order to get more bookings and increase its occupancy
rate.

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On the contrary, we were in Rio during Olympic Games where the demand was very high.
Guests were struggling to find available rooms and the hotels would be full. The elasticity was
low. The hotel had an opportunity to maximize its RevPAR through higher prices without
threatening its occupancy rate. The correlation between occupancy and price is strong.
Therefore, the hotel pricing strategy must be based on the understanding of this relationship.

Solution and performances

As of now, the demand-based pricing solution SMART pricing has been deployed in
1,000 Accor Hotel properties worldwide.
Revenue managers steer the solution recommendations, and integrate market and competition
price intelligence to make the right decisions. After less than six months, the results are positive

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with an average 5% increase in RevPAR, mainly due to a bolder pricing strategy and higher
occupancy rates. Beyond the solution and the associated performance, it is essential to support
the teams and the customers to make a shift from a static to a dynamic pricing model. It is
necessary to explain over and over again why the price is dynamic to make sure that the hotel
team members feel confident about the proposed pricing and to avoid any misperception of the
pricing model being considered unfair by the guests.
Source: Agnès Roquefort, Senior VP Global RM, Pricing and Analytics, Data and RM Department, Accor Hotels.

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