Chapter 12

Pricing
Products:
Pricing
Considerations,
Approaches,
and Strategy
©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition
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 “The real issue is value, not
price.”

-Robert T. Lindgren

©2006 Pearson Education, Inc. Marketing

Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
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Kotler,Bowen,
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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

Marketing
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for Hospitality
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and Tourism,
4th edition
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Kotler,Bowen,
Bowen,andandMakens
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

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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Kotler,Bowen,
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 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

Marketing
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for Hospitality
and Tourism,
and Tourism,
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 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

Marketing
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and Tourism,
4th edition
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 Factors to Consider
when Setting Prices

©2006 Pearson Education, Inc. Marketing

Marketing
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and Tourism,
4th edition
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 Internal Factors
• Marketing Objectives
– Survival
– Current Profit Maximization
– Market-Share Leadership
– Brad Equity Growth
– Product-Quality Leadership

©2006 Pearson Education, Inc. Marketing

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 Internal Factors
• Marketing Mix Strategy

• Costs
– Fixed vs. Variable Costs

• Organizational Considerations
©2006 Pearson Education, Inc. Marketing
Marketing
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and Tourism,
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Kotler,Bowen,
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 External Factors Affecting
Pricing Decisions
• Market and Demand

• Cross Selling and Upselling

• Consumer Perceptions of Price and

Value

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
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and Tourism,
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 External Factors Affecting
Pricing Decisions
• Analyzing the Price – Demand
Relationship

• Price Elasticity of Demand

• Factors Affecting Price Sensitivity

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
and Tourism,
and Tourism,
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Kotler,Bowen,
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 Price Elasticity of Demand

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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Kotler,Bowen,
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 Factors Affecting Price
Sensitivity
• Unique Value Effect

• Substitute Awareness Effect

• Business Expenditure Effect

©2006 Pearson Education, Inc. Marketing

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and Tourism,
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 Factors Affecting Price
Sensitivity
• End-Benefit Effect
• Total Expenditure Effect
• Sunk Investment Effect
• Price Quality Effect

©2006 Pearson Education, Inc. Marketing

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 General Pricing Approaches
• Cost-Based Pricing

• Break-Even Analysis and Target Profit Pricing

• Value-Based Pricing

• Competition-Based Pricing

©2006 Pearson Education, Inc. Marketing

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 Cost Based Pricing
Product
Product

Cost
Cost

Price
Price

Value
Value

Customers
Customers
©2006 Pearson Education, Inc. Marketing
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 Break-even

• 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

©2006 Pearson Education, Inc. Marketing

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for Hospitality
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 Break-even Analysis or Target Profit
Pricing

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
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4th edition
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 Value-based Pricing
Customer
Customer

Value
Value

Price
Price

Cost
Cost

Product
Product

©2006 Pearson Education, Inc. Marketing

Marketing
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 Competition-Based Pricing
Product

Cost

Price

Value

Customer
©2006 Pearson Education, Inc. Marketing
Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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 Pricing Strategies
• New-Product Pricing Strategies

• Existing-Product Pricing Strategies

• Psychological Pricing

• Promotional Pricing
©2006 Pearson Education, Inc. Marketing
Marketing
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 New-Product
Pricing Strategies
• Prestige Pricing

• Market-Skimming Pricing

• Market-Penetration Pricing

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
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 Setting Initial Product Prices
Market
Market Skimming
Skimming Market
Market Penetration
Penetration
> Setting a high price
> Setting a low price
for a new product to
for a new product in
skim maximum
order to attract a
revenues from the
large number of
target market.
guests.
> Results in fewer,
> Results in a larger
more profitable sales.
market share.
> Popular night club
> New Marriott
charges a high cover
charge

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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 Existing-Product
Pricing 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

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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 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

Marketing
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for Hospitality
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 Psychological Pricing
• Price-quality relationship

• Reference prices

• Rounding

• Length of the field

©2006 Pearson Education, Inc. Marketing
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 Promotional Pricing

• Temporary pricing of products below

list price and sometimes below cost

– Value Pricing

– Price Sensitivity Measurement

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
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 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

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
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

Marketing
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for Hospitality
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 Initiating Price Cuts

• Excess capacity

• Dominate market

• Increase market share

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
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 Initiating Price Increases

• Increase profits

• Cost inflation

• Excess demand

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
and Tourism,
and Tourism,
4th edition
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Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
Makens
 Reactions to Prices Changes

• Buyer’s reaction

• Competitor’s reaction

• Trade Ally’s reaction

©2006 Pearson Education, Inc. Marketing

Marketing
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for Hospitality
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and Tourism,
4th edition
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Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
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 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
Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition
Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
Makens
 Best Practices
• Boston Market
• Royal Caribbean Cruises revenue
management department
• La Colombe D’Or cross-selling
strategies

©2006 Pearson Education, Inc. Marketing

Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition
Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
Makens
 Key Terms
• Cost-plus pricing

• Cross-selling

• Discriminatory pricing

• Fixed costs

• Going-rate pricing
©2006 Pearson Education, Inc. Marketing
Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition
Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
Makens
 Key Terms
• Price
• Survival
• Upselling
• Value-based pricing
• Yield management/Revenue
management

©2006 Pearson Education, Inc. Marketing

Marketing
for Hospitality
for Hospitality
and Tourism,
and Tourism,
4th edition
4th edition
Upper Saddle River, NJ 07458 Kotler,
Kotler,Bowen,
Bowen,andandMakens
Makens