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Chapter 11 Pricing Products Pricing Strategies Factors Affecting Price 2

Pricing Products Chapter Objectives Explain the concept of price. Identify typical pricing strategies. Describe how hospitality and tourism businesses use discounting. Describe the concept of supply and demand. Explain elasticity of demand. Explain how the product life cycle affects price. 3

Pricing Products What Is Price? There are several terms for price in the hospitality and tourism industries. Airfare Cruise package Rack rate Toll Tariff Section 11. 1 price the value placed on goods or services being exchanged Tuition Tip Commission Tax 4

Pricing Products What Is Price? Price is more than just the cost of an item. Price is also the value that the item holds for the consumer. Section 11. 1 5

Pricing Products Pricing Hospitality & Tourism A number of techniques are used to assign prices to hospitality and tourism products. Section 11. 1 6

Pricing Hospitality & Tourism Pricing Techniques Airlines Use a class system Cruise lines Based on cabin size and location Hotels Based on room categories Car rental companies Based on automobile type Restaurants Set à la carte or prix fix Section 11. 1 7

Pricing Hospitality & Tourism Pricing Strategies Promotional pricing Psychological pricing Market-penetration pricing Breakeven pricing Cost-based pricing Discounting Section 11. 1 8

Pricing Products Promotional Pricing Hospitality and tourism businesses use promotional pricing strategies to generate sales during traditionally slow periods. Losses incurred from lower-priced promotional items will be made up by purchases of other items. Section 11. 1 9

Pricing Products Promotional Pricing Lodging properties also use promotional pricing. Packaging several products together for one price adds value for the customer and creates a positive image for the business. Section 11. 1 10

Pricing Products Psychological Pricing The price of a product has a psychological impact on customers. prestige pricing based on consumer perception Hotels and restaurants that focus on establishing a luxury image use prestige pricing. Section 11. 1 11

Pricing Products Market-Penetration Pricing Market-penetration pricing happens when a company prices its products at or below cost just to enter the market and gain a market share quickly. Section 11. 1 12

Pricing Products Breakeven Pricing For breakeven pricing, a business determines the price of a product or service at which it will break even. To break even, the price must generate enough revenue to cover the costs and expenses of the product. Section 11. 1 13

Pricing Products Cost-Based Pricing One of the easiest methods used to set price is markup the difference between the retail or wholesale price and the cost of an item When using cost-plus pricing, the goal is the same—to make a profit. cost-plus pricing products by calculating all costs and expenses and adding desired profit Section 11. 1 14

Pricing Products Discounting is a strategy used to reward consumer behavior, such as booking early, buying offseason, or buying in volume. Prices are adjusted by a certain percentage, or special rates are assigned to specific periods. Section 11. 1 15

Pricing Products Special Pricing Strategies Price lining is selling all the products in a product line at specific price points. Bundle pricing is a strategy that involves selling several items as a package for a set price. Loss-leader pricing is pricing an item at cost or below cost to draw customers. Yield-management pricing is pricing items at different prices to maximize revenue when limited capacity is involved. Section 11. 1 16

Pricing Products Value, Price, and Strategy It is important to know the value of a product or service before pricing it. Value differs from one consumer to another. Section 11. 1 17

Pricing Products Name Your Price According to a study inbusiness on an electronic channel—the Operating an e-tail 2003, 75 percent of travelers who use the Web—can be or more Web sites before purchasing their Internet visit threecostly, due to design, delivery, returns, and operating decisions tickets. Their expenses. depend on price, not brand loyalty. Online travel sites, such as Priceline and Hotwire, take advantage of the Though Many larger dot-com price-minded travel consumer. companies crashed in the 1990’s, small stores like Harris Cyclery of West Newton, These name-your-price travel sites allow theusing to basic Web Massachusetts, actually increase sales user a request a certain price fora third ofprovide credit-card details, and then site. Today, a ticket, Harris’s bicycle business rides in on purchase the ticket. Online travel servicespersonal service. the Web to get hard-to-find parts and are reaching millions of users. However, there are drawbacks for some consumers, such as Describe an e-business’sinconvenient to your class after no refunds for tickets and home page flight times. viewing one through marketingseries. glencoe. com. For more information, go to marketingseries. glencoe. com. Section 11. 1 18

Pricing Products 11. 1 1. What is cost-plus pricing? 2. How do hospitality and tourism businesses use discounting? 3. Describe the concept of yield management. Section 11. 1 19

Pricing Products External and Internal Factors External and internal factors can affect product-pricing decisions. External • Market-demand issues • Competition • Economy • Environmental conditions Section 11. 2 Internal • Company’s marketing objectives • Marketing mix 20

Pricing Products External and Internal Factors If the supply of an item is limited, the price is usually higher. supply the amount or quantity of goods and services that producers provide at various prices How much product a company will sell is directly related to demand the amount or quantity of goods and services that consumers are willing to buy at various prices Section 11. 2 21

Pricing Products External and Internal Factors Fluctuating demand can be caused by seasonal changes. elasticity of demand the variation of consumer demand due to a change in price When demand increases because the price decreases, or vice versa, there is elasticity of demand. Section 11. 2 22

Pricing Products External and Internal Factors To be competitive, a business must price its products lower than its competitors’ products to draw customers. Section 11. 2 23

Pricing Products External and Internal Factors A business must consider the economic environment. Factors that affect pricing conditions include periods of recession and state and local taxes. Section 11. 2 24

Pricing Products External and Internal Factors Environmental conditions that affect pricing decisions and consumer demand include: War or threat of war Terrorist acts Bad weather Section 11. 2 25

Pricing Products External and Internal Factors A business must first look at the cost of doing business to determine price. To make a profit, a business must cover expenses in developing and delivering a product. Section 11. 2 26

Pricing Products Internal Factors Pricing decisions are made by senior management staff, the marketing or sales department, or by company policy. Factors such as the company’s marketing objectives and marketing mix must be considered for pricing to be effective. Section 11. 2 27

Pricing Products The Product Life Cycle and Pricing The stages of a product’s life cycle are: Maturity Growth Decline Introduction Section 11. 2 28

The Product Life Cycle and Pricing Prices remain the same or may be lowered to attract customers. Maturity Decline Growth Introduction Prices are high to cover the costs of production. Section 11. 2 Prices may have to be lowered to keep customers. Promotional efforts may increase. A company that continues to market a declining product will lose money. Product must be kept or dropped. 29

Pricing Products Prices Subject to Change Customers want the best value for their money, and businesses want to sell as much product as possible. When a product’s price is set, it should be reviewed regularly to determine if adjustments are necessary. Section 11. 2 30

Pricing Products 11. 2 1. What is meant by elasticity of demand? 2. What are some of the internal and external factors affecting price? 3. What is the effect of the growth stage on price? Section 11. 2 31

Pricing Products Checking Concepts 1. Define the term price. 2. Identify who decides if exchanging money for a product is worth the benefit. 3. List the typical pricing strategies. continued 3. Pricing the value 2. The consumer 1. Price is strategies include if decidespromotional placed on goods or pricing, exchanging money services being psychological is worth the exchanged. benefit pricing, of a good or valuemarketpenetration or service. pricing, breakeven pricing, cost-based pricing, discounting, and other special pricing strategies. 32

Pricing Products Checking Concepts 4. Give two examples of discounting in hospitality and tourism. 5. Explain consumer demand. 6. Describe how the economy may affect prices. continued 6. Demand is the 5. Discounts are 4. Economic conditions affect pricesthe amount or quantity offered in in many ways: During periods of of goods consumer hospitality and recession, servicesdecreases tourism industries spending that consumers early, for businesses may and booking are have to lower prices to willing off-season, buying to buy at keep buying in various prices. and customers. Inflation, rising interest volume. Examples rates, and other will vary. conditions economic influence pricing. 33

Pricing Products Checking Concepts 7. Explain how prices are affected during a product’s decline. Critical Thinking 8. Discuss adjusting prices according to environmental conditions. 8. During the and other 7. Bad weather decline adverse environmental stage of a product, conditions can prices may bea negatively affect lowered to keep travel/tourism customers buying company’s pricing. To provide incentives for the product. customers to travel, travel-related businesses may offer value-added packages or lower prices. 34

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