Marketing for Hospitality and Tourism

Seventh Edition

CHAPTER 11
Pricing:
Understanding and
Capturing Customer
Value

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 Learning Objectives

1. Outline the internal factors affecting

pricing decisions, especially marketing
objectives, marketing mix strategy,
costs, and organizational
considerations.

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 Learning Objectives (cont.)

2. Identify and define the external factors

affecting pricing decisions, including
the effects of the market and demand,
competition, and other environmental
elements.

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 Learning Objectives (cont.)

3. Contrast the differences in general

pricing approaches, and be able to
distinguish among cost-plus pricing,
target profit pricing, value-based
pricing, and going rate.
4. Identify the new product pricing
strategies of market-skimming pricing
and market-penetration pricing.

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 Learning Objectives (cont.)

5. Understand how to apply pricing

strategies for existing products, such
as price bundling and price-adjustment
strategies.
6. Understand and be able to implement
a revenue management system.

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 Learning Objectives (cont.)

7. 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

• Simply defined
– Price is the amount of money charged
for a product or service.
• Broadly defined
– Price is the sum of values consumers
exchange for the benefits of having or
using the product or service.

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Factors to Consider When Setting
Prices

Factors that
Internal Affect External
Factors Pricing Factors
Decisions

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 Internal Factors

Internal Factors

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 Marketing Objectives

Current
Market-Share
Survival Profit
Leadership
Maximization

Product-
Other
Quality
Objectives
Leadership

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 External Factors

The Nature of
Market & Demand

Consumer
Competition
Perceptions
of Price &
Value

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Figure 11–2 Two hypothetical demand schedules.

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Determinants of Price Elasticity

Buyers are The Product is

The Product is High in Quality,
Less Price
Unique Prestige or
Sensitive Exclusiveness
When:

Substitute Products
are Hard to Find

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Factors Affecting Price Sensitivity

Substitute Business
Unique Awareness Expenditure
Value Effect Effect Effect

End- Total Price

Hidden
Benefit Expenditure Quality
Fees
Effect Effect Effect

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 Approaches to Pricing

Cost-Base Break-Even
Pricing Pricing

Value-Based Competition-
Pricing Based Pricing

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New Product Pricing Strategies

Prestige
Pricing

Market- Market-
Penetration Skimming
Pricing Pricing

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Existing Product Pricing Strategies

Existing Price-
Product-
Product
Bundle Pricing Adjustment
Pricing Strategies Strategies

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Price-Adjustment Strategies

Discount Discriminatory Revenue

Pricing and Pricing Management
Allowances

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 Revenue Management

Dynamic
Bar Pricing
Pricing

Rate Parity Overbooking

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 Psychological Pricing

Price Endings

Promotional Value
Pricing Pricing

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 Price Changes

Initiating
Price
Changes

Price
Price Cuts Increases

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 Key Terms

• Cost-plus pricing
– Adding a standard markup to the cost of
the product
• Cross-selling
– The company's other products that are
sold to the guest

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 Key Terms (cont.)

• Discriminatory pricing
– Refers to segmentation of the market
and pricing differences based on price
elasticity characteristics of the segments
• Dynamic pricing
– Continually adjusting prices to meet the
characteristics and needs the
marketplace

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Marketing for Hospitality
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 Key Terms (cont.)

• Fixed costs
– Costs that do not vary with production
or sales level
• Going-rate pricing
– Setting price based largely on following
competitors' prices rather than on
company costs or demand

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Marketing for Hospitality
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 Key Terms (cont.)

• Price
– The amount of money charged for a
product or service, or the sum of the
values that consumers exchange for the
benefits of having or using the product
or service

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Marketing for Hospitality
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 Key Terms (cont.)

• Revenue management
– Forecasting demand to optimize profit.
Demand is managed by adjusting price.
Fences are often built to keep all
customers from taking advantage of
lower prices. For example, typical fences
include making a reservation at least
two weeks in advance or staying over a
Saturday night.

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 Key Terms (cont.)

• Survival
– A technique used when a company's or
business unit's sales slump, creating a
loss that threatens its existence.
Because the capacity of a hotel or
restaurant is fixed, survival often
involves cutting prices to increase
demand and cash flow. This can disrupt
the market until the firm goes out of
business or the economy improves.
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 Key Terms (cont.)

• Total costs
– Costs that are the sum of the fixed and
variable costs for any given level of
production

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 Key Terms (cont.)

• Upselling
– Training sales and reservation
employees to offer continuously a
higher-priced product that will better
meet the customers' needs, rather than
settling for the lowest price
• Value-based pricing
– Uses the buyer's perceptions of value,
not the seller's cost, as the key to
pricing
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