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Chapter 12

Pricing Products: Pricing Considerations, Approaches, and Strategy

There are two fools in every market; one asks too little, one asks too much.
Russian Proverb



Definition: The amount of money charged for a product or service. Most flexible element of marketing mix Attitudes hard to change Price is dynamic because of environmental influences Gets us into the most trouble
Charging too much chases away potential customers Charging too little leave company in a poor position

Factors to Consider when Setting Prices

Internal Factors

Pricing Decisions

External Factors

Internal Factors Affecting Pricing Decisions

Marketing Objectives Marketing-Mix* Strategy Costs Organizational Considerations

Marketing Objectives that Affect Pricing Decisions

Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business.

Current Profit Maximization

Marketing Objectives

Choose the Price that Produces the Maximum Current Profit, Cash Flow or ROI.

Market Share Leadership

Low as Possible Prices to Become the Market Share Leader.

Product Quality Leadership

High Prices to Cover Higher Quality and Guest Service Levels

Marketing Mix Strategy

Marketing Mix Variables Affecting Pricing Decisions

Companies Will Consider Price Along With All the Other Marketing-Mix Elements When Developing the Marketing Program.

Price Must be Coordinated With:

Product Design

Non-Price Factors

Marketing-Mix Strategy

Distribution Channels

Promotion Costs

Costs, Effecting Pricing Decisions

Fixed Costs (Overhead)
Costs that dont vary with sales or production levels. Executive Salaries Rent Insurance

Variable Costs
Costs that do vary directly with the level of production. Raw Materials

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

Organizational Considerations Affecting Pricing

Management must decide who within the organization will set prices
Small companies Top management Large companies Corporate or Regional Managers

Managements Responsibility

Yield (Revenue) Management Applications

External Factors
Market and Demand
Costs set lower limits of prices Market and demand set upper limits

Marketers must understand the relationship between price and demand for a product

External Factors
Cross Selling and Upselling
Cross selling
When the company promotes & sells other products to the guests Example: Room service, fax, or retail products

Occurs through training or sales reservations employees to suggest a higher priced product Examples: Offering after dinner coffee

External Factors
Consumer Perceptions of Price and Value

In the end, it is the consumer who decides whether a products price is right. Pricing decisions must be buyer oriented Good pricing begins with analyzing consumer needs Value is what compels the customer to buy. Sopricing decisions require an: Awareness of the target market. A customer-oriented approach. A recognition of the differences in buyers perceptions.

External Factors
Analyzing the Price Demand Relationship

Demand & Price are inversely related. The demand curve for prestige goods is usually the opposite of a typical demand curve. What are some factors that affect demand along with price? How do these nonprice factors affect the demand curve?

External Factors
Analyzing the Price Demand Relationship

Chapter 12: Figure 12-4: Inelastic and elastic demand

External Factors
Price Elasticity of Demand

If demand hardly varies with a small change in price, we say that demand is inelastic.

If demand changes greatly, we say that the demand is elastic.

Buyers are less price sensitive when the product is unique or when it is high in quality, prestige or exclusiveness.

External Factors
Factors That Affect Price Sensitivity

The Unique Value Effect The Substitute Awareness Effect Business Expenditure Effect The End-Benefit EndEffect

The Total Expenditure Effect The Shared Cost Effect The Sunk Investment Effect The Price Quality Effect

External Factors
Competitors Prices & Offers
 A hotels salesperson must learn the price, quality, and features of each competitors offer  When competitors prices are known, this information can be used as a starting point for your own pricing & position yourself accordingly.

External Factors
Other External Elements
 Inflation  Economic boom or recession,  Interest rates & the birth of new technology are examples of macroenvironmental factors that affect pricing strategies.

General Pricing Approaches


Cost Based Pricing





General Pricing Approaches

Cost - Based Pricing
*** Product costs set a floor for the price ***

Cost Percentage

Adding a standard markup to the cost 40 + 15% = 46 Cost as a percentage of selling price
Cost = 40 percent of sales price


Break Break-Even or Target Profit Rule-of-Thumb (1 per 1000) Rule-of-

General Pricing Approaches

Example : Break Even Analysis

BE= Fixed Costs/Contribution (SP-VC) (SPExample : Meal SP = 20, VC = 8 Contribution Margin (SP-VC)= 12 (SPFixed costs are 2400 a day BE=2400/12 = 200 Need to sell 200 meals @ 20 to break-even breakVC = 40%, contribution margin % = 60% BE = 2400/.6 = 4000

Chapter 12: Figure 12-5: Break-even chart for determining target price

General Pricing Approaches

ValueValue-Based Pricing
Uses the buyers perceptions of value Setting price to match the perceived value Consider the various prices different restaurants charge for the same items

CompetitionCompetition-Based Pricing (Going-Rate (GoingPricing)

Same, more or less than the major competitors Charge what the traffic will bear

Pricing Strategies
New Products

Prestige Pricing
A hotel or restaurant wanting to position themselves as luxurious & elegant enters the market with a high price.

Marketing Penetration
Companies set a low initial price to penetrate the market quickly & deeply. Works best when:  The market is highly price sensitive.  The low price minimizes competition.

Marketing Skimming
When the market is pricepriceinsensitive, a firm will set high prices, taking advantage of the market.

Pricing Strategies
Existing Products Pricing Strategies
Product-Bundle Pricing

Sellers use bundling to combine several of their products & offer them at a reduced price. This is a common practice to induce buyers of products who otherwise might not buy the single product. Hotels, cruise lines, car rental companies or special attractions can be found packaged.

Existing Products Pricing Strategies

Price-Adjustment Strategies

Volume Discounts
Special rates for customers who are likely to purchase a large quantity of hotel rooms Free room for every 20 room nights book for associations or corporate meeting planners.

Discounts based on Time of Purchase

Price reduction when the demand is lower Hotels, motels and airlines offer seasonal discounts Early bird specials Senior citizen discounts between (2:00 to 6:00 PM)

Existing Products Pricing Strategies

PricePrice-Adjustment Strategies Discriminatory Pricing
Refers to segmentation and pricing differences based on price elasticity. Same product or service at two or more prices. Use different prices for price sensitive and not sensitive customers, such as coupon users, retired people, business travelers etc. Price discrimination is a useful tool for smoothing demand, bringing additional revenue and profits.

Existing Products Pricing Strategies

PricePrice-Adjustment Strategies

Yield Management (Revenue Management)

Managing capacity by maximizing the revenue based on elasticity of demand for selected customer segments. Yield Management System Software In some YM systems, customers staying a longer period can be charged more than those staying only a few nights.

Last Minute Pricing

Unsold inventory creates a market for last-minute lastinventory selling

Existing Products Pricing Strategies

Pricing Adjustment Strategies

Psychological Pricing
Consider the psychology of prices, not economics Reference prices buyers carry in their minds Popular products often have reference prices, such as a cup of coffee, a strip steak, or a hamburger. Uses aspects such as prestige, reference prices and round figures. .99 ; 1.99; 9.99 cent pricing

Existing Products Pricing Strategies

Pricing Adjustment Strategies

Promotional Pricing
(Below list price, or below cost price in special days, such

as Valentines Day, Mothers Day)  Fast food restaurants will price a few products as loss leader to attract customers, such as a coffee for 25 cents, or 3 hamburgers for a dollars  Hotels may offer special promotional rates, such as Valentines weekend special.  In casino hotels the main product is gaming, so they offer very low room prices to customers in low seasons.

Existing Products Pricing Strategies

Pricing Adjustment Strategies

Value Pricing: Everyday Low Prices (EDLP)

 Offering a price below competitors on a permanent basis.  Anytime a product/service is purchased, at any price, the buyer must have perceived value in that product.  Value pricing is risky if a company does not have the ability to cut costs significantly.  A marketing strategy Taco Bell, Southwest Airlines