Understanding Pricing Strategies in Hospitality and Tourism

2. Chapter 11 Pricing Products Pricing Strategies Factors Affecting Price

3. 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.

4. Airfare • Cruise package • Rack rate • Toll • Tariff • Tuition • Tip • Commission • Tax What Is Price? There are several terms for price in the hospitality and tourism industries. price the value placed on goods or services being exchanged Section 11.1

5. 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

6. Pricing Hospitality & Tourism A number of techniques are used to assign prices to hospitality and tourism products. Section 11.1

7. Pricing Hospitality & Tourism Pricing Techniques Airlines Use a class system Cruise lines Based on cabin size and location Hotels Based on room categories Car rentalcompanies Based on automobile type Restaurants Set à la carte or prix fix Section 11.1 7

8. Pricing Hospitality & Tourism Pricing Strategies Promotional pricing Psychological pricing Market-penetration pricing Breakeven pricing Cost-based pricing Discounting Section 11.1 8

9. 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

10. 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

11. Psychological Pricing The price of a product has a psychological impact on customers. prestige pricing pricing based on consumer perception Hotels and restaurants that focus on establishing a luxury image use prestige pricing. Section 11.1

12. 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

13. 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

14. Cost-Based Pricing One of the easiest methods used to set price is markup. markup the difference between the retail or wholesale price and the cost of an item cost-plus pricing pricing products by calculating all costs and expenses and adding desired profit When using cost-plus pricing, the goal is the same—to make a profit. Section 11.1

15. Discounting Discounting is a strategy used to reward consumer behavior, such as booking early, buying off-season, or buying in volume. Prices are adjusted by a certain percentage, or special rates are assigned to specific periods. Section 11.1

16. 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

17. 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

18. Name Your Price According to a study in 2003, 75 percent of travelers who use the Internet visit three or more Web sites before purchasing their tickets. Their decisions depend on price, not brand loyalty. Online travel sites, such as Priceline and Hotwire, take advantage of the price-minded travel consumer. Operating an e-tail business on an electronic channel—the Web—can be costly, due to design, delivery, returns, and operating expenses. Though Many larger dot-com companies crashed in the 1990’s, small stores like Harris Cyclery of West Newton, Massachusetts, actually increase sales using a basic Web site. Today, a third of Harris’s bicycle business rides in on the Web to get hard-to-find parts and personal service. Describe an e-business’s home page to your class after viewing one through marketingseries.glencoe.com. These name-your-price travel sites allow the user to request a certain price for a ticket, provide credit-card details, and then purchase the ticket. Online travel services are reaching millions of users. However, there are drawbacks for some consumers, such as no refunds for tickets and inconvenient flight times. For more information, go to marketingseries.glencoe.com. Section 11.1 18

19. 11.1 What is cost-plus pricing? How do hospitality and tourism businesses use discounting? Describe the concept of yield management. 1. 2. 3. Section 11.1

20. External • Market-demand issues • Competition • Economy • Environmental conditions • Internal • Company’s marketing objectives • Marketing mix External and Internal Factors External and internal factors can affect product-pricing decisions. Section 11.2

21. 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. demand the amount or quantity of goods and services that consumers are willing to buy at various prices Section 11.2

22. 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

23. External and Internal Factors To be competitive, a business must price its products lower than its competitors’ products to draw customers. Section 11.2

24. 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

25. 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

26. 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

27. 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

28. The Product Life Cycle and Pricing The stages of a product’s life cycle are: Maturity Decline Growth Introduction Section 11.2

29. Prices remain the same or may be lowered to attract customers. 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. Prices are high to cover the costs of production. The Product Life Cycle and Pricing Maturity Decline Growth Introduction Section 11.2 29

30. 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

31. 11.2 What is meant by elasticity of demand? What are some of the internal and external factors affecting price? What is the effect of the growth stage on price? 1. 2. 3. Section 11.2

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

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

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

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