Chapter 11
Pricing Products:
Pricing Considerations, Approaches,
and Strategy
Objectives
• Outline the internal factors affecting pricing
decisions, especially marketing objectives, marketing
mix strategy, costs, and organizational
considerations.
• Identify and define external factors affecting pricing
decisions, including effects of market & demand,
competition, and other environmental elements.
• Contrast the differences in general pricing
approaches, and be able to distinguish among cost
plus, target profit pricing, value-based pricing, and
going rate.
Topics
1. Factors affect Price – Internal and External
2. General Price Approach
3. Pricing Strategies: New Product Pricing and
Existing Product Pricing
4. Psychological Pricing
Price
• Price is the amount of money charged for a
product. It is the only marketing mix
element that produces revenue.
• More broadly, price is the sum of the
values consumers exchange for the benefits
of having or using the product or service.
Factors to consider when setting
prices
Internal
InternalFactors
Factors((44Factors
Factors))
Pricing
Pricing
Decisions
Decisions
External
ExternalFactors
Factors(3
(3Factors)
Factors)
Figure 1, p 316 *** Factors affect Price
Figure 11-1 Factors affecting price decisions.
Internal Factors Affecting Pricing
Decisions
1.Marketing
Objectives
2.Marketing-Mix
Strategy
3.Costs
4.Organizational
Considerations
1. Marketing Objectives that Affect
Pricing Decisions ( continue ) p 316-317
Survival
Survival
Survival
Survival
Low Prices just only to Cover Variable
Low Prices
Low just only to Cover Variable
LowPrices
Pricesto
toCover
Costs
Cover
Costs
Variable
and
Variable
and
Costs
Costsand
and
Some
Some Fixed Costs to Stay in Business.
SomeFixed
Some FixedCosts
Fixed Coststo
Costs toStay
to Stayin
Stay inBusiness.
in Business.
Business.
Current
CurrentProfit
ProfitMaximization
Maximization
Choose
Choosethe
thePrice
Pricethat
thatProduces
Producesthe
the
Marketing
Marketing Maximum
Maximum Current Profit, Cash Flow orROI.
Current Profit, Cash Flow or ROI.
Objectives Market
MarketShare
ShareLeadership
Leadership
Objectives
Low
LowPrices
Pricesas
asPossible
Possibleto
toBecome
Become
the Market Share Leader.
the Market Share Leader.
Product
ProductQuality
QualityLeadership
Leadership
High
HighPrices
Pricesto
toCover
CoverHigher
Higher
Quality
Quality and Guest ServiceLevels
and Guest Service Levels
2. Marketing Mix Variables that Affect 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
ProductDesign
Design
Non-Price Marketing-Mix
Non-Price Strategy Distribution
Factors Distribution
Factors
Promotion
Promotion
3. Types of Cost Factors that Effect Pricing Decisions
Costs set the floor for the price company can charge
For its products. Costs take two forms: fixed costs and variable costs.
Fixed
Fixed Costs
Costs Variable
Variable Costs
Costs
(Overhead)
(Overhead)
Costs
Coststhat
thatdon’t
don’t Costs
Coststhat
thatdo
dovary
vary
vary
vary with salesor
with sales or directly with the
directly with the
production
productionlevels.
levels. level
levelof
ofproduction.
production.
Eg.
Eg. Eg.
Eg.
Executive
ExecutiveSalaries
Salaries Raw
Rawmaterials
materials
Rent
Rent
Total
TotalCosts
Costs
Sum
Sumof
ofthe
theFixed
Fixedand
andVariable
VariableCosts
Costsfor
foraaGiven
Given
Level
Levelof
ofProduction
Production
4. Organizational Considerations That Effect
Pricing Decisions
Who
Who sets
sets prices?
prices?
In
Insmall
smallcompanies:
companies:top
topmanagement,
management,InInlarge
large
companies:
companies:corporate
corporatedepartment.
department.However,
However,
Many
Manyhospitality
hospitalityand
andtravel
travelcompanies
companiesnow
now
use
userevenue
revenuemanagement
managementdepartments
departments
External Factors Affecting Pricing
Decision
1. The market and demand p 320
While costs set the lower limits of prices, the
market and demand set the upper limit.
Before setting prices, a marketer must understand
the relationship between price & demand for a product. p
320-321
1.1 Cross Selling: When the company promotes and sells other
products (side orders) to take with main product to the
guest.
1.2 Upselling: Occurs through training of sales and reservation
to offer a higher price product.
Consumer Perceptions of Price
and Value
• When setting the price management must
consider how consumers perceive price and
the ways that these perceptions affect
consumers’ buying decision.
Analyzing the price-demand
relationship p 322
• Each price leads to a different level of demand.
– the demand curve shows the relationship
between price charged & resulting demand
Figure 11-2 Two hypothetical demand schedules.
Price Elasticity of Demand p 323
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
Price
P2
P1
Q 2 Q1
Quantity Demanded per Period
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.
Price
P’2
P’1
Q2 Q1
Quantity Demanded per Period
Factors Affecting Price Sensitivity**
p 324-326
Less price sensitive when :-
• The unique value effect : your offering is different
• The substitute awareness effect : hotel restaurants
often charge more for meals based on the substitute
awareness effect (guests are not aware about
substitutes)
• Business expenditure effect : someone else pays the
bill
• End-benefit effect : Customers are less price-
sensitive when the price of product accounts for a
small share of the total cost of the end benefit.
Factors Affecting Price Sensitivity**
p 324-326
• The total expenditure effect : Customers are less
price-sensitive when the price of product can save
for a lot in total expenditure (for frequent users /
large volume)
• The price quality effect : Charging high price means
“good quality”
2. Competition p 326
Using technology for price comparison –
Competitors’ prices and their
booking.com
possible reactions to a company’s own pricing
moves are other external factors affecting pricing
decisions. Therefore, it needs to be
considered when setting prices
3. Other environment p 327
• Eg. Economic factors : Economic factors such
as inflation, boom, or recession and interest
rates affect pricing decisions.
• Marketers must know the laws concerning
price and make sure that their pricing policies
are legal.
General Price Approaches
p 327-330
1. Cost-Based Pricing : is cost plus pricing adding a
standard markup to the cost of the product.
2. The value-based approach : based their prices on
the product’s perceived value.
3. Competition-based approach : A strategy of going-
rate pricing is the establishment of price based
largely on those of competitors, with less attention
paid to costs or demand.
Break-even Analysis or Target Profit
Pricing p 328
Price at Which a Firm Will Break Even or Make a Target
Profit
Total
Cost in Dollars (millions)
Revenue
Target Profit
12 ($2 million)
10 Total
8 Cost
6 Fixed
4 Cost
2
0
200 400 600 800 1,000
Sales Volume in Meals Served
(thousands)
Pricing Strategies p 331-341
1. New Product Pricing Strategies*** p 331
Setting Initial Product Prices
1.1 Prestige Pricing : hotels or restaurants seeking
to position themselves as luxurious and elegant
enter the market with a high price to support
this position (forever)
e.g. Night clubs charge a cover charge
Pricing Strategies p 331-341
2. Market-Skimming Pricing : setting a high
price when the market is price-insensitive
(temporary).
3. Market-Penetration Pricing : setting a low
initial price to penetrate the market quickly &
deeply, attracting many buyers and winning a
large market share (temporary)
2.Existing-Product Pricing Strategies***
p 332
2.1 Product-Bundling Pricing
2.1 Product-Bundling Pricing
sellers combine several products and offer the bundle
at a reduced price.
– Customer A will pay $60 for a Disney pass and $120 for a hotel room,
Customer B will pay $95 for a Disney pass and $80 for the hotel room
Hotel selling a two night package with pass for $350
– hotels sell specially priced weekend packages
• 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
2.Existing-Product Pricing Strategies***
p 332
2.2. Price-Adjustment Strategies
2.2 Price adjustment strategies p 333
Discount Pricing
Discounts
DiscountsBased
Based Discounts
DiscountsBased
Based
On
On On
On
Volume
Volume Time
Timeof
ofPurchase
Purchase
Volume Discounts - special rates to attract customers who are
likely to purchase a large quantity of hotel rooms.
Discounts Based on Time of Purchase - seasonal discounts allow
the hotel to keep demand steady during the year.
Discrimination Pricing
• The term often invokes mental images of
discrimination on the basis of
race, religion, gender, or age.
• Some tourist attractions set 2 prices:
For Foreign Tourist, and for Thai Tourist
Revenue Management (Segmented
Pricing) p 335
• involves upselling, cross-selling, and analysis of profit
margins and sales volume for each product line.
• The concept is to manage revenue & inventory
effectively by pricing differences based on the elasticity
of demand for selected customer segments.
“To sells the right product to the right person at the
right price and at the right time”
BAR Pricing (Best Available Rate) p 339
- Instead of a single rate for a multiple-night stay,
BAR charges a different rate each night.
– daily rates are determined via yield
management.
Psychological Pricing : p 340**
Prestige prices
Reference prices
Ignoring end figures
The length of the field
• Prestige prices
– High prices for prestigious image
• Reference prices
– Prices that buyers carry in their minds & refer to
when looking at a given product.
• Ignoring end figures
– Simplify price information by ignoring end figures.
– there is greater perceived distance between
$0.69 and $0.71 <----------> $0.67 and $0.69
• The length of the field is another consideration.
– the jump from $0.99 to $1.00 or $9.99 to $10.00
can be perceived as significant, although it is only
one cent
Value Pricing : The term is confusing, and has become
synonymous with the everyday low prices (EDLP).
• Value Pricing is opposite from Promotional Pricing p
340-341
End of Chapter
Q&A
