Pricing in Tourism and Hospitality

Introduction

A product's price is that which consumers exchange with the market in order to
purchase the product. Consumers consider price to be an important criterion in their evaluation
of alternatives, both before and after making a purchase.

WHAT IS PRICE?

Price is the amount that the customer pays for a product; it is the amount of money
exchanged for something of value. Price makes products available to the target market and
reflects the value of the product. It is the sum of values that consumers exchange for and
reflects the value of the product.

Key Concepts Relevant to Pricing

There are few terms that need to be defined in order to easily understand
concepts in pricing. They are as follows:

1. Sales - is the total amount that a company gets based on quantity sold
multiplied by selling price.
2. Revenue- is the total income/profit that the company keeps after all the
expenses have been paid for. Simply put: sales minus expense equals
revenue.
3. Fixed Costs - are costs incurred due to the operations of the business;
they do not fluctuate with the volume of sales.
4. Profit Margin - is the level of income that is desired by the company. This
usually comes out in percentage form as the amount of mark-up placed
on top of the fixed and variable cost of a product.
5. Variable Costs - is a production expense that increases or decreases
depending on changes in a company's manufacturing activity.
The raw materials used as components of a product are variable costs
because this type of expense typically fluctuates based on the number of
units produced
6. Break-even Point - is the lower limit of profit when determining margins.
A company has broken even when its total sales or revenues equal its
total expenses. At the break even point, no profit has been made, nor
have any losses been incurred.
Key Factors Affecting Price
1. Costs
The product cost will be inclusive of the cost of production, the distribution costs
and the selling and promotion costs. This cost will act as a benchmark for setting the
price.

2. Organizational and Marketing Objectives

Companies go into business for survival, profit maximization, high rate of return
of investment, brand equity growth, and an adequate share of the market. Some
organizations such as foundations and national parks may set low fees because they are
not commercial in nature.
3. Other Marketing Mix Variables
When your product is priced lower than your competitors' products, customers
are more likely to click on one of your ads or buy one of your products. A competitive
pricing strategy results in a higher click-through rate and a higher conversion rate.
4. Buyer Perceptions of Value and Price
Buyers have different perceptions of product quality and value based on
branding and image. Price affects buyer perceptions. The higher the price, the higher the
buyer's expectations of quality are.
5. Competition
In highly price-sensitive markets, companies try to win customers by setting a
lower price than that of the competition.
6. Government Regulations and Taxes
Regulations Can Decrease Sales Volumes When regulations make it harder or
more expensive to make a product, consumers might look for alternatives, rather than
paying higher prices. This causes sales volumes to fall, so pricing strategies have to
reflect these new sales levels.
7. Nature of the Market and Demand
Prices and rates change as supply or demand changes. If something is in
demand and supply begins to shrink, prices will rise. If supply increases beyond current
demand, prices will fall. If supply is relatively stable, prices can fluctuate higher and
lower as demand increases or decreases.
8. Pricing in Different Markets
As the price of a good goes up, consumers demand less of it and more supply
enters the market. If the price is too high, the supply will be greater than demand, and
producers will be stuck with the excess. Conversely, as the price of a good goes down,
consumers demand more of it and less supply enters the market.
9. Price Elasticity of Demand
Demonstrates how a change in price affects the quantity demanded. It is
computed as the percentage change in quantity demanded over the percentage change
in price, and it will commonly result in a negative elasticity because of the law of
demand.
10. Other Environmental Factors
Other environmental factors that may be beyond the company's control can affect
pricing. These factors may include but are not limited to political instability, calamities,
environmental issues, etc

Price and Its Relationship to Marketing Objectives

1. Survival - A company may be experiencing a deep crisis in which the
most basic reason for its marketing efforts is merely to survive. The
crisis may be a recession, an economic crisis, or stiff competition.

2. Current Profit Maximization - Some companies seek to use marketing for

short- term financial gains. Gains such as current profit maximization,
improved cash flows, and swift return on investment are mostly for
short-term financial gains.

3. Market Share Leadership - Some companies build on marketing

strategies that will help the company gain a huge market share and
become a market leader in its product category. This objective seeks to
enjoy low costs because of high volume which will eventually lead to
long-term gains.

4. Brand Equity Growth - Establishing a positive brand image leads to high

awareness and perception of quality.

5. Product-quality Leadership - is where a company aims to provide the

best quality product in the market, and therefore charges more than its
competitors. These companies are usually market leaders.
GENERAL PRICING APPROACHES
Aside from pricing strategies, this chapter also discusses some general pricing
approaches that will help marketers in determining the "right" price.
1. Cost-based Pricing - is a pricing method that is based on the cost of production,
manufacturing, and distribution of a product. Essentially, the price of a product is
determined by adding a percentage of the manufacturing costs to the selling price
to make a profit.

2. Break-even Analysis and Target Profit Pricing - To formulate the break-even price,
a person simply uses the amount of the total cost of a business or financial activity
as the target price to sell a product, service, or asset, or trade a financial
instrument with the goal to break even.

3. Buyer-based Pricing (Value-based) - In this pricing model, the value of a product

or service is perceived by customers. Particularly that gives the guideline for the
 price of that product or service. In other words, the price is not set after the
production of the product but before the production.

4. Competition-based pricing - is a pricing method that involves setting your prices in

relation to the prices of your competitors. This is compared to other strategies like
value-based pricing or cost-plus pricing, where prices are determined by analyzing
other factors like consumer demand or the cost of production

PRICING STRATEGIES
1. Prestige Pricing - is used when the product or service is positioned to be luxurious
and elegant. Higher price projects that the product is high-end and prestigious.

2. Market Skimming Pricing - a pricing approach in which the producer sets a high
introductory price to attract buyers with a strong desire for the product and the
resources to buy it, and then gradually reduces the price to attract the next and
subsequent layers of the market.

3. Market Penetration Pricing - an approach to pricing in which a manufacturer sets a

relatively low price for a product in the introductory stage of its life cycle with the
intention of building market share.

4. Product Bundling Pricing - is a technique in which several products are grouped

together and sold as a single unit for one price. This strategy is used to encourage
customers to buy more products.

5. Volume Discounts - is a price reduction offered to buyers who purchase in bulk

quantities. Producers or sellers are able to reduce inventories and take advantage
of economies of scale by allowing discounts to bulk buyers.

6. Discounts Based on Time of Purchase - A price reduction is given to buyers who

purchase services out of season when the demand is lower or way ahead of time

7. Discriminatory Pricing - is a selling strategy that charges customers different

prices for the same product or service based on what the seller thinks they can get
the customer to agree to.

8. Psychological Pricing - is a strategy that uses pricing to influence a customer's

spending or shopping habits to make more or higher value sales.

9. Promotional Pricing - is a pricing method where a company temporarily reduces

the price of a product or service in the interest of quickly driving sales.

10. Value Pricing - is offering the price below competitors permanently, unlike
promotional pricing where the price is lowered temporarily
REVENUE MANAGEMENT
Refers to the strategic distribution and pricing tactics you use to sell your
property's perishable inventory to the right guests at the right time, to boost revenue
growth. Other products such as your amenities and food and beverage offerings will also
come into the picture.
Shoemaker et al. (2007) cite that revenue management is beneficial to the hotel
and airline industries in particular because of the following reasons:
1. Product is perishable; thus, it is better to sell the room/seat at a low price than
leave it empty.
2. Capacity is fixed daily. In no way can rooms or seats be increased on a specific
day to meet demand.
3. Demand fluctuates and is uncertain depending on the days of the week and
seasons of the year.
4. Different market segments have different lead times for purchase. Conventions
and conferences have longer preparation time that can span from anywhere
between one year to three years, while a business traveler can book even just a
week prior to travel.
5. There is flexibility in pricing hotel rooms and airline seats. The market accepts that
hotel room and airline seat rates may vary depending on purchase lead time and
seasonality.
Market Recovery Through Price
Some destinations that have lost market share through different external and
internal reasons may recover from their loss through price combined with effective
promotions. Price can represent a significant incentive to encourage visitors to offset
their fears and to return
Dealing with Price Changes
Know when to initiate a price cut or a price increase. When does a business alter
its pricing? Typically, businesses choose a strategy that fits well with their business.
Companies must exercise caution when implementing price reductions because doing so
could start a war in which all players on the market suffer. When there is extra capacity
or inventory, price cuts might be made. A business may choose to lower its pricing in
the hopes that sales volume will increase despite promotional activities, product
upgrades, and stronger distribution methods.
On the other side, inflation makes price rises unavoidable. Customers should
believe that a price increase is acceptable. In order to implement a price rise, customer
acceptance is essential. Price increases should be planned carefully.
Customers generally prefer price reductions over rising prices. The buyer's
perception of price changes, however, is heavily influenced by the customer's impression
of the goods. Some price rises that occur from preserving product quality can be seen
positively. Price reductions might occasionally be seen negatively since they could imply
poor service or food.