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Pricing Products, Considerations, Approaches, and strategy

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Outline the internal factors affecting pricing decisions, especially marketing ... The marketer cannot design a product and marketing program and then set price... – PowerPoint PPT presentation

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Title: Pricing Products, Considerations, Approaches, and strategy


1
Pricing Products, Considerations, Approaches, and
strategy
  • The real issue is value, not price.
  • Robert T. Lindgren

2
Objectives
  • After reading this chapter, you should be able
    to
  • Outline the internal factors affecting pricing
    decisions, especially marketing objectives,
    marketing mix strategy, cost, and organizational
    considerations
  • Identify and define the external factors
    affecting pricing decisions, including the
    effects of the market and 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 pricing

3
Objectives
  • After reading this chapter, you should be able
    to
  • Identify the new product pricing strategies of
    market-skimming pricing and market-penetration
    pricing
  • Understand how to apply pricing strategies for
    existing products, such as price bundling and
    price adjustment strategies
  • Understand and be able to implement a revenue
    management system
  • 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

4
Price
  • Price is the amount of money charged for a good
    or service
  • Price is the only marketing mix element that
    generates revenueall others represent costs
  • The most common pricing mistakes are
  • Pricing that is too cost oriented
  • Prices not revised to reflect changes in the
    market
  • Pricing that ignores the rest of the marketing
    mix
  • Prices that are not varied enough between
    different products and market segments

5
Setting Prices
  • Factors to consider when setting prices
  • Internal factors
  • Company marketing objectives
  • Marketing mix strategy
  • Costs
  • Organizational considerations
  • External factors
  • Nature of the market
  • Demand competition
  • Other environmental elements (economy, resellers,
    government, etc.)

6
Setting Prices - Internal Factors
  • Marketing objectives
  • Strategic decisions on market positioning will
    have a major influence on price
  • The more clear the objectives, the easier it is
    to set prices
  • Some common objectives include
  • Survival
  • Short-run profit maximization
  • Market-share maximization
  • Product-quality leadership

7
Setting Prices - Internal Factors
  • Marketing mix strategy
  • Price must be coordinated with product design,
    distribution, and promotion decisions
  • Promotional mix also influences pricing

8
Setting Prices - Internal Factors
  • Costs
  • Cost sets the floor for the price a company can
    charge for its products or services
  • The price has to cover the cost of producing,
    distributing, and promoting the product as well
    as a fair rate of return for investors
  • Costs take two forms
  • Fixed costs, also known as overhead, are costs
    that do not vary with the volume of sales
  • Variable costs vary directly with production or
    sales volume
  • Total costs are the sum of fixed and variable
    costs

9
Setting Prices - Internal Factors
  • Organizational considerations
  • Revenue management
  • Many hospitality firms (i.e., restaurants) must
    set prices and keep them stable
  • Other travel and tourism firms have more
    flexibility in changing prices in response to
    changing market conditions and demand (hotels,
    airlines, theme parks, cruise lines, etc.)

10
Setting Prices - External Factors
  • Market and Demand
  • Costs set minimum prices the market and
    consumer demand establish maximum prices that can
    be charged
  • As in all market transactions, demanders weigh
    the benefits expected from a purchase with the
    cost, primarily price. If the expected cost
    exceeds the expected benefit, ceteris paribus,
    the purchase is forgone.

11
Setting Prices - External Factors
  • Market and Demand
  • Price versus value
  • Value is determined by the purchaser
  • Consumers tend to look at the final price and
    then decide whether they received a good value
  • Different market segments evaluate products
    differently
  • Marketing managers must seek to provide their
    target markets with product attributes that the
    target market will value and eliminate those
    features that do not create value

12
Setting Prices - External Factors
  • The price-demand relationship
  • A demand curve shows the relationship between
    price and quantity demanded, ceteris paribus
  • There is an inverse relationship between price
    and quantity demanded - as price rises, quantity
    demanded tends to fall

13
Setting Prices - External Factors
  • The price-demand relationship
  • If the ceteris paribus assumption is relaxed, the
    entire demand curve shifts to the right or left
  • A greater or lesser quantity will be demanded in
    the market at the same price

14
Setting Prices - External Factors
  • Price Elasticity of Demand
  • If the price elasticity of demand is greater than
    1, a 1 decrease in price will generate a greater
    than 1 increase in quantity demanded (demand is
    elastic)
  • If the price elasticity of demand is less than 1,
    a 1 decrease in price will generate a less than
    1 increase in quantity demanded (demand is
    inelastic)
  • If the price elasticity of demand 1, a 1
    decrease in price will create a 1 increase in
    quantity demanded

15
Setting Prices - External Factors
  • Price Elasticity of Demand
  • Price elasticity of demand measures the
    sensitivity of the quantity demanded to a change
    in the price of a good or service
  • The greater the elasticity of demand (the more
    elastic the demand), the greater will be the
    change in quantity demanded resulting from a
    small change in price
  • The smaller the elasticity of demand (the more
    inelastic the demand) the smaller will be the
    impact on quantity demanded resulting from a
    small change in price

16
Setting Prices - External Factors
17
Setting Prices - External Factors
  • What determines price elasticity of demand?
  • Existence of substitutes the greater the
    availability of substitutes the more elastic the
    demand
  • Share of budget the greater the share of a
    persons budget represented by the price, the
    more elastic will be the demand
  • Time for adjustment the longer the time frame
    for seeking acceptable substitutes, the more
    elastic will be the demand

18
Setting Prices - External Factors
  • Factors affecting price sensitivity
  • Unique value effect Picasso print, Pebble Beach
    Golf Club, Disney World
  • Substitute awareness effect the greater the
    difficulty finding information about available
    substitutes, the more inelastic will be the
    demand
  • Business expenditure effect when someone else
    pays the bill, the less price-sensitive the
    customer will be
  • End-benefit effect related to share of budget
    determinant identifies price-sensitive markets
    and may create opportunities to overcome some
    pricing objectives

19
Setting Prices - External Factors
  • Factors affecting price sensitivity
  • Total expenditure effect also related to share
    of budget determinant can be useful in selling
    lower priced products or cost savings to volume
    users
  • Sunk investment effect purchasers who have an
    investment in products they currently use will be
    less likely to change due to a small change in
    price
  • Price quality effect consumers tend to equate
    price with quality

20
Setting Prices - External Factors
  • Other external factors
  • Competitors prices and offers
  • Economic factors such as recessions, booms,
    changes in interest rates (inflation), changes in
    government regulations and taxes, etc.

21
Pricing Approaches
  • Product costs set a floor for the price consumer
    perceptions of the products value set the
    ceiling
  • The ultimate objective of the hospitality manager
    is to maximize profits
  • Maximizing profits is not the same as maximizing
    revenues thus, the discussion of price
    elasticity of demand
  • The real value (for you, the hospitality manager)
    in understanding price elasticity is
    understanding what price to charge to maximize
    profits!

22
Pricing Approaches
  • We will consider three general pricing
    approaches
  • The cost-based approach
  • Cost-plus pricing
  • Break-even analysis
  • Target profit pricing
  • The value-based approach
  • Perceived value pricing
  • The competition-based approach
  • Going rate pricing

23
Pricing Approaches
  • Cost-based pricing
  • Simplest method involves cost plus a standard
    percentage markup
  • Works best when the variety of products and/or
    services is small and/or costs are similar
  • Break-even analysis and target profit pricing
  • Firm tries to determine price and minimum sales
    volume necessary to break even and generate zero
    profit

24
Pricing Approaches
  • Some firms use a variation called target profit
    pricing, which targets a certain return on
    investment

25
Pricing Approaches
  • Break-even Analysis

26
Pricing Approaches
  • Value-based Pricing
  • Uses the buyers perceptions of value, not the
    sellers cost, as the key to pricing
  • The marketer cannot design a product and
    marketing program and then set priceprice is
    considered with the other marketing mix variables
    as part of the process
  • Requires more comprehensive marketing research
    and analysis

27
Pricing Approaches
  • Competition-based Pricing
  • Going-rate pricing is the establishment of price
    based largely on the prices being charged by
    competitors with less attention paid to costs or
    demand

28
Pricing Strategies
  • New product pricing strategies
  • Prestige pricing
  • Market-skimming pricing
  • Market-penetration pricing

29
Pricing Strategies
  • Existing-product pricing strategies
  • Product-bundle pricing offering several
    products at a discounted price
  • Used effectively by theme parks, tour
    wholesalers, casinos
  • Two benefits to hospitality and travel
    organizations
  • Reservation prices of buyers
  • Can help hide price of core product from
    competition

30
Pricing Strategies
  • Price-adjustment strategies
  • Discount pricing reducing prices for volume
    purchasers or changes in demand or time of
    purchase
  • Discriminatory pricing pricing based on
    charging a different price to one segment than
    others
  • To price-discriminate successfully, the following
    basic criteria must be met
  • The different segments must be identifiable and
    able to be segregated
  • No opportunity for resellers to participate
  • Must pass cost/benefit analysis

31
Pricing Strategies
  • Revenue Management
  • An effective use of discriminatory pricing
  • Revenue management involves upselling,
    cross-selling, and analysis of profit margins
    and sales volume
  • The concept behind revenue management is to
    manage revenue and inventory effectively by
    pricing differences based on the elasticity of
    demand for selected customer segments

32
Pricing Strategies
  • BAR Pricing - best available rate
  • Last minute pricing use it or lose it!
  • Psychological pricing considers the psychology
    of pricing in addition to the economics of
    pricing
  • Promotional pricing
  • Value pricing
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