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Chapter 11: Pricing: Understanding and Capturing Customer Value
Chapter Objectives
1. Outline the internal factors affecting pricing decisions, especially marketing objectives,
marketing mix strategy, costs, and organizational considerations.
3. Contrast the differences in general pricing approaches, and be able to distinguish among
cost-plus, target profit pricing, value-based pricing, and going rate.
5. Understand how to apply pricing strategies for existing products, such as price bundling
and price adjustment strategies.
7. Discuss the key issues related to price changes, including initiating price cuts and price
Teaching Suggestions
The following explanations and suggestions are outlined based on the Chapter Objectives.
1. Outline the internal factors affecting pricing decisions, especially marketing
objectives, marketing mix strategy, costs, and organizational considerations.
This is a good topic for class discussion. Ask your students to think about how these
different factors might influence the pricing decision. An easy topic to start with is how
rising costs of fuel might impact the travel and tourism industry.
Marketing objectives: Before establishing price, a company must select a product
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Organizational Considerations: Management must decide who within the
organization should set price. Companies handle pricing in a variety of ways. In
2. Identify and define the external factors affecting pricing decisions, including the
effects of the market and demand, competition, and other external elements.
Again, this is a good topic for class discussion. A good starting place is with competition
what happens to a business if one of their microcompetitors raises or lowers their
prices?
Market and Demand:
3. Contrast the differences in general pricing approaches, and be able to distinguish
among cost-plus, target profit pricing, value-based pricing, and going rate.
Break students into groups and assign each group a hospitality product or service. Ask
the groups to come up with different prices based on the different approaches to pricing
(You could also assign all students the same hospitality product or service and have each
group look at a different approach to pricing). Discuss why each approach yields different
prices.
Cost-Based Pricing: The simplest pricing method is cost-plus pricing, adding a
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4. Identify the new product pricing strategies of market-skimming pricing and
market-penetration pricing.
Ask students to think of different companies or products that use market-skimming and
market-penetration pricing. See if they can come up with hospitality examples.
5. Understand how to apply pricing strategies for existing products, such as price
bundling and price adjustment strategies.
Again, ask students to come up with examples of hospitality companies that use product
bundle pricing and pricing adjustment strategies (for example, hotel companies use
bundles and revenue management strategies).
Product Bundle Pricing: Sellers use bundling to combine several of their products
6. Understand and be able to implement a revenue management system.
This is an excellent topic for bringing in a guest speaker. Revenue Management is still a
growing field in the hospitality industry and many hotels now have an in-house revenue
manager that might be able to speak to your students.
The concept behind revenue management is to manage revenue and inventory effectively
7. 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.
This is a good topic for class discussion. Start out by discussing buyer reactions to price
changes particularly customer perceptions of quality based on prices. For example,
most students will have an opinion about how they would perceive a price change (either
increase or decrease) at their favorite restaurant.
Initiating Price Cuts: Excess capacity or a drive to dominate the market or
Initiating Price Increases: Inevitably many companies must eventually raise
Competitor Reactions to Price Changes: Competitors are most likely to react
Chapter Outline
I. Price. [Slides 11-4] Simply defined, price is the amount of money charged for a good or
service. More broadly, price is the sum of the values consumers exchange for the benefits
of having or using the product or service.
II. Factors to Consider When Setting Price [Slide 11-5]
J. Internal factors [Slide 11-6]
1.Marketing objectives [Slide 11-7]
a. Survival. It is used when the economy slumps or a recession is
c. Market-share leadership. When companies believe that a company
2.Marketing mix strategy. Price must be coordinated with product design,
3.Costs
4.Cost subsidization
5.Organization considerations. Management must decide who within the
K. External factors [Slide 11-8]
1.Nature of the market and demand
a. Cross-
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b. Upselling. Sales and reservation employees are trained to offer
2.Consumer perception of price and value. It is the consumer who decides
3.Analyzing the price demand relationship. [Slide 11-9] Demand and price
4.Price elasticity of demand. [Slide 11-10] If demand hardly varies with a
small change in price, the demand is inelastic; if demand changes greatly,
5.Factors Affecting Price Demand Relations [Slide 11-11]
a. Unique value effect. Creating the perception that your offering is
b. Substitute awareness effect. Lack of the awareness of the existence
6.
starting point
for deciding its own pricing.
a. Price-rate compression. This occurs when higher-priced hotels
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7.Other environmental factors. Other factors include inflation, boom or
III. General Pricing Approaches [Slide 11-12]
J. Cost-based pricing. Cost-plus pricing: a standard markup is added to the cost of
the product.
K. Break-even analysis and target profit pricing. Price is set to break even on the
IV. Pricing Strategies
A. New product pricing strategies. [Slide 11-13] Pricing strategies usually change as
a product passes through its life cycle. The introductory stage is especially
challenging.
27. Prestige pricing. Hotels or restaurants seeking to position
28. Market-skimming pricing. Price skimming is setting a high price
29. Marketing-penetration pricing. Companies set a low initial price to
30. Product-bundle pricing. Sellers using product-bundle pricing
B. Existing-product pricing strategies. [Slide 11-14] The strategies just described are
used primarily when introducing a new product. However, they can also be useful
with existing products. The following strategies are ones that can be used with
existing products.
1.Price-adjustment strategies. [Slide 11-15] Companies usually adjust their
basic prices to account for various customer differences and changing
situations.
a. Volume discounts. Hotels have special rates to attract customers
2.Revenue management. [Slide 11-16] A yield-management system is used
3.Psychological pricing. [Slide 11-17] Psychological aspects such as
4.Promotional pricing. Hotels temporarily price their products below list
5.Value pricing. Value pricing means offering a price below competitors
V. Price Changes [Slide 11-18]
A. Initiating price cuts. Reasons for a company to cut price are excess capacity,
C. Buyer reactions to price changes. Competitors, distributors, suppliers, and other
Answers to Discussion Questions
1. One way of increasing revenue is through upselling. Give examples from the
2. You have just been hired as the dining room manager at a local hotel. The manager
asks you to evaluate the menu prices to see if they need to be adjusted. How would
you go about this task?
This is a great topic for group discussion. Depending on where they are in your program,
many students might bring up analyzing the contribution margin of each item as a means
For example, depending on the type of restaurant, one would need to understand the
original methods of pricing. Which pricing approach was used? Is this an appropriate
method for the current situation? Additionally, a discussion of the internal and external
factors affecting pricing might include some of the following questions:
Internal factors: What are the objectives of the company? Is the strategy used in
the menu pricing supportive of these objectives? What is the range of product
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3. A number of factors affecting price sensitivity are discussed in this chapter. Provide
some examples of the application of these factors in the hospitality or travel
businesses.
This is a good assignment or class discussion topic. Following is an example to help get
students thinking about this question:
End-Benefit Effect: People traveling to resort destinations these days are given an
4. Give an example of an effective use of price discrimination. Support your reasons
for thinking that it is a good example.
5. Can a hotel or restaurant increase or maintain customer satisfaction after
implementing its first revenue management program? Explain your answer.
This is a great topic for class discussion. For example, revenue management is meant to
be a long-term approach to improve the overall profitability of the operation. As revenue
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6. Airlines and hotels give bonus frequent-flyer miles, gifts, and free companion tickets
to attract the business traveler. These promotions are often provided in lieu of a
price cut. The traveler benefits personally, although their company does not get the
benefit of lower rates. Is this ethical?
This is a great discussion topic designed to help students think about ethics. Here are
some examples of statements supporting each side of this question:
Unethical: In most jobs it is considered unethical to take gifts from supplier
because it might unduly influence your decision to purchase from them. Why
should taking gifts from travel companies be any different? What if a business
traveler chooses the most expensive flight just because that airline offers them the
best rewards?
Ethical: Business travel is generally very taxing on people typically such travel