MKT 705 - Test 6

Price lining

Refers to the practice of having a limited number of products available at different price levels based on quality. For example, a car may come in three different styles: a value model, a standard model and a limited model.

Establishing A Price Structure

Revenue per available room (REVPAR) provides information of a hotels capacity utilization than average daily rate (ADR). ADR is calculated using total revenue, occupancy rate, and number of rooms available Total revenue = sum of (room x price) for all rooms sold Number of rooms sold = occupancy rate x available rooms Average daily rate = total revenue / # of rooms sold Can be used to estimate long-term revenues (monthly, annually) for hotels and lodging facilities

Financial performance objectives

Focus on areas such as the firm's level of profitability, rates of return on sales and equity and cash flow. Most large companies continually monitor these measures as benchmarks or objectives

Bartering

Individuals or organizations exchanged goods and services with one another

Revenue Management

Involves combining people and systems in an attempt to maximize revenue by coordinating the processes of pricing and inventory management. One of the challenges of this is that price sensitivity varies from customer to customer. The goal is *"sell the right product to the right customer at the right time for the right price".* This concept is particularly important in the service industry because of the intangible nature of the product; hotels and airlines for example, have limited capacities and resources. Revenue cannot be inventoried, leaves firms in a difficult position. Unused capacity for service firms is lost forever. This idea leads to overbooking by hotels and airlines.

Odd/Even Pricing

Involves setting prices just below even dollar amounts to give the perception that the product is less expensive Example: $4.99 instead of $5.00

Target return pricing

Is another form of cost oriented pricing that sets the price to yield a target rate of return on a firms investment; more sophisticated Price = ATC + (desired dollar return/ unit sales)

Prestige pricing

Is used by firms that have products with strong price-quality relationships in markets with inelastic demands Example: five star hotels and fine dining

Legal Issues in Pricing

*1. Explicit Agreements* Formal agreements among firms to set the same price or to use the same formula in setting prices; This practice of price fixing is generally regarded as illegal and will be enforced; It is illegal for competitive hotels to discuss prices *2. Non-explicit Agreements* Take the form of concerted actions by competitors that are not formal but represent some level of collusion; The courts look for a pattern of uniform business conduct or "conscious parallelism"; It is not enough for competitive firms to exhibit parallel behavior; they must also be found guilty of making a conscious effort to engage in that behavior. *3. Price Discrimination Laws* Firms are forbidden from charging purchases difference prices for commodities of like grade and quality in an attempt to lessen competition "cost justification defense" allows firms to charge different prices when the costs of providing the product different between purchasers and the "meeting competition defense" allows firms to charge different prices to meet the lower price of a competitor. *4. Tie-In Sales* Is the practice of sellers requiring that, as a condition of purchasing one product, customers must buy other products exclusively from the seller.

Price quality effect

*Consumers use price as an indicator of a products quality, especially when they do not have much experience with the product category.* (example: foreign country means lack of familiarity with products). Consumers will be less sensitive to a products price to the extent that they believe higher prices signify higher quality.

Volume objectives

*Focus on sales and market share; these measures can be based either on the number of units sold or on the dollar amount of the units sold*; the sales measure looks at the firm individually, while the market share measure views the firm to the competition Volume objectives are particularly common in the early stages of the product life cycle when firms are willing to forgo profits in exchange for building long-term sales and market share.

Image objectives

*Focus on the firms overall positioning strategy* A firms position in the market is a direct result of its price - quality relationship as perceived by consumers The hotel market can be segmented by price into economy, mid-market, and premium categories. Also airline companies offer bereavement fares for emergency travel, and hotel offer discounts for guests with family members in the hospital.

Consumer Price Sensitivity

*How consumers react to changes in price* Many situational factors affect a consumers price sensitivity and these factors can actually vary from one purchase decision to another For example, a married couple may be less price-sensitive when choosing a restaurant for a special occasion than they would be if they were having a normal meal after work

Penetration pricing

*Involves setting low prices in relation to the firms economic value to most potential consumers* This works best on price sensitive consumers who are willing to change product or service providers to obtain a better price Firms will choose to have lower profit margins in an attempt to gain sale volumes and market shares Stays common among economy hotels that market consumers who view the product as merely a place to sleep and have no need for additional amenities *ON FINAL*

Cost-plus pricing

*Is the most widely used approach to pricing in the industry* *is adding a standard make-up to the cost of the product to reach the price charged.* For example, if a restaurant purchased a bottle of wine at $20, and the manager decided that all wines will be marked up by 100 percent, which means double in this case, the bottle of wine will be sold at 40 dollars. *ON FINAL*

Segmenting by Purchase Volume

*ONE OF THE MOST COMMON FORMS OF PRICE SEGMENTATION IS TO VARY PRICE BASED ON THE QUANTITY PURCHASED - OFFERING DISCOUNTS FOR LARGER ORDERS* Example: offerings discounts for groups of 10 or more or hotels to sell catering functions for weddings

Segmenting by Product Design

*This is based on the actual product/service*; segment consumers by offering simple variations of a firm's product/service that appeal to the different segments. *Example: airlines found they could charge more for first class seating by widening seats and providing more service (the design of the seat)*

Yield MGT is widely used for a variety of reasons:

1. *Perishable inventory* If a hotel room is not occupied one evening or an airline flies with empty seats those services can not be captured at a later date (no inventories for services) 2. *Fluctuating demand* Demand rises and falls within a day, week, month or year. During high demand periods, services are sold at or near full price. During low demand, capacity remains unused. 3. *Ability to segment customers* Segment based on price; offer a discounted price to selective group of customers 4. *Low variable costs* Firms often have large retro of fixed to variable costs which favor a high-volume strategy. The marginal cost of serving an additional customer is minimal as long as there is excess capacity.

End benefit effect

A product may represent only one component of the purchases necessary to attain a desired benefit The end benefit effect consists of two parts: Derived demand and the share of total cost *Derived demand = Refers to the relationship between the desired end benefit and the consumers price sensitivity for something that contributes to that end benefit* This is the most popular in industrial markets where firms purchase products to resell to other consumers

Break even analysis/Break even point

Can be used to examine the relationships between costs, sales, and profits The BREAK EVEN POINT is the point where total revenue and total costs are *equal*. Therefore, at the break-even point, the profit equals to 0. BEP = total fixed costs / Selling price - variable costs.

Political environment

All levels of government have a tremendous impact on the operation of hospitality and tourism firms throughout the country Changes in minimum wage laws affect the costs of restaurants, while changes in tax laws relates to business expenses affect the demand in restaurants

Demand-based pricing

Allows for higher prices when the demand is high and for lower prices when the demand is low, regardless of the cost of the product. Is also called 'buyer-based pricing', or 'sensitivity pricing' *It is a pricing method that considers the consumer* *You may notice that airfares and hotel room rates are higher on weekends, holidays, and during summer because of high demand.* *ON FINAL*

Demand oriented pricing

Approaches use consumer perceptions of value as a basis for setting priced The goal is to set prices to capture more value not to maximize volume

Variable Costs

Are the costs associated with doing business, and they vary with changes in sales volume

Cost-based and cost-plus pricing:

Both are traditional pricing methods that are simple and easy to adopt. However, these methods do not consider market condition and what the market, or consumers, will bear. *For example, during an economic downturn, consumers may not happy to pay $40 for a bottle of wine.*

Economic value

Can be defined as the sum of a products reference value, or the cost of competing product that the consumer perceives as the closest substitute, and a products differentiation value, or the value to the consumer of any differences between a firms offering about the reference product

Pricing objectives

Can be grouped into four major categories based on goals related to financial: 1. performance 2. volume 3. competition 4. image

What is prestige pricing?

Can be used for the introduction of new products. It sets prices high to position a product at the upper or luxury end of the market. For example, hospitality organization that wish to be seen as top-end organization or products must enter the market with high prices to reflect this quality image. Here is an example: A coach company introduces a new luxury vehicle with airline-style seats, individual lights air-conditioning controls, panoramic windows and onboard catering. The company can price the transportation as a prestige product. If consumers value these attributes, they will pay the additional premium price. *ON FINAL*

Social environment

Changes in cultures and subcultures throughout the world are affecting many societies Different cultures have different spending patterns and saving practices

What is market skimming?

Commonly used for the introduction of new products Is a policy of 'skimming the cream', meaning that *setting high prices at the launch stage and progressively lowering them as the product becomes better developed and progresses through its life cycle.* It takes advantage of the fact that most products are in high demand in the early stage of the life cycle, when they are novel or unique or when supplies are limited. *ON FINAL*

Economic environment

Constant changes occur in the state of the economy as measured by indicators such as business growth, inflation, consumer spending, unemployment rates, and interest rates Foreign exchange rates = Prices alter in accordance with changes in income and consumer spending, as well as with variations in a firms costs resulting from changes in the economy

Perceived substitutes effect

Consumers become more price sensitive when comparing a products higher price with the lower prices of perceived substitutes for the product; Consumers must be aware of the other products and actually perceive them as substitutes For example, there are no significant price difference between products in fast food restaurants or airline tickets of a popular route

Difficult comparison effect

Consumers may be aware of substitutes for a product, but they will tend to become less price sensitive as it becomes more difficult to compare brands Then companies differentiate themselves from the competition on certain attributes that are difficult to compare *Learn difference between this term and perceived substitutes effect*

Unique value effect

Consumers will be less price-sensitive when a product stays unique and does not have close substitutes; If a firm successfully differentiates its product from those of its competitors it can charge a higher price. Consumers must remain aware of the differentiation and convinced of its value in order to pay the higher price Example: Resorts and health spas use this strategy by marketing themselves as one of a kind properties and similarly fine dining restaurants use this approach and differentiate themselves on attributes such as the chef.

Shares cost effect

Consumers will be less sensitive to price if another organization or individual is sharing in the cost of a product; The smaller the portion of the price paid by the consumer, the less sensitive the individual is to price This can be in the form of tax deduction, a business reimbursement, or some types of sales promotion Example: your employer pays for 60% of your health insurance

Total expenditure effect

Consumers will tend to be more price sensitive the larger the amount of the total expenditure This amount can either be absolute terms or as a percentage of income For example, a consumer booking a cruise at a price of 5000 will be more sensitive to price than If he or she were eating a meal in a restaurant

Selective Discounting

Cornerstone offers discounts to a selected group of customers Rather than offer one price for a given time period, either peak or non-peak, firms can distinguish between customers; This minimizes the effect of lost revenue resulting from consumers who are willing to pay full price being able to pay the discounted price To accomplish this, service firms normally place restrictions on the discounted price so that consumers must sacrifice something in return for the discount. *Example: hotels require guests to stay over weekends, during non-peak seasons for a minimum number of nights.*

New products face unique problems

If the product is truly new - something never before available in the marketplace - it will be extremely difficult for consumers to develop a sense of what price is appropriate. If there are no similar products with which to compare it, consumers may either undervalue the innovation or perhaps overvalue it. To deal with such problems, companies may need to conduct detailed research on price sensitivity, clearly outline the unique features of the new product, and research the best way to communicate this information to consumers.

Segmenting by Buyer Identification

In order to obtain a discounted price, consumers must belong to a group of people that share similar characteristics. Ex: hotels have discounted rates for customers belonging to AAA or AARP.

Technological environment

Many of the new technologies in the hospitality and tourism industry are intended to improve the efficiency of firms thereby reducing costs

Historical Booking Analysis

One major problem is the determination of the amount of capacity to make available at the discounted rate.

Psychological pricing

Practices have been proven to be successful based on their *ability to influence consumer perceptions of price*

Broad pricing strategies

Prices can be set high to restrict the firms market to a limited segment of buyers as in luxury hotels and fine dining restaurants; set to low to attract buyers, as in economy hotels and fast food restaurants; or kept neutral to emphasize other aspects of marketing, as in midscale hotels and theme restaurants.

Price

Pricing = is the process of determining the value of products/services that will result in the maximum total revenue for the firm Price is a component of the marketing mix and the vehicle used in free enterprise to allocate limited resources. The other three are promotion, product, and distribution and they create value ad appear on the firms income statement as expenses Price is the firm's tool for capturing value, and it affects the revenue section of the income statement Pricing strategy integrates marketing and finance in an attempt to create an atmosphere of mutual satisfaction. The buyer and seller have to be mutually satisfied with the *EXCHANGE* to take place this does not have to include monetary units.

Pricing Law and Ethics

Pricing practices are normally illegal if they are fund to be in anti-competitive or if they take unfair advantage of consumers.

Yield Management

Programs are used to set prices that will maximize revenue based on the costs of providing services and the price sensitivities of the consumers. A technique used to maximize the revenue, or yield, obtained from a service operation, given limited capacity and uneven demand; this was first used by airline companies and then lodging and cruise firms. Uses historical data to predict the demand for future reservations with the goal of setting prices that will maximize the firms revenue and profit. The YM equation: maximize (actual revenue/potential revenue)

Segmenting by Purchase Location

Segment consumers based on where they purchase a product/service. Some restaurants chains will vary their prices in different geographic locations to account for differences in purchasing power and standard of living.

Segmenting by Time of Purchase

Service firms tend to notice certain purchasing patterns based on the time of day, week, month or year. It is not always possible to meet the demand during these peak periods. Smooth demand by offered discounted prices during off peak season. Example: Restaurants offering early bird specials (Relates to yield management)

Neutral pricing

Strategy involves setting pricing at a moderate level in relation to the economic value to most potential consumers The firm makes a strategic decision to use attributes other than price to gain a competitive advantage

What are the unique problems of pricing new products?

The core of pricing is the consumer's perception of price in relation to quality and value for money. When a new product enters the market, it is important to obtain market share and create the desired image for the product in the consumer's eyes.

Law of demand

The inverse relationship of price elasticity of demand: • Elastic ep > 1 • Inelastic ep <1 • Unitary elasticity ep = 1

Reservation price

The max price that a consumer is willing to pay for a product or service

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price Ep = (q2-q1)/q1/(P2-P1)/p1 Usually negative because price increases tend to result in decreased in quantity demanded

Segmenting by Product Bundling

This involves packaging products and services into price bundles; firms offer several products to consumers at a packaged price that is lower than the cost of purchasing the products separately. Example: fast food places offer bundled meals that include a burger, fries and drink. Alternative to this is to offer premiums, or free merchandise, with the purchase. (example is the toy in the happy meals)

Fixed Costs

Those incurred by a company to remain in business, and they do not vary with changes in sales volume

Cost oriented pricing

Uses a firms cost to provide a product or service as a basis for pricing Firms want to set a price high enough to cover costs and make a profit

Ethical Issues in Pricing Level 1

assumes all exchanges are voluntary and it is the responsibility of the buyer to obtain as much information as necessary to make a good decision

Ethical Issues in Pricing Level 4

condemns the practice of segmented pricing even when the product is non-essential. It states that the prices should not be segmented based on value and firms should not take advantage of consumers during periods where there are shortages, even for non-essential products.

Ethical Issues in Pricing Level 2

consumers should not be exposed to making purchases under conditions of asymmetric information. The seller should be required to disclose pertinent information to buyers so that they are not at a disadvantage.

Price discrimination laws

forbid firms from charging purchasers different prices for commodities of like grade and quality in an attempt to substantially lessen competition.

Ethical Issues in Pricing Level 3

imposes an additional restriction that sellers cannot earn excessive profits by charging high prices for essential products. Example: pharmaceutical companies charging high prices for life saving drugs that are unaffordable to those without insurance or with low incomes

What is competition-based pricing?

is also called competition-oriented pricing or going-rate pricing. *is defined as setting the price of a product or service based on what the competitors are charging.* Advantage of this method is that it offers an opportunity to increase sales and marketer shares if the company charges lower prices than its competitors. However, it is a dangerous approach because *it does not focus on either cost or consumer.* *ON FINAL*

Cost-based pricing

is based on the break-even point; For example, if a restaurant purchased a bottle of wine at 20 dollars; the restaurant MAY sell it to consumers at ANY price HIGHER than $20. It can be $21 , $22 , or even $100; It depends on how much profit the restaurant manager wants to make. *Therefore, cost-based pricing is defined as setting prices higher than the sum of their product or service costs.* *ON FINAL*

Inventory management

is the process of determining how much of a product/service should be offered at each price point. Example: hotels allocate a number of guest rooms for groups to try to fill quota by setting a price that will extract the most revenue from the market.

Segmented pricing

the importance of price varies among consumers and firms often use this variation as a means for segmenting markets. Then a firm can choose to target one or more of these markets with specific marketing strategies tailored to each market segment.

Ethical Issues in Pricing Level 5

would seem extreme for most people; it is not consistent with free markets in a capitalist economy. Suggest that every member of the community or society should share with others to ensure a minimum standard of living.