Marketing and Pricing Strategies

• Marketing is considered the whole of business from the customer's point of view
• Business success is determined by the customer

Price

• Price is the amount of money charged for a good or service
• Price is the only marketing mix element that produces revenue
• Changing prices too much can deter potential customers, while pricing too low cuts revenue

Factors to Consider When Setting Prices:

• Internal factors:
  • Marketing objectives
  • Marketing-mix strategy
  • Costs
  • Organization for pricing
• External factors:
  • Nature of market and demand
  • Competition
  • Other environmental factors like the economy, resellers, and government

Internal Factors:

• Include marketing objectives like survival, current profit maximization, market-share leadership, brand equity growth, and product-quality leadership

Marketing Objectives

• Survival: Used during economic slumps or recessions
  • Manufacturing firms reduce production to match demand
  • Hotels cut rates to improve cash flow
• Current Profit Maximization: Companies set prices to maximize current profit, cash flow, or ROI, focusing on financial outcomes over long-term performance
• Market Share Leadership: Setting low opening rates to become the market share leader, based on the belief that a company with the largest market share will enjoy low costs and high long-run profit
• Product Quality Leadership: Hotels like Ritz-Carlton charge a high price for luxury products to capture the luxury market

Marketing Mix Strategy:

• Price must be coordinated with product design, distribution, and promotion decisions for a consistent and effective marketing program

Costs:

• Fixed Costs: Costs that do not vary with production or sales level
• Variable Costs: Costs that vary directly with the level of production

External Factors:

• Nature of the market and demand involves cross-selling and upselling
• Cross-Selling - the company's other products are sold to the guest
• Upselling - Sales and reservation employees are trained to offer higher-priced products that better meet customer needs, rather than settling for the lowest price
• Consumer Perception of Price and Value –
  • The consumer decides if a product's price is right
  • The price must be buyer oriented
  • Price decisions require awareness of the target market and recognition of buyer's differences

Price Elasticity of Demand

• If demand varies with price, it's elastic; if it doesn't, it's inelastic
  • Buyers are less price-sensitive for unique, high-quality, prestigious, or exclusive products
  • Consumers are also less price-sensitive when substitute items are hard to find
• If demand changes greatly, the demand is elastic
  • Sellers generally lower prices to produce more revenue

Factors Affecting Price Demand Relationship:

• Unique Value Effect: Create a perception that an offering is different from competitors to avoid price competition
• Substitute Awareness Effect: Lack of awareness of alternatives reduces price sensitivity
• End Benefit Effect: Consumers are more price-sensitive when the product's price accounts for a large share of the end benefit's total cost
• Price Quality Effect: Customers equate price with quality, especially with a lack of prior experience

Competitor Pricing

• A company should be aware of its competitors' prices and offers
• Price Rate Compression: Occurs when high-priced hotels lower rates to maintain occupancy, competing with lower-rated hotels

General Pricing Approaches:

• Cost-Based Pricing:
  • Cost-plus pricing - a standard markup is added to the product's cost
• Value-Based Pricing:
  • Prices are based on the product's perceived value to the buyer
• Competition-Based Pricing:
  • Price is based largely against that of competitors, with less emphasis on cost or demand
• Break-Even Pricing:
  • Setting a price point at which a business will earn zero profits to gain market share and drive competitors from the market

Pricing Strategies:

• Pricing strategies should change as a product moves through its life cycle
• Introductory stages are usually challenging
• Prestige Pricing: Hotels and restaurants positioning themselves as luxurious and elegant enter the market with a high price to support their position
• Market Skimming: Setting a high price for a new product to realize maximum revenues from the target market and results in fewer, more profitable sales
• Market Penetration: Setting a low price for a new product to attract a large number of guests, resulting in a larger market share
• Product Bundle Pricing: Combining several products and offer at a reduce price

Existing Product Pricing Strategies

• Price Adjustment Strategies: Companies adjust basic prices for customer differences and changing situations
  • Volume Discounts: Hotels give special rates to attract customers who purchase a large quantity of hotel rooms
• Discount based on time purchase : A seasonal discount is a price reduction for purchasing services out of season when demand is lower
  • Allows the hotel to keep demand steady year-round
• Discriminatory Pricing: Segment the market with pricing differences based on price elasticity; sell product or services at two or more prices
• Psychological Pricing: Psychological aspects such as prestige, reference price, round figures, and ignoring end figures are used in pricing.
• Promotional Pricing
  • Hotels temporarily price their products below list price, and sometimes even below cost for special occasions such as introduction or festivities
• Value Pricing: Means offering a price below competitors permanently, which differs from promotional pricing, in which price may be temporarily lowered during a special promotion

Final Thoughts

• Pricing involves both science and art
• Businesses must consider cost, demand, competition, and consumer psychology to set the right price