Marketing for Hospitality and Tourism Pricing Products PDF

Pricing Products: Pricing Considerations, Approaches, and Strategy 1 “The real issue is value, not price.” -Robert T. Lindgren Common pricing terminology and pricing strategies used in hospitality...

Pricing Products: Pricing Considerations, Approaches, and Strategy 1 “The real issue is value, not price.” -Robert T. Lindgren Common pricing terminology and pricing strategies used in hospitality 2  Chapter Objectives Outline the internal factors affecting pricing decisions, especially marketing objective, marketing-mix strategy, costs, 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 3  Chapter Objectives Identify the new product pricing strategies of market-skimming pricing and market- penetration pricing Understanding how to apply pricing strategies for existing products, such as price bundling and price adjustment strategies Discuss the key issues related to price changes, including initiating price cuts and price increases, buyer and competitor reactions to price changes, and responding to4  Price Simply defined as Price is the amount of money charged for a good or service Broadly defined as – Price is the sum of values consumers exchange for the benefits of having or using the product or service. It is the only marketing mix element that produces revenue Changing too much chases away potential customers, charging too little cuts revenue 5  Price The firm has multiple ways to charge price by the: ₋ quality of good or services ₋ acceptable form of payment ₋ time or place of transfer of ownership ₋ quantity of money or goods or services to be paid by the buyer ₋ quantity of goods or services offered by the seller ₋ premium or discounts according to quantity ₋ time or place of payment 6  Price Price is important to marketers – It is the only revenue producing part of the mix – It is used to match supply to demand so financial objectives can be achieved – It is a powerful force in attracting attention and increasing sales – It establishes the market positioning of the product – The pricing practice can have a major impact on customer loyalty 7  Price Price should be arrived at after a thorough decision making process Pricing is ultimately customer driven Unique hospitality implications – Set physical facilities may require marketing to a new target that will accept the price rather than setting the price to the target market 8 Factors to Consider when Setting Prices 9  Internal Factors 1. Marketing Objectives Before establishing price, a company must select a product strategy as; – Survival – Current Profit Maximization – Market-Share Leadership – Brand Equity Growth – Product-Quality Leadership If the company has selected a target market and positioned itself carefully, its marketing mix strategy, including price, will be more precise 10  Internal Factors 2. Marketing Mix Strategy – Price must be coordinated with product design, distribution, and promotion decisions to form a consistent and effective marketing program – Decisions made for other marketing mix variables may affect pricing decisions – A firm's promotional mix also influences price 11  Internal Factors 3. Costs – Fixed vs. Variable Costs = Total Costs  Costs set the floor for the price a company can charge for its product  A company wants to charge a price that covers its costs for producing, distributing, and promoting the product  Beyond covering these costs, the price has to be high enough to deliver a fair rate of return to investors 12  Internal Factors 4. Organizational Considerations Management must decide who within the organization should set prices Companies handle pricing in a variety of ways  In small companies, top management, rather than the marketing or sales department, often sets the prices  In large companies, pricing is typically handled by a corporate department or by regional or unit managers, under guidelines established by corporate management Many corporations within the hospitality industry now have a revenue management department with responsibility for pricing and coordinating with other departments that influence price 13  External Factors Affecting Pricing Decisions 1. The Nature of Market and Demand –Both consumer and channel buyers such as tour wholesalers balance the product's price against the benefits it provides –Thus, before setting prices, a marketer must understand the relationship between price and demand for a product 2. Competition 14  External Factors 3. Consumer Perceptions of Price and Value In the end, it is the consumer who decides whether a product's price is right – When setting prices, management must consider how consumers perceive price and the ways that these perceptions affect consumers' buying decisions – Like other marketing decisions, pricing decisions must be buyer oriented – Consumers tend to look at the final price and then decide whether they received a good value 15  4. Cross-Selling and Upselling Cross-selling opportunities abound in the hospitality industry – For example, a hotel can cross-sell food and beverage (F&B), exercise room services, and executive support services, and it can even sell retail products ranging from hand-dipped chocolates to terry-cloth bathrobes Upselling involves training sales and reservations employees to continuously offer a higher-priced product, rather than settling for the lowest price 16  External Factors Affecting Pricing Decisions  Analyzing the Price – Demand Relationship  Price Elasticity of Demand  Factors Affecting Price Sensitivity 17 Price Elasticity of Demand 18  Factors Affecting Price Sensitivity Unique Value Effect: Creating the perception that you offering is different from those of your competitors Substitute Awareness Effect: The guest knows that a better value probably exist elsewhere, but is unfamiliar with other firms Business Expenditure Effect: When someone else pays the bill, the consumer is less price sensitive 19  Factors Affecting Price Sensitivity End Benefit Effect: Consumers are more price sensitive when the price of the product accounts for a large share of total cost of the end benefit (main objective). Total Expenditure Effect: The more someone spends on a product the more sensitive to price Shared Cost Effect: Sharing the costs among participants Price Quality Effect: For prestigious products Hidden Fees: The hospitality industry is known for charging hidden fees or fees that a guest has to pay to use the product that are not included in the basic price (internet connection, baggage fees, etc.). These charges allow the hotel, airline, or cruise to post a lower base rate, then collecting 20 these hidden fees from the guest.  General Pricing Approaches Cost-Based Pricing Break-Even Analysis and Target Profit Pricing Value-Based Pricing Competition-Based Pricing Reference Pricing 21  Approaches to Pricing Break- Cost-Based Even Pricing Pricing Value- Competition- Based Based Pricing Pricing Cost Based Pricing Product Product Cost Cost Price Price Value Value Customers Customers 23  Break-even BE = Fixed Costs / Contribution (SP - VC) Example; Meal SP = $ 20, VC = $ 8 20 – 8 = $ 12 Fixed costs are $ 2400 a day BE = $ 2400 / $ 12 = 200 We need to sell 200 meals at $ 20 per meal to break-even VC = 40 %, contribution = 60 % BE = $ 2400 / 0.6 = $ 4000 SP : Sales price VC: Variable cost BE: Break Even 24  Break-even Analysis or Target Profit Pricing ©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens 25 Value-based Pricing Customer Customer Value Value Price Price Cost Cost Product Product 26  Value-Based Pricing Determining price after estimating market demand and customers perceived value – Quantified as what is received divided by what was paid Cost is irrelevant Forces management to: – Review objectives in marketing the product – Keep in touch with customer wants and needs 27  Value-Based Pricing Trust is a major antecedent (previous) to loyalty Identification with the organization – Relate so strongly to the organization that price is removed from consideration set – Tactics to increase customers’ feeling of affiliation 28  Components of Value Financial Temporal Functional Value Value Value Experiential Emotional Social Value Value Value 29  Financial Value Role of the firm is to make customers less price sensitive and thus pay more for a product Buyers are more price sensitive when the cost is large in relation to their household income or budget End-benefit effect Fairness effect Price quality 30  Temporal Value Saving time will be worth money to the customer – Research shows that business travelers feel their time is worth an average $ 150 per hour 31  Functional Value - Product or service does what it was designed to do - Main components are RATER Reliability – your ability to provide the service you have promised consistently, accurately, and on time. Assurance – the knowledge, skills, and credibility of staff; and their ability to use this expertise to inspire trust and confidence. Tangibles – the physical evidence of the service you provide. This could be offices, equipment, employees, and the communication and marketing materials that you use. Empathy – the relationship between employees and customers. Responsiveness – your ability to provide a quick, high quality service to your customers - Customer experiences should be managed 32  Other Components of Value Experiential value – Guests are active participants rather than passive observers in the service Emotional value – Catering to the customers’ need to feel special Social value – Celebration of special occasions with friends and family 33 34 35 Competition-Based Pricing Product Cost Price Value Customer 36  Reference Price The price range Based on anticipated by the – Price last paid consumer based on – Price of similar items prior experience or – Price considering the knowledge brand name – Real or imagined cost to The price for which produce the item consumers believe – Perceived cost of product the product should failure sell 37  Reservation Price The maximum price a customer is willing to pay for a product Should be built into the pricing decision 38  Pricing Strategies New-Product Pricing Strategies Existing-Product Pricing Strategies Psychological Pricing Promotional Pricing 39  New-Product Pricing Strategies Prestige Pricing Market-Skimming Pricing Market-Penetration Pricing 40  Setting Initial Product Prices Market Market Skimming Skimming Market Market Penetration Penetration Setting a high price for a Setting a low price new product to skim for a new product in maximum revenues from order to attract a the target market. large number of Results in fewer, more guests. profitable sales. Results in a larger Popular night club market share. charges a high cover New Marriott charge 41  Skim Pricing Works best when: – Customers are price insensitive – Customers place a high value on the product’s differentiating attributes – There is value attached to prestige and exclusivity – The price is not important in relation to the benefits derived – The firms has no real competition for the product offer 42  Penetration Pricing Generate sales volume even if it means lower margins relative to the competition The opposite of skim pricing Works best when: – A large share of the market is willing to change suppliers in response to the price differential – Customers look only at price and not at other features – Price is not a trivial matter to customers – Customers are brand insensitive 43  Penetration Pricing Only works long term if the firm has lower costs than competitors Does not generate new demand, but takes market share from others Often used when a new hotel opens 44  Match Pricing One firms matches the price of firms that are in direct competition Works best when: – Customer perceives no difference in the competition – Cost structure allows pricing near the competition – Assumes competitors have made the correct pricing decision – Market must be able to buy at this level – Market must be totally concerned about price Drawbacks – Product is rarely the exact same as the competition – Firms usually do not have the same goals 45  Neutral Pricing In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. The major drawback is that your company is not maximizing its profits by basing price only on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. 46  Neutral Pricing Value added services – Added on to the basic product to enhance the perception of value – A part of loyalty marketing – It fails when firm adds services the customer does not want or need – Solution is flexible service offerings tailored to the customer 47  Neutral Pricing Value added services – Determine which services are of value to your customer and: Do not offer the service Give the service away at no charge Raise the price equal to the cost of the service Raise the price less than the cost of the service Raise the price slightly higher than the cost of the service to camouflage a price 48  Existing-Product Pricing Strategies Product-Bundle Pricing Price-Adjustment Strategies – Volume Discounts – Discounts Based on Time of Purchase – Discriminatory Pricing – Yield Management Non-Use of Yield Management Last-Minute Pricing 49  Product‑Bundle Pricing Sellers use bundling to combine several of their products and offer it at a reduced price. Price bundling can promote the sales of products consumers might not otherwise buy, but the combined price must be low enough to convince them to buy the bundle. Hotels, cruise lines, car rental companies or special attractions can all be found "packaged”. Price bundling has two major benefits to hospitality and travel organizations. 50  Product‑Bundle Pricing First, customers have different maximum prices or reservation prices they will pay for a product. Thus, by packing products we can transfer the surplus reservation price on one component to another component of the package. A second benefit of price bundling is the price of the core product can be hidden to avoid price wars or the perception of having a low quality product. 51  Pricing Adjustment Strategies: We will look at the following adjustment strategies: (1) discount pricing (2) discriminatory pricing, (3) yield management, (4) psychological pricing, (5) promotional pricing. a. Discount pricing Discounts based on volume‑hotels, for example, have special rates to attract customers who are likely to purchase large quantities of hotel rooms, either for a single period or throughout the year. Wholesalers are common dealers in these volume 52  Pricing Adjustment Strategies Discounts Based on Time of Purchase‑A seasonal discount is a price reduction to buyers who purchase services out of season. Seasonal discounts allow the hotel to keep demand steady during the year. b. Discriminatory Pricing maximizes the amount that each customer pays for a product or service. It refers to segmentation of the market and pricing differences based on price elasticity characteristics of the segments. 53  Pricing Adjustment Strategies In discriminatory pricing, the company sells a product or service at two or more prices. The difference in price, however, is not based on differences in cost, but rather differences in customer segment, timing, product, location, etc. Marriott has designed a pricing system based on discriminatory pricing to fill rooms and maximize revenue opportunities. Marriott refers to the concept as fencing. The purpose behind fencing is to keep price-inelastic customers from using rates designed for price-elastic 54  Pricing Adjustment Strategies To price discriminate successfully, the following criteria must be met: 1. Different groups of consumers must have different responses to price; that is, they must value the service differently; 2. The different segments must be identifiable and a mechanism must exist to price them differently; 3. There should be no opportunity for persons in one segment who have paid a lower price to sell their purchases to other segments. 55  Pricing Adjustment Strategies 4. The segment should be large enough to make the exercise worthwhile; 5. The cost of running the price discrimination strategy should not exceed the incremental revenues obtained. This is partly a function of criterion 4; 6. The customers should not become confused by the use of different prices. 56 57  Yield Management one application of discriminatory pricing is yield management. These systems help hotels achieve the maximum contribution margin based on the demand for hotel rooms. a. The concept behind yield management is to manage revenue and inventory effectively by pricing differences based on the elasticity of demand for selected customer segments. b. An effective yield management system establishes fences to prohibit customers from one segment 58  Yield Management For example, a typical fencing strategy for leisure travelers would be to require a Friday and Saturday night stay with a 30-day advance reservation. This effectively fences out business travelers, who then pay higher rates to stay during a business week with little or no advance reservations. If used properly, yield management systems can provide extra revenue. c) Although yield management may be ethical, it may not be viewed as fair by the guest. Thus, managers should be aware of what are unacceptable practices from customers’ viewpoints. 59  Revenue Management Dynamic Bar Pricing Pricing Rate Overbooki Parity ng  Dynamic Pricing A popular tool used by revenue managers is dynamic pricing. Dynamic pricing continually adjusts prices to meet the characteristics and needs of the marketplace. When demand increases or capacity is reduced due to previous sales, prices increase and the reverse is also true. Airlines, cruise lines, and hotels use dynamic pricing. Dynamic pricing is different from price discrimination. It raises or lowers prices based on demand for the 61  BAR Pricing Best Available Rate (BAR) pricing is a relatively new pricing technique used for guests who stay several nights. Instead of charging a single rate for a multiple- night stay, such as $100 per night, BAR pricing charges different rates for each night. Thus, some nights might be priced below $100 and others above the rate. These daily rates are determined through revenue management. BAR is sometimes referred to as nonblended pricing. 62  Rate Parity Hotel Rate Parity is a controversial strategy that has been challenged in court and survived. Rate Parity is essentially a strategy in which hotel chains agree to allow their product (rooms) to be shown and sold by OTAs provided the prices they offer are the same and are not lower than the hotel’s BAR. The OTAs refer to these hotels as merchant model suppliers. Consumers are unlikely to find a rate lower than the BAR rate set by the hotel. 63  Overbooking Revenue management continues to provide great service to the hospitality industry. Nevertheless, occasionally there are problems with overbooking, which can create guest/passenger dissatisfaction. When overbooking happens, the supplier has an ethical and legal responsibility to compensate the buyer and/or find alternative flights, hotels, and so on. Airlines offer to pay passengers to give up their seats and accept an alternative flight. Guests of hotels are not interested in accepting a hotel room the next day or even hours later and they are 64 Revenue management at the RLH Corporation, USA Since its 1959 establishment in the Pacific Northwest of the United States, the Red Lion Hotels Corporation has expanded across the U.S. and Canada with eight unique brands encompassing over 900+ locations. To reflect its growing portfolio of brands beyond its eponymously named Red Lion Hotels chain, the company quietly rebranded itself as RLH Corporation around July 2017. The challenge for RLH Corporation was no different to what the rest of the hotel industry faced. Since 2000, the evolution of Internet hotel distribution had changed dramatically, with customer acquisition costs rising twice as fast as the rate of revenue, meaning that profitability was shrinking. As meta-search sites like KAYAK, trivago, Google Travel and Tripadvisor evolved, the costs and complexities of digital distribution had increased. At its core, revenue management combines three core disciplines: segmenting customers, forecasting demand and then pricing to optimize revenue. RLH Corporation, like many players in the hotel industry, had been using an approach common for more than a decade. Best-available-rate (BAR) pricing provided hotels with a more advanced approach compared to the ‘gut feel’ method of pricing in the pre-Internet era. With a fixed-tier revenue management strategy, hoteliers set the BAR, typically the lowest publicly available price you’d find on the hotel’s website, and all other rates are adjusted accordingly – usually based on a percentage difference from the BAR. For example, if the BAR is set at $100 for any given day, the loyalty rate might be 15 per cent less, online travel agent package rate 35 per cent less, and opaque channels like Hotwire might be discounted down to 45 per cent. If the BAR goes up or down, all other rates move in tandem. Clearly the benefit of this methodology is its simplicity, but, as distribution has become more complex, the loss of potential revenue is a major disadvantage. 65 Revenue management at the RLH Corporation, USA When Greg Mount took over as CEO of RLH Corporation in 2014, he realized that pricing practices and the way hotels use revenue management to determine room rates were outdated. To address the issue, he came up with a very clear goal: ‘We will be known for having the leading technology and being best at e-commerce.’ As a result, the RLH Corporation introduced open pricing, a new more dynamic approach to revenue management that enables hoteliers to manage the yield in all segments, distribution channels, offers and room types independently of each other, and without the need to close off an option. On compressed dates, hoteliers using a fixed-tier BAR pricing often have to close channels rather than accept heavily discounted rates with higher commission costs. Open pricing allows hotel owners to evaluate the demand that every single market segment has and then manage the opportunities to maximize revenue within that specific segment across all channels. By moving beyond just historical booking information and bringing in new third party data like competitive pricing, online reviews and ratings, and web shopping data, RLH Corporation has been able to review demand more discretely and accurately forecast the future across all segments and channels. Combining better data and open pricing has allowed RLH Corporation to move closer to the key aim of revenue management – ‘getting the right price for the right customer at the right time and in the right channel’ – and the results have been impressive. The company has seen consecutive quarters of revenue per available room (RevPAR) increases. For more information about Red Lin Hotels, visit www.redlion.com. 66  Psychological Pricing Includes the visibility of the consumer and product Buyers and non-buyers may have different impressions Price lining clumps (aggregates) prices together so the perception of increased quality is created Marketer must be aware of how the customer uses price to differentiate products 67 Psychological Pricing Price Endings Promotional Value Pricing Pricing  Psychological Pricing Prices cause psychological reactions in the consumer Prices may imply quality High price = high quality Low price = low quality Higher priced items may sell better 69  Psychological Pricing Consumers tend to simplify price information by ignoring end figures For instance, there is a greater perceived distance betwee $ 0.69 and $ 0.71, than there is between $ 0.67 and $ 0.69. Consumers also tend to round figures. One restaurant study found that consumers round prices ranging from $ 1.80 to $ 1.39 to a dollar, from $ 1.40 to $ 1.79 to a dollar and a half, and from $ 1.80 to $ 2.49 to two dollars. 70  Psychological Pricing If this is the case, there may be little change in demand caused by a price increase of $ 0.30 from $ 1.45 to $ 1.75, but there may be a significant decrease in demand between $1.75 and $ 2.05. The length of the field is another consideration. The jump from $ 0.99 to $ 1.00 or the jump from $ 9.99 to $ 10 can be perceived as a signifivant increase, althought it is only $ 0.01. 71  Psychological Pricing Taco Bells value prices were all under $ 1, therefore only two digits. Some psychologists argue that each digit has symbolic and visual qualities that should be considered in pricing. For example, because the number 8 is round, it creates a soothing (calming down) effect, whereas 7 is angular (angle shaped), creating a jarring (resistant) effect. 72  Promotional Pricing Temporary pricing of products below list price and sometimes below cost – Value Pricing – Price Sensitivity Measurement 73 SALES- AND MARKETING-ORIENTATED PRICING STRATEGIES When a company adopts a sales- or marketing-oriented pricing strategy, its goal is usually to achieve a specific sales volume (e.g., number of room-nights), revenue or market share. A typical pricing objective would be ‘to achieve $2 million sales within two years’ or ‘to grow market share from 12 per cent to 15 per cent over three years’. Sales - and marketing - related pricing strategies do vary. They may focus on maximizing sales revenues, targeted sales volumes, achieving market share or building consumer trial. Sales- and marketing-oriented pricing strategies include 74 SALES- AND MARKETING-ORIENTATED PRICING STRATEGIES Maximize sales revenues: Firms with well-defined, highly differentiated offerings may be able to maximize sales revenue by managing prices upwards over time. For this to be possible, the business must have strong and price-inelastic demand. Firms that are not market leaders and that do not have well-defined, highly differentiated offerings may flex prices downwards or introduce short-term price promotions to increase sales revenues by attracting new customers. However, this strategy may not be very effective in the long term since customers who are attracted to low prices are likely to be price-sensitive, deal seeking customers who may not be loyal to any brand. They may swich providers based on the price of the products or services. Targeted sales volume: Some hospitality managers set prices that enable them to achieve specific sales volume targets, such as room-nights or occupancy levels. Key intermediaries, such as major tour companies, booking agents and high-volume customers, often negotiate significant discounts from larger hotel companies for a guaranteed sales volume. This negotiation can be one of the most crucial pricing decisions affecting the hotel’s profitability for that period. 75 SALES- AND MARKETING-ORIENTATED PRICING STRATEGIES Market share: Companies that aim to expand their market share may offer lower prices to attract new customers. Hospitality firms that operate in mature markets (e.g., quick service restaurants) can also offer lower prices to maintain and expand their market share. In mature markets, companies can only grow their market share by stealing (winning) their competitors’ customers. They may set prices to secure market share growth. Building consumer trial: Hospitality businesses that aim to enter a new market such as newly opened hotels, resorts and restaurants/bars, or businesses that develop a new product or a service, may utilize a penetration pricing strategy. The pricing objective here is to build sales quickly by offering special lower prices to motivate non-users to try the product or service through lowering the financial risk associated with trial. Unless the location and offer are unique, this is normally achieved by convincing non - users to try the product or service or by attracting competitors’ customers. 76  Price Sensitivity Measurement Price Sensitivity Measurement (PSM) helps to establish a balance of price with product or service value based on consumer’s perceptions of that value. – The product or service to be cheap? – The product or service to be expensive? – The product or service to be too expensive, so expensive that you will not consider buying it? – The product or service to be too cheap, so cheap that you would question the quality? 77  Price Changes Initiating Price Changes Price Price Cuts Increases  Initiating Price Cuts Excess capacity Dominate market Increase market share 79  Initiating Price Increases Increase profits Cost inflation Excess demand 80  Reactions to Prices Changes Buyer’s reaction Competitor’s reaction Trade Ally’s reaction 81  Responding to Price Changes Why did competitor change price? – To gain market share? Use excess capacity? Where is my product in its life cycle? What is its importance in the company’s product mix? 82 Common pricing terminology and pricing strategies used in hospitality ADR Average daily room rate BAR Best available rate RevPAR Revenue per available room Rack rate The advertised or normal price of the room – the highest price that can be charged, forming the benchmark for any discounts Revenue management: The practice of forecasting demand and optimizing price, distribution and product availability to maximize revenues. Yield management: A flexible pricing strategy that uses forecasted levels of demand to maximize profits from a fixed and perishable number of resources such as rooms. 83 Common pricing terminology and pricing strategies used in hospitality Dynamic pricing: Pricing strategy which changes prices according to market demand Opaque pricing: Pricing method where unsold capacity (e.g., rooms) is sold at discounted prices, but the customer does not know who the provider is (e.g., the hotel) Price discrimination: Pricing strategy to sell the same product at different prices Transparent pricing: A market where customers and sellers know the price of comparable products Rate parity: Pricing strategy to ensure that all prices are the same regardless of the distribution channel Skim pricing: A pricing strategy that can be used when introducing a new product or a service. The company that introduces a new product or a service charges the highest initial price that customers are willing to pay. As the demand of the first customers is satisfied and competitors start offering similar products or services, the company lowers the price to attract more price-sensitive customers and to stay competitive in the marketplace. 84 Common pricing terminology and pricing strategies used in hospitality Penetration pricing: Pricing strategy aiming to achieve high market share through setting the price of a product or a service initially low. Companies that utilize this pricing strategy assume that customers will switch to the new product because of the lower price. Cost-plus pricing: Cost-plus pricing, sometimes called gross margin pricing, is a widely used pricing method because of its simplicity. Managers calculate the cost of producing and delivering a product or a service and add on a percentage (profit) to that price to determine the selling price. Price bundling: The marketer groups a set of products and services for a hospitality or tourism experience such as a vacation or a weekend package and charges a total price that is lower than if those products and services were sold separately. Competitor price matching: Matching the prices of competitors or determining prices based on the prices of market leaders. Marginal cost pricing: The practice of setting the price of a product or service at or slightly above the variable cost to produce it. The final price covers the variable cost and some of the fixed cost. This pricing strategy is justified on the grounds that even a small contribution to fixed cost is better than none since fixed cost will continue to be incurred regardless of the product or service is sold or not. 85  End of chapter slides 86  Discussion Questions Choose a large hotel in a city of your choice. Do an internet search to see how many different prices you can find for the same type of room. Write up your findings. Enter some of the airlines’ web pages and analyse, compare and comment their pricing strategies 87