Pricing in Tourism and Hospitality PDF

CHAPTER 6 PRICING IN TOURISM AND HOSPITALITY CELESTE NAVARRO - CASPE, MSBA LEARNING OBJECTIVES: A. Discuss price and its role in tourism marketing. B. Enumerate the key factors affecting price. C. Identify the general pricing approaches and strategies; D. Explain the concept of revenue management...

CHAPTER 6 PRICING IN TOURISM AND HOSPITALITY CELESTE NAVARRO - CASPE, MSBA LEARNING OBJECTIVES: A. Discuss price and its role in tourism marketing. B. Enumerate the key factors affecting price. C. Identify the general pricing approaches and strategies; D. Explain the concept of revenue management and market recovery through price. E. Explain how to deal with price changes. WHAT IS PRICE? Price is the amount that the customer pays for the products; the amount of money exchanged for something of value. Price makes products available to the target market and reflects the value of the product. Key Concepts Relevant to Pricing There are a few terms that need to be defined in order to easily understand concepts in pricing. They are as follows: 1. Sales – total amount that a company gets based on quantity sold multiplied with selling price. 2. Revenue - total income/profit that the company keeps after all the expenses have been paid for. Simply put: sales minus expense equals revenue. 3. Fixed Costs - costs incurred due to the operations of the business; do not fluctuate with volume of sales 4. Profit Margin – level of income that is desired by the company. This usually comes out in percentage form as the amount of mark-up placed on top of the fixed and variable cost of a product. 5. Variable Costs - costs that vary based on volume or quantity. Bigger quantities of the same order will cost less than smaller quantities of the same specifications. This concept is commonly known as economies of scale. 6. Break-even Point - the point wherein total cost is equal to total revenue. A company incurs a loss if cost exceeds revenue and generates an income when revenue exceeds costs. Key Factors Affecting Price 1. Costs The setting of prices should incorporate a calculation of how much it costs the organization to produce the product or the service (Hudson 2008). Both variable and fixed costs should be included in the price. 2. Organizational and Marketing Objectives Companies get into business for survival, profit maximization, high rate of return of investment, brand equity growth, and an adequate share of the market. 3. Other Marketing Mix Variables Price is affected by the interplay of the other variables in the marketing mix. 4. Buyer Perceptions of Value and Price Buyers have different perceptions of product quality and value based on branding and image. Price affects buyer perceptions. 5.Competition Knowing what competition offers is an important factor in the success of a business. In highly price-sensitive markets, companies try to win customers by setting a lower price than that of competition. 6. Government Regulations and Taxes Some government regulations and taxes can either cause a company to maintain its low prices or increase its prices 7. Nature of the Market and Demand Tourism caters to a highly segmented marketplace. Pricing needs to address the differences in the nature of such markets as well as the differences in the demand of each market segment. 8. Pricing in Different Markets Different markets have different levels of price sensitivity. Hence, a one price-fits-all market would not be recommended. 9. Price Elasticity of Demand Price increases or decreases normally have an effect on the level of sales of the product. The concept of elasticity of demand is shown in this formula: If demand increases when price decreases, then the product is elastic. If demand stays the same even if there is a price cut, the product is inelastic. In the tourism industry, as prices fall, demand increases; hence, products are elastic. 10. Other Environmental Factors Other environmental factors that may be beyond the company's control can affect pricing. Price and Its Relationship to Marketing Objectives Tourism establishments may have different reasons for coming up with a marketing mix strategy. 1. Survival A company may be experiencing a deep crisis that the most basic reason for its marketing efforts is merely to survive. 2. Current Profit Maximization Some companies seek to use marketing for short term financial gains. Gains such as current profit maximization, improved cash flows and swift return on investment are mostly for short-term financial gains. 3. Market Share Leadership Some companies build on marketing strategies that will help the company gain a huge market share and become a market leader in its product category. 4. Brand Equity Growth Establishing a positive brand image leads to high awareness and perception of quality. 5. Product-Quality Leadership Some companies want their brands to be associated with high quality.  GENERAL PRICING APPROACHES Aside from pricing strategies, this chapter also discusses some general pricing approaches that will help marketers in determining the "right" price. 1. Cost-based Pricing. Cost-based pricing is an approach that aims to cover costs and make a profit. 2. Break-even Analysis and Target Profit Pricing. This kind of pricing approach is when price is determined using break-even price and projecting a target profit. 3. Buyer-based Pricing (Value-based). Some companies base their prices on the product's value as perceived by the consumers. 4. Competition-based pricing. This approach looks at what price competitors are putting on their products and services. All these pricing strategies are valid. Because of the changing market environments and high degree of product perishability, successful pricing should be more scientifically determined. Having the right price means that the price is acceptable to the buyers, captures the projected market share, covers all fixed and variable costs, and provides an acceptable margin of profit.  PRICING STRATEGIES Pricing strategies are ways by which tourism businesses offer products and services at the "right" price. Prestige Pricing Prestige pricing is used when the product or service positioned to be luxurious and elegant. Higher price (compared to prevailing market prices) projects that the product is high-end and prestigious. Market Skimming Pricing Companies employ the market skimming pricing strategy when the market is price insensitive. Consumers become price insensitive when demand is high and supply is low. Market Penetration Pricing Market penetration pricing is used when setting a low initial selling price to penetrate the market quickly and to attract many buyers for a large market share. Pricing that considers market behavior and demand include (1)product bundling, (2)volume discounts, (3)discounts based on time of purchase, and (4)discriminatory pricing. 1. Product Bundling Pricing Product bundling is a strategy used to attract buyers to purchase because of the reduced rate of the bundle compared to the total cost of the items if purchased individually. 2. Volume Discounts Volume discounts are rates given to frequent or high volume users to attract them to purchase the products. 3. Discounts Based on Time of Purchase This strategy addresses the seasonality aspect of the tourism product. A price reduction is given to buyers who purchase services out of season when the demand is lower (Kotler et al. 2010) or when purchased way ahead of time. 4. Discriminatory Pricing Kotler et al. (2010) define discriminatory pricing as the segmentation of the market and pricing differences based on price elasticity characteristics of the segments. Other pricing strategies, which may influence purchase, include (1)psychological pricing and (2)promotional pricing. 1. Psychological Pricing Psychological aspects like prestige, reference prices, round figures, and ignoring end figures are used in pricing. This strategy plays on the psychology of the consumer. 2. Promotional Pricing Promotional pricing offers discounts and short-term incentives especially during the introductory stage of the product or during special activities such as anniversaries or festivals. Value Pricing Offering the price below competitors permanently, unlike promotional pricing where the price is lowered temporarily (Kotler et al. 2017) REVENUE MANAGEMENT Revenue management is a systematic approach to matching demand for services with an appropriate supply in order to maximize revenues (Shoemaker et al.2007). With advancements in technology, revenue management has become more scientific and less gut feel-based. It plans out the ideal business mix (types of clients vary from different industries, group size, length of stay, etc.) and adjusts rates on an ongoing basis as reservations materialize. Shoemaker et al. (2007) cite that revenue management is beneficial to the hotel and airline industry in particular because of the following reasons: 1. Product is perishable 2. Capacity is fixed daily. 3. Demand fluctuates and is uncertain depending on days of the week and seasons of the year. 4. Different market segments have different lead times for purchase. 5. Flexibility in pricing hotel rooms and airline seats.  Thorough knowledge of one's market segments, their purchase behavior, travel motivations, and price acceptable to each market is important to ensure business success. Forecasting demand is also crucial to the success of managing revenue. Kotler et al. (2010) discuss a similar term known as yield management. Yield management is a form of discriminatory pricing wherein some of the market segments pay higher or lower prices than other tourists for the same tourism products and services in order to ensure optimal from the available inventory. It aims to manage revenue by controlling prices and capacity. Calculating Yield A hotel has a fixed number of rooms per day and a variety of market segments with different price ranges. Let us demonstrate in simple terms how yield is calculated. Hotel ABC has 500 rooms and an average rack rate of P3, 000.00. On January25, it had occupancy of 70% and an average room rate of P2, 500.00. Revenue potential is P1, 500,000.00 (500 rooms x P3, 000.00). Rooms occupied are 350 rooms (500 rooms x 0.7). Revenue realized is P875, 000.00 (350 rooms x P2, 500.00) Yield is computed by dividing revenue realized over projected income. In this case, yield is 58.33% (P875, 000,000/P1, 500,000). Hotel ABC can realize the same yield or a higher yield if it sells fewer rooms at a higher rate or more rooms at a lower rate.  400 This example illustrates how pricing can affect revenue and volume. An understanding of the impact of price on volume and potential revenue can help business owners come up with a suitable pricing strategy. Market Recovery through Price Some destinations that have lost market share through different external and internal reasons may recover from their loss through price combined with effective promotions. Price can represent a significant incentive to encourage visitors to offset their fears and to return(Hsu et al. 2008) Dealing with Price Changes Know when to initiate a price cut or a price increase. When does a company change its prices? Companies need to be careful to employ price cuts because doing so might lead to a price war where all the market players are affected negatively. One major reason to cut prices is when there is excess capacity or inventory. Another reason for cutting price is to gain a higher market share. Price increases, on the other hand, become inevitable mainly due to inflation. A price increase should also be perceived by its customers as justified. Increasing prices should be timed strategically. Price increases are usually less welcomed than price cuts by customers. Competitors will also react to price changes, since price can easily be matched by competitors, a firm that lowers its price and has it matched by competition loses both its competitive advantage and profit (Kotler 2010). End of Chapter 6