Transcript New-Product Pricing Strategies

Chapter 12
Pricing
Products:
Pricing
Considerations,
Approaches,
and Strategy
©2006 Pearson Education, Inc.
Upper Saddle River, NJ 07458
Marketing for Hospitality and Tourism, 4th edition
Kotler, Bowen, and Makens
“The real issue is value, not
price.”
-Robert T. Lindgren
©2006 Pearson Education, Inc.
Upper Saddle River, NJ 07458
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Marketing
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and Tourism,
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Kotler,
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Bowen,and
andMakens
Makens
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
©2006 Pearson Education, Inc.
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Kotler,
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Chapter Objectives
• Contrast the differences in general pricing
approaches, and be able to distinguish
among cost-plus, target profit pricing, valuebased pricing, and going rate
• Identify the new product pricing strategies of
market-skimming pricing and marketpenetration pricing
©2006 Pearson Education, Inc.
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and Tourism,
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Chapter Objectives
• 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 to
price changes
©2006 Pearson Education, Inc.
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Price
• Price is the amount of money charged for a
good or service
• The only marketing mix element that
produces revenue
• Changing too much chases away potential
customers, charging too little cuts revenue
©2006 Pearson Education, Inc.
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and Tourism,
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Factors to Consider
when Setting Prices
©2006 Pearson Education, Inc.
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Internal Factors
• Marketing Objectives
– Survival
– Current Profit Maximization
– Market-Share Leadership
– Brad Equity Growth
– Product-Quality Leadership
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Internal Factors
• Marketing Mix Strategy
• Costs
– Fixed vs. Variable Costs
• Organizational Considerations
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External Factors Affecting
Pricing Decisions
• Market and Demand
• Cross Selling and Upselling
• Consumer Perceptions of Price and
Value
©2006 Pearson Education, Inc.
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External Factors Affecting
Pricing Decisions
• Analyzing the Price – Demand
Relationship
• Price Elasticity of Demand
• Factors Affecting Price Sensitivity
©2006 Pearson Education, Inc.
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Price Elasticity of Demand
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Factors Affecting Price
Sensitivity
• Unique Value Effect
• Substitute Awareness Effect
• Business Expenditure Effect
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Factors Affecting Price
Sensitivity
•
•
•
•
End-Benefit Effect
Total Expenditure Effect
Sunk Investment Effect
Price Quality Effect
©2006 Pearson Education, Inc.
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General Pricing Approaches
• Cost-Based Pricing
• Break-Even Analysis and Target Profit Pricing
• Value-Based Pricing
• Competition-Based Pricing
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Cost Based Pricing
Product
Cost
Price
Value
Customers
©2006 Pearson Education, Inc.
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Break-even
•
•
•
•
•
•
•
BE= Fixed Costs/Contribution (SP-VC)
Example - Meal - SP = $20, VC = $8
Fixed costs are $2400 a day
BE=$2400/$12 = 200
Need to sell 200 meals @ $20 to break-even
VC = 40%, contribution = 60%
BE = $2400/.6 = $4000
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Break-even Analysis or Target Profit
Pricing
©2006 Pearson Education, Inc.
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Value-based Pricing
Customer
Value
Price
Cost
Product
©2006 Pearson Education, Inc.
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Competition-Based Pricing
Product
Cost
Price
Value
Customer
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Pricing Strategies
• New-Product Pricing Strategies
• Existing-Product Pricing Strategies
• Psychological Pricing
• Promotional Pricing
©2006 Pearson Education, Inc.
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New-Product
Pricing Strategies
• Prestige Pricing
• Market-Skimming Pricing
• Market-Penetration Pricing
©2006 Pearson Education, Inc.
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Setting Initial Product Prices
Market Skimming
> Setting a high price
for a new product to
skim maximum
revenues from the
target market.
> Results in fewer,
more profitable sales.
> Popular night club
charges a high cover
charge
©2006 Pearson Education, Inc.
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Market Penetration
> Setting a low price
for a new product in
order to attract a
large number of
guests.
> Results in a larger
market share.
> New Marriott
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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
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Product-Bundling Pricing
• Transfer surplus reservation price (the maximum
price a customer will pay for a product)
– Customer A will pay $60 for a Disney pass and and
$120 for a hotel room,Customer B will pay $95 for the
Disney pass and $80 for the hotel room – A hotel
selling a two night package with pass for $350 will get
both customer
• Price-bundling also reduces price competition –
by making it hard to figure price of components
– In an airline and hotel package it is difficult to
determine the price of the room
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Psychological Pricing
• Price-quality relationship
• Reference prices
• Rounding
• Length of the field
©2006 Pearson Education, Inc.
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Promotional Pricing
• Temporary pricing of products below
list price and sometimes below cost
– Value Pricing
– Price Sensitivity Measurement
©2006 Pearson Education, Inc.
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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?
©2006 Pearson Education, Inc.
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Marketing
Marketing
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and Tourism,
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Kotler,
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Bowen,and
andMakens
Makens
Other Pricing
Considerations
• Price Spread Effect
– “The highest price menu item should
not be more the 2.5 times the price
of the lowest”
• Price Points
©2006 Pearson Education, Inc.
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Initiating Price Cuts
• Excess capacity
• Dominate market
• Increase market share
©2006 Pearson Education, Inc.
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Marketing
Marketing
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Initiating Price Increases
• Increase profits
• Cost inflation
• Excess demand
©2006 Pearson Education, Inc.
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Marketing
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Kotler,
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Reactions to Prices Changes
• Buyer’s reaction
• Competitor’s reaction
• Trade Ally’s reaction
©2006 Pearson Education, Inc.
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Marketing
Marketing
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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?
©2006 Pearson Education, Inc.
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Marketing
Marketing
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and Tourism,
and Tourism,
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Kotler,
Kotler,Bowen,
Bowen,and
andMakens
Makens