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• Companies today face a fierce and fast-changing pricing environment.

• Value-seeking customers have put increased pricing pressure on many companies.

• Cutting prices is often not the best answer.

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Introduction

Price

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• Internal & external company factors affect a company’s pricing decisions. – internal factors include marketing objectives, marketing

mix strategy, costs & organizational considerations

– external factors include the nature of the market, demand

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Internal & External

Factors to Consider When Setting Prices

Figure 11-1 Factors affecting price decisions.

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Introduction

General Pricing Approaches

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• Pricing strategies usually change as a product passes through its life cycle, and the introductory stage is especially challenging, as several options exist:– prestige, market-skimming & market-penetration pricing

• Prestige Pricing - hotels or restaurants seeking to position themselves as luxurious and elegant enter the market with a high price to support this position.

• Market-Skimming Pricing - setting a high price when the market is price-insensitive. – a danger is that competition will enter the market, creating

more supply and eventually reducing prices

Descriptions

Pricing Strategies

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Prestige Pricing – most expensive hotels in the world

• http://www.dirjournal.com/info/10-most-expensive-hotel-rooms-in-the-world/

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Market Skimming – Space tourism by Virgin

• http://www.virgingalactic.com/booking/

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– the market must be highly price-sensitive so that a low price produces more market growth

– there should be economics that reduce costs as sales volume increases

– the low price must help keep out competition

Descriptions

Pricing Strategies

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• Market-Penetration Pricing - other companies seta low initial price to penetrate the market quickly & deeply, attracting many buyers and winning a large market share.

• Several conditions favor setting a low price:

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• Product-Bundle Pricing - sellers combine several products and offer the bundle at a reduced price. – hotels sell specially priced weekend packages

• Product bundling can promote the sales of products that consumers might not otherwise buy.

• What is the benefits of products bundling?

Existing Product Pricing Strategies

Pricing Strategies

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• Volume Discounts - most hotels have special rates to attract customers who are likely to purchase a large quantity of hotel rooms.

• Discounts Based on Time of Purchase - seasonal discounts allow the hotel to keep demand steady during the year.

• Discriminatory Pricing - the term often invokes mental images of discrimination on the basis ofrace, religion, gender, or age. – sex-based price discrimination has served as a promotional

tactic in nightclubs that offer a ladies nights

Price Adjustment Strategies

Pricing Strategies

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• The ongoing fear of “product spoilage” from unsold inventory creates a market for last-minute selling.

• Private companies known as consolidators or travel consolidators acquire excess inventory from diverse members of the hospitality industry, create consumer packages, and sell them at discounts to the public.

• Participating suppliers such as bed and breakfasts and guest ranches often sell their available inventory at discounts of 50% or more.

Last-Minute Pricing

Pricing Strategies

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• Psychological pricing considers the psychology of prices, not simply the economics. – prestige can be created by selling products & services at a

high price

• Another aspect is reference prices.– prices buyers carry in their minds & refer to when they

look at a given product

• A buyer’s reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation.

• Popular products often have reference prices.

Psychological Pricing

Pricing Strategies

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• Customers tend to simplify price information by ignoring end figures. – there is greater perceived distance between $0.69 and

$0.71 than between $0.67 and $0.69

• Consumers tend to round figures, and the length of the field is another consideration.– the jump from $0.99 to $1.00 or $9.99 to $10.00 can be

perceived as significant, although it is only one cent

• Some psychologists argue digits have symbolic & visual qualities that should be considered in pricing.– because the number 8 is round, it creates a soothing effect

Psychological Pricing

Pricing Strategies

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• When companies use promotional pricing, they temporarily price their products below list price.– sometimes even below cost

• During slow periods, hotels may offer special promotional rates to increase business, and well-managed hotels create special events: – a Valentine’s weekend special

– a theater package with a room & tickets to a play

• Promotions give the guest a reason to come, add value for the customer & creates a positive image. – straight price discounting can create a negative image

Promotional Pricing

Pricing Strategies

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• The restaurant industry has historically employed a rule of thumb that the highest price entree should be no more than 2.5 times as expensive as the lowest.

• The rationale is that if the price span is too great, customers purchase predominantly the low-price items, which probably carry the lowest margins.

• A study at Cornell University in the Terrace Restaurant tended to confirm this rule of thumbas indeed correct.

• http://www.foodservicewarehouse.com/education/restaurant-operations/price-menu-items.aspx

Price Spread Effect

Other Pricing Considerations

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• After developing their price structures & strategies, companies may face occasions when they want tocut or raise prices.– excess capacity, or to dominate the market

– Inevitably many companies must eventually raise prices, knowing the increases may be resented by customers, dealers, and their own sales force.

Price Changes

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Initiating price changes

• Price Cuts Price Increase

Excess Capacity

Falling Market Share

Dominate Market through lower cost

Cost Inflation

Over Demand; Cannot supply all customer needs

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• Major airlines face very difficult pricing strategy decisions in these tough air travel times. – some offer no-frills flights & charge rock-bottom prices,

others offer luxury & prices to match

• One airline appears to have found a radical new pricing solution, that customers are sure to love.– make flying free!

• Michael O’Leary chief executive of Ireland’s Ryanair, wants to make air travel free, as in zero cost.– by the end of the decade, he promises, “more than half of

our passengers will fly free.”

Ryanair

Pricing - Considerations, Approaches, Strategy

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– last it flew year 42.5 million passengers to more than100 European destinations

– sales, $2.2 billion were up 28% over the previous year

– profits have increased at double-digit rates

– though average fare is just $53, Ryanair’s net margins are 18% more than double Southwest’s 7%

Ryanair

Pricing - Considerations, Approaches, Strategy

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• Few analysts think his prediction is farfetched.– Ryanair already offers free fares to 25% of its customers

• Ryanair is one of Europe’s most popular carriers.

• The secret? Ryanair’s frugal cost structure, modeled after Southwest’s.

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• The Irish airline also charges for virtually everything except tickets, from baggage check-in to seat-back advertising space. – says an analyst. “Imagine the seat as akin to a cell phone:

It comes free, or nearly free, but its owner winds up spending on all sorts of services.”

• Following Southwest’s lead, to economize, Ryanair employs only a single type of aircraft.– the good old Boeing 737

• It also began focusing on smaller secondary airports and offering unassigned passenger seating.

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Ryanair

Pricing - Considerations, Approaches, Strategy

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– for example, removing seat-back pockets to reduce weight and cleaning expense

– Ryanair sells more than 98% of its tickets online, cutting admin costs & travel agent commissions

– flight crews even buy their own uniforms and headquarters staff members supply their own pens

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Ryanair

Pricing - Considerations, Approaches, Strategy

• Ryanair has since taken Southwest’s low-cost pricing model even further. – O’Leary says “We want to be …the Wal-Mart of flying”

• Ryanair is constantly looking for ways to cut costs.

• Passengers reap the benefit in lower fares.

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• The penny-pinching airline also charges passengers for virtually every optional amenity they consume.– notes a Business 2.0 analyst, “There are no free peanuts

or beverages on Ryanair flights”

• Ryanair eliminated its free checked-bag allowance and began charging $3.50 per piece.– a ‘revenue-neutral’ fee offset by cutting ticket prices an

average of $3.50

• The airline is just as aggressive in its efforts to develop new sources of revenue.– and has turned planes into giant billboards, displaying ads

for such companies as Vodafone Group, Jaguar, and Hertz

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Ryanair

Pricing - Considerations, Approaches, Strategy

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• Flight attendants hawk everything from scratch-card games to perfume & digital cameras.

• The company gets commissions from sales of Hertz rental cars, hotel rooms, ski packages, and travel insurance.– ancillary revenues rose 36%, to $332 million

• Customers aren’t complaining, because the additional purchases are discretionary. – many are entertaining or make life a little easier

• Ryanair even intends to offer in-flight gambling in the near future, with the airline earning a cut.

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Ryanair

Pricing - Considerations, Approaches, Strategy