Setting the Price
Summary
This chapter provided a comprehensive overview of pricing as a marketing mix element, pricing strategies, and their application in sectors such as tourism, hospitality, and leisure.
Key Takeaways
- Price is a critical element of the marketing mix, representing the value exchange between consumers and businesses.
- Effective pricing strategies must balance internal factors (e.g., costs and objectives) with external factors (e.g., market demand and competition).
- The evolution from segmented pricing to dynamic pricing has revolutionized many sectors, allowing for more precise and responsive pricing.
- Psychological pricing techniques can significantly influence consumer perceptions and behaviour.
- Legal and ethical considerations play an important role in pricing decisions, with regulations varying across jurisdictions.
- In the tourism, hospitality, and leisure sectors, pricing strategies must often account for seasonality, perishable inventory, and varying customer segments.
- Technology, particularly AI and big data analytics, is increasingly central to modern pricing strategies, enabling more sophisticated and personalized approaches.
- While pricing is a powerful tool for maximizing revenue, it must be balanced with delivering value to customers to ensure long-term success and brand loyalty.
Exercises
Check Your Understanding
Exercise 1:Â Identifying Pricing Strategies
Scenario: A luxury hotel introduces a new suite priced significantly higher than its other rooms to attract affluent customers and create an exclusive image.
Task: Which pricing strategy is the hotel using?
Recommended Answer:
The hotel is using prestige pricing, as the high price is designed to signal exclusivity and superior quality.
Exercise 2:Â Calculating Markup and Margin
Scenario: A restaurant sells a meal for $25. The cost to prepare the meal is $15.
Task: Calculate the markup percentage and margin percentage.
Recommended Answer:
Markup Percentage:
[latex]\begin{array}{rcl}\text{Markup}&=&[(\text{Selling Price}-\text{Cost})/\text{Cost}]\times100\\\text{Markup}&=&(25−15/15)\times100\\\text{Markup}&=&66.67\%\end{array}[/latex]
Margin Percentage:
[latex]\begin{array}{rcl}\text{Margin}&=&[(\text{Selling Price}-\text{Cost})/\text{Selling Price}]\times100\\\text{Margin}&=&(25−15/25)\times100\\\text{Margin}&=&40\%\end{array}[/latex]
Exercise 3:Â Price Elasticity of Demand
Scenario: A theme park increases ticket prices from $50 to $60, and attendance drops from 10,000 visitors to 8,000 visitors.
Task: Calculate the price elasticity of demand (PED). Is demand elastic or inelastic?
Recommended Answer:
[latex]\text{PED Formula}=\%\text{ Change in Quantity}\div\%\text{ Change in Price} ​[/latex]
[latex]\begin{array}{rcl}\text{Percentage Change in Quantity}&=&[(8\,000-10\,000)/10,000]\times100\\\text{Percentage Change in Quantity}&=&-20\%\end{array}[/latex]
[latex]\begin{array}{rcl}\text{Percentage Change in Price}&=&[60-50/50]\times100\\\text{Percentage Change in Price}&=&20\%\end{array}[/latex]
PED Calculation:
[latex]\text{PED}=-20\div20=-1.0[/latex]
Since PED is equal to -1, demand is unit elastic, meaning the percentage change in quantity demanded equals the percentage change in price.
Exercise 4:Â Applying Psychological Pricing
Scenario: A travel agency offers a vacation package priced at $999 instead of $1,000.
Task: Which psychological pricing strategy is being used, and why might it be effective?
Recommended Answer:
The strategy used is charm pricing, where prices ending in odd numbers (e.g., $999) create the perception of a better deal. This technique appeals to customers by making the price seem significantly lower, even though the difference is minimal.
Exercise 5:Â Ethical Pricing Scenario
Scenario: A resort charges different prices for the same room based on customers’ location, with domestic travelers paying less than international visitors.
Task: Is this practice ethical or unethical? Justify your answer.
Recommended Answer:
This practice could be considered unethical if it constitutes unfair price discrimination based solely on location without justification (e.g., higher costs for international marketing). However, it may be acceptable if it reflects genuine cost differences or market segmentation strategies aimed at affordability for local customers.
Exercise 6: Multiple Choice Questions
Glossary of Key Terms
Anchoring: A psychological pricing technique where a reference price is provided to influence consumers’ perception of value, making the actual price seem more attractive.
Charm Prices: A pricing strategy that uses prices ending in odd numbers (e.g., $199 instead of $200) to create the perception of a lower cost and better value.
Competitor-Oriented Pricing: A strategy where prices are set based on competitors’ pricing, either matching, pricing above, or pricing below competitors.
Customer-Oriented Pricing: A strategy focusing on the customer’s perceived value and willingness to pay rather than solely on costs or competitors’ prices.
Discounting Strategies: Methods such as seasonal discounts, quantity discounts, and bundling used to attract customers or clear inventory while maintaining profitability.
Dynamic Pricing: Real-time price adjustments based on factors like demand, competition, and customer behavior — often leveraging big data and AI technologies.
Ethical Pricing Practices: Ensuring compliance with laws and ethical standards by avoiding practices like price discrimination, predatory pricing, deceptive pricing, and unfair dynamic pricing mechanisms.
Fixed Costs: Stable expenses like rent and salaries that do not vary with production levels. Pricing strategies must account for recovering these costs over time.
Margin Pricing: A pricing method where profit is expressed as a percentage of the selling price, calculated as: Margin=Selling Price−Cost/Selling Price.
Market Skimming Pricing: A strategy involving high initial prices for new products to maximize profits from early adopters before gradually lowering prices.
Markup Pricing: A pricing method where profit is expressed as a percentage of the cost, calculated as: Markup=Selling Price−Cost/Cost
Penetration Pricing: A strategy where low initial prices are set to quickly gain market share and discourage competitors from entering the market.
Prestige Pricing: Setting high prices to create a perception of superior quality, exclusivity, or luxury.
Price Bundling: A technique where multiple products or services are sold together at a combined price that is typically lower than if purchased separately, increasing perceived value.
Price Elasticity of Demand: A measure of how sensitive consumers are to price changes. Elastic demand occurs when small price changes lead to significant changes in quantity demanded, while inelastic demand sees little change in demand despite price shifts.
Price War: A competitive situation where businesses continually lower their prices to undercut each other, potentially leading to unsustainable profitability levels.
Profit-Oriented Pricing: A strategy focused on maximizing profits by setting prices above total production and selling costs, often calculated using margin or markup methods.
Psychological Pricing: Techniques that influence consumer perceptions, such as anchoring (using reference prices), charm pricing (e.g., $199 instead of $200), and bundling (offering multiple products at a combined price).
Revenue Management: An evolved form of yield management that incorporates broader data points and advanced forecasting techniques to optimize total customer value.
Segmented Pricing: Charging different prices for the same product or service based on customer segments, timing, or purchase volume to maximize revenue.
Variable Costs: Costs that change with production volume, such as raw materials and labor. Prices must be set above these costs to ensure profitability.
Yield Management: A pricing approach used in industries like airlines and hotels to maximize revenue by adjusting prices based on demand forecasts and inventory availability.
