Setting the Price
Pricing Strategy Analysis
We will now examine examples of pricing strategies in different contexts.
Pricing Strategies for New Products
When introducing a new product companies can choose from several pricing strategies. The three main strategies are:
- Market skimming pricing
- Market penetration pricing
- Prestige pricing
Market Skimming Pricing
Market skimming pricing involves setting a high initial price for a new product and gradually lowering it over time. This strategy is often used for innovative or highly anticipated products.
Key Points:
- Used when the market is price insensitive
- Maximizes profits from early adopters
- Takes advantage of customers’ willingness to pay high prices for novelty or exclusivity
Example
Market Skimming Pricing
A luxury resort might use skimming pricing when launching a new, state-of-the-art spa facility, initially charging premium rates to attract high-end clientele before gradually offering more accessible pricing options.
Market Penetration Pricing
Penetration pricing involves setting a low initial price to quickly gain market share and discourage competitors from entering the market.
Key points:
- Aims to attract a large customer base rapidly
- Can help establish brand loyalty before competitors enter the market
Example
Market Penetration Pricing
A new budget airline might use penetration pricing to establish itself in a competitive market, offering significantly lower fares than established carriers to attract cost-conscious travelers.
Prestige Pricing
Prestige pricing is a strategy where businesses intentionally set high prices for their products or services to create a perception of superior quality, exclusivity, and luxury. This approach leverages consumer psychology, capitalizing on the tendency to associate higher prices with better value and status.
Key Points:
- Often used for high-end or luxury products
- Price itself becomes a selling point, signaling quality or exclusivity
Examples
Prestige Pricing
Brands like Louis Vuitton, Rolex, and Chanel use prestige pricing to position their products as symbols of luxury, craftsmanship, and exclusivity.
Tour operators offering bespoke (custom) travel experiences, such as private safaris or luxury yacht charters, use prestige pricing to appeal to wealthy travelers looking for rare and unique adventures.
Examples
When is Price Skimming Successful?
Price skimming can be particularly effective under certain conditions.
Inelastic Demand: When customers are not very sensitive to price changes.
Example: Exclusive guided tours to newly discovered ancient ruins.
Superior Product: When the product offers unique features or benefits.
Example: A hotel with groundbreaking technology or services not available elsewhere.
Legal Protection: When the product is protected by patents or copyrights.
Example: A theme park with exclusive rights to use certain characters or themes.
Technological Breakthrough: When the product represents a significant advancement.
Example: A resort offering a revolutionary virtual reality experience.
Limited Production: When supply is constrained, either naturally or artificially.
Example: A small, boutique eco-lodge in a remote location.
Customer Segmentation: Price skimming can be part of a strategy to target different customer segments over time.
Example: A new attraction might start with high prices for early adopters, then gradually lower prices to attract a broader audience.
Discounting Strategies
Discounting strategies are ways to offer lower prices to attract customers, clear inventory, or achieve other business goals. These can be temporary or permanent and can be offered to some or all customer segments.
Key Points:
- Target Market: Different discounts may appeal to different customer segments.
- Timing: The timing of discounts can significantly impact their effectiveness.
- Profitability: Ensure that discounts still allow for acceptable profit margins.
- Brand Image: Be cautious about excessive discounting, which might harm the brand’s perceived value.
- Competitor Response: Consider how competitors might react to your discounting strategy.
Examples
Discounting Strategies
Quantity Discounts: These are price reductions offered to customers who buy in large quantities.
Example: A tour operator might offer a discount to travel agencies that book a certain number of tours per year.
Seasonal Discounts: These are price reductions offered during off-peak periods to stimulate demand.
Example: A ski resort offering lower rates during the summer months or a beach hotel offering discounts during the winter.
Trade Discounts: These are discounts given to intermediaries in the distribution channel, such as travel agents or online booking platforms.
Example: A hotel chain might offer a 10% commission to travel agents who book rooms for their clients.
Trade-in Allowances: While more common in industries like automotive, this concept can be adapted to tourism and hospitality.
Example: A timeshare company might offer a discount to customers who “trade in” their existing timeshare for a new one.
Price Bundling: This involves combining multiple products or services into a package deal at a lower price than if bought separately.
Example: A “city break” package that includes hotel accommodation, airport transfers, and tickets to local attractions at a discounted rate.
Last-Minute Pricing: This involves offering discounts on unsold inventory close to the date of use.
Example: A cruise line offering reduced rates on unsold cabins a week before departure.
Examples
Discounting Strategies in Action
Airlines: Offer lower fares for bulk bookings (quantity discount) and during off-peak travel times (seasonal discount).
Hotels: Provide special rates for travel agents (trade discount) and create vacation packages that include meals and activities (price bundling).
Theme Parks: Offer discounted tickets for large groups (quantity discount) and lower prices during weekdays or off-season (seasonal discount).
Cruise Lines: Provide last-minute deals on unsold cabins (last-minute pricing) and offer package deals including flights and excursions (price bundling).
Psychology of Price: Perceived Value Practices
Psychological pricing involves understanding how consumers perceive and respond to different pricing strategies. Perceived value is crucial as customers often make decisions based on their perception of what they are getting for their money.
Let’s explore three key practices:
- Anchoring
- Charm prices
- Price bundling
Anchoring
Anchoring is a cognitive bias where consumers rely heavily on the first piece of information offered (the “anchor”) when making decisions.
How It Works:
- Present a higher price first, making subsequent prices seem more reasonable.
- Use a reference price to make the actual price seem more attractive.
Examples
Anchoring
A hotel might list a “rack rate” (full price) of $300 per night, then offer a “special deal” of $200, making the $200 seem like a great value.
A cruise line might advertise “Suites from $1,500 per night,” making their $500 standard cabins seem more affordable in comparison.
Key Point: The initial price serves as an “anchor” that influences how consumers perceive subsequent prices.
Charm Prices
Charm prices involve setting prices just below a round number.
How It works:
- Use prices ending in 9, 99, or 95 to create the perception of a better deal.
- Consumers tend to round down rather than up when seeing these prices.
Examples
Charm Prices
A tour package priced at $999 instead of $1,000.
A hotel room rate of $295 per night instead of $300.
Key Point: Charm prices can make a product seem significantly cheaper, even if the actual difference is minimal.
Price Bundling
Price bundling involves combining multiple products or services into a single package at a price that is perceived as a better value than buying the items separately.
How It Works:
- Combine complementary products or services.
- Offer a package price that is lower than the sum of individual prices.
Examples
Price Bundling
Many resorts offer all-inclusive packages that bundle accommodation, meals, drinks, and activities into one price. This approach simplifies the vacation experience for travelers and often creates a perception of greater value.
Fast food restaurants often offer meal deals that bundle a main dish, side, and drink at a lower price than purchasing items individually. This strategy encourages customers to spend more while perceiving better value.
Key Point: Bundling can increase perceived value and encourage customers to spend more overall.
Examples
Applying Psychological Pricing Practices in Tourism and Hospitality
For a Resort:
- Anchor: Display the peak season rate prominently.
- Charm Price: Offer an off-season rate of $299 per night.
- Bundle: Create a package including accommodation, spa treatment, and dining.
For an Airline:
- Anchor: Show the flexible fare price first.
- Charm Price: Offer economy seats at $199 instead of $200.
- Bundle: Create a package with flight, hotel, and car rental.
For a Theme Park:
- Anchor: Highlight the gate price for a single-day ticket.
- Charm Price: Offer advance online tickets for $89 instead of $90.
- Bundle: Create a multi-day pass that includes fast-track options and meal vouchers.
Remember, while these practices can be effective, it is important to use them ethically and ensure that customers always receive fair value for their money.
Which leads us to the final topic in this chapter…
Legal Issues Related to Pricing
While pricing strategies are important for business success, companies must be aware of legal constraints and regulations surrounding pricing practices. Some key legal issues related to ethical pricing practices include:
- Price discrimination
- Predatory pricing
- Price fixing
- Deceptive pricing practices
- Tax-inclusive vs. tax-exclusive pricing
- Dynamic pricing and privacy concerns
Price Discrimination
Price discrimination involves charging different prices to different customers for the same product or service. While often legal, it can become problematic if it unfairly targets specific groups.
Key Points:
- Generally legal when based on factors like quantity purchased, time of purchase, or customer segment.
- Can be illegal if based on protected characteristics like race, gender, or nationality.
Examples
Price Discrimination
A hotel offering different rates to corporate clients versus leisure travelers is usually legal, but offering different rates based on customers’ ethnicity would be illegal.
“Price Discrimination – Good or Bad?” [1:59 min] by StreamLearn[1]
“Exposing Price Discrimination in Online Shopping (Marketplace)” [22:25 min] by CBC News[2]
Predatory Pricing
Predatory pricing involves setting prices unreasonably low to drive competitors out of business.
Key Points:
- Illegal in many jurisdictions as it is considered anti-competitive.
- Difficult to prove as it requires demonstrating intent to harm competition.
Example
Predatory Pricing
A large hotel chain drastically lowering prices in a specific location to force smaller, independent hotels out of business could be considered predatory pricing.
Price Fixing
Price fixing occurs when competitors agree to set prices at a certain level, which is illegal under competition laws.
Key Points:
- Strictly prohibited in most countries.
- Includes agreements on price ranges, discounts, or other pricing terms.
Example
Price Fixing
If several airlines agreed to set minimum fares on certain routes, this would be illegal price fixing.
Deceptive Pricing Practices
Deceptive pricing practices include various ways of misleading consumers about prices. These practices are regulated by consumer protection laws.
Key Points:
- Includes practices like bait-and-switch, hidden fees, or misleading reference pricing.
- Bait-and-switch: Advertising a great deal to get customers in, then pressuring them to buy a more expensive item.
- Misleading Reference Pricing: Showing a fake “original” price to make a sale price look better.
Example
Deceptive Pricing Practices
Advertising a low hotel rate but then adding significant mandatory “resort fees” at check-in could be considered deceptive.
Tax-Inclusive vs. Tax-Exclusive Pricing
Tax-inclusive and tax-exclusive pricing occur when different jurisdictions have different rules about whether advertised prices should include taxes.
Key Points:
- In some countries, tax-exclusive pricing is standard (e.g., US and Canada).
- In others, tax-inclusive pricing is required by consumer protection laws.
Example
Tax-Inclusive vs. Tax-Exclusive Pricing
A tour package advertised in Europe might need to include all taxes in the displayed price, while in the US, it might not.
Dynamic Pricing and Privacy Concerns
The use of personal data for dynamic pricing raises legal and ethical questions.
Key Points:
- Must comply with data protection laws (e.g., General Data Protection Regulation (GDPR) in Europe).
- Potential for discrimination claims if pricing algorithms produce biased results.
Example
Dynamic Pricing and Privacy Concerns
An online travel agency using browsing history to adjust prices could face scrutiny under privacy laws.
Government Oversight and Consumer Protection in Canada
Competition Bureau of Canada: This is a government agency that makes sure businesses compete fairly. They enforce laws that prevent things like price fixing and misleading advertising.
Office of the Privacy Commissioner of Canada: This office makes sure companies follow privacy laws, including how they use customer information for pricing.
Provincial Consumer Protection Acts (BC’s version): Each province in Canada has its own set of laws to protect consumers. These laws cover various aspects of how businesses can sell products and set prices.
Media Attributions
- Figure 1: “Man in green jacket walking on sidewalk during daytime” Markus Spiske (2020), via Unsplash, is used under the Unsplash content license.
- StreamLearn. (2014, October 21). Price discrimination - Good or bad? [Video]. YouTube. https://youtu.be/MpG9FSbZKz0?si=9_K2b3AtbxEpeQvz ↵
- CBC News. (2017, November 24). Exposing price discrimination in online shopping (Marketplace) [Video]. YouTube. https://youtu.be/NZVpbwz6kPk?si=l-hcCH92ADAO61nn ↵
A strategy involving high initial prices for new products to maximize profits from early adopters before gradually lowering prices.
A strategy where low initial prices are set to quickly gain market share and discourage competitors from entering the market.
Setting high prices to create a perception of superior quality, exclusivity, or luxury.
Methods such as seasonal discounts, quantity discounts, and bundling used to attract customers or clear inventory while maintaining profitability.
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).
A psychological pricing technique where a reference price is provided to influence consumers' perception of value, making the actual price seem more attractive.
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.
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.
Ensuring compliance with laws and ethical standards by avoiding practices like price discrimination, predatory pricing, deceptive pricing, and unfair dynamic pricing mechanisms.
