pricing objectives financial performance – profit, cash flow, return on investment volume –...
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Pricing Objectives
• Financial performance – profit, cash flow, return on
investment
• Volume – sales/revenue, market share
• Competition – leader, follower, parity
• Image – positioning, quality
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Consumer Price Sensitivity
• Price-quality effect
• Unique value effect
• Perceived substitutes effect
• Difficult comparison effect
• Shared cost effect
• Expenditure effect
• End-benefit effect
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Environmental Factors Affecting Price
• Economic
• Social
• Political
• Technological
• Competitive
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Broad Pricing Strategies
• Skim Pricing – high price, exclusive market, unique product
• Penetration Pricing – low price, high volume, economies of scale,
price sensitive consumers
• Neutral Pricing – moderate price, value conscious consumers
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Economic Value and PriceRelative Price
low high
Neutral
Neutral
low
high
Economic Value
Skim Pricing
Penetration Pricing
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Pricing Techniques
• Cost-Oriented Pricing– Break-even pricing– Cost-plus pricing– Target-return pricing
• Demand-Oriented Pricing– Prestige pricing– Odd/even pricing– Price lining
• Competitive Pricing
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Breakeven Analysis
Dollars
Total revenue
Total costs
Losses Profits
Fixed costs
BEPunits Volume
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Price Elasticity of Demand
Price
P2 P2 P2
P1 P1 P1
Q2 Q1 Q2 Q1 Q2 Q1 Quantity
a. Elastic Demand b. Inelastic Demand c. Unitary Demand
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Table 15.2 Segmented Pricing Examples across Industry Segments
Segmentation Strategy
Lodging Food Service Travel Leisure
Buyer Identification Business vs. leisure
Seniors and children Seniors, students Golf memberships for ladies, children, seniors
Purchase Location City, suburban, airport, resort
Mall, airport, corporate dining
Online vs. calling or using a travel agent
Theme parks on-site vs. off-site
Time of Purchase Weekend vs. weekday
Peak hours vs. early-bird (before 6 p.m.)
Peak business travel vs. leisure
Theme parks and golf courses with twilight discounts
Purchase Volume Meetings and corporate contracts vs. transient
Banquets vs. restaurants in hotels
Airlines and rental car companies that offer corporate rates
Golf course discounts for tournaments
Product Design Concierge or business level
Corporate dining facilities often have fine dining and cafeterias
Southwest Airlines “business select” and airline first class seats
Country clubs offer social memberships and full memberships
Product Bundling Overnight stay with champagne brunch and/or theater tickets
“Value” meals or combos (e.g., meal deal at Subway)
Cruise lines offer airline tickets and online travel agents package hotels, airlines, and rental cars
Grouping museum admissions (e.g., Ripley’s Believe It Or Not and Guinness World Records)
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Segmented Pricing
• Segmenting by buyer identification
• Segmenting by purchase location
• Segmenting by time of purchase
• Segmenting by purchase volume
• Segmenting by product design
• Segmenting by product bundling
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Yield Management
Yield management refers to a technique used to maximize the
revenue, or yield, obtained from a services operation, given limited
capacity and uneven demand.
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Reasons for Yield Management
• Perishable inventory
• Fluctuating demand
• Ability to segment customers
• Low variable costs
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Historical Booking Analysis% of Rooms Sold
100%
75% reduce discounts
50%
25% increase discounts
10 20 30 40
Weeks Prior to Date
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Legal Issues in Pricing
• Explicit Agreements
• Nonexplicit Agreements
• Price Discrimination
• Tie-in Sales
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Ethical Restraints in Pricing
Level of Ethical Restraint
1 2 3 4 5
Price is paid voluntarily
X
X
X
X
X
Price is based on equal information
X
X
X
X
Price is not exploiting buyers essential needs
X
X
X
Price is justified by costs
X
X
Price provides equal access to goods regardless of one’s ability to cover the cost
X
© 2010 John Wiley & Sons, Inc.