1. The price a hotel charges for its services will be somewhere between one that is too low to make a profit and one that is too high to produce sufficient demand. A hotel must consider internal and external factors to find the best price between these two extremes. Using the diagram below explain the internal and external company factors that affect hotel pricing decisions.
Marketing Objectives. Once in the market businesses set different product strategies that will help them establish the final price of the good or service.
- Survival: in the short term the survival of a firm is more important than profit. Businesses having trouble while dealing with competition, high capacity or the change in market demand set survival as their objective. Hotels are businesses which use this objective more often particularly if the economy experiences problems. The business trying to make it through the slump trying achieve the best possible cash flow given the situation, it will cut on its room rates and hoping to attract more customers in order to minimize its losses. This strategy has an obvious and direct effect on close competitors and the market segment itself. For example a hotel which has 100 rooms no matter what happens it will have the same amount of rooms to offer even if the occupancy drops, but lower demand means less profit. So by dropping rates the hotel hopes to raise its occupancy and lessen the overall loss.
- Current Profit Maximization: Businesses always care about profit, the higher the revenue the better for the operation. Companies try to come up with the best price for their product that will yield the highest income, return on investment, cash flow and focus on current financial results rather than on the long term. In order to achieve this they try to estimate possible prices with different levels of demand before selecting the one offering the highest results.
- Market Share Leadership: There are businesses that want to have a strong or even dominant position in the market. These companies believe that if they attract the most customers of their target market compared to their competition then they will eventually have lower costs and much higher long term revenue. This strategy uses mainly the price as a demand motivator combined with some of the other elements of the market mix aiming to create the impression of better value than the competitors. To do so the business sets their product price as low as possible in order to produce some revenue then slowly rises the amount. For example a Newly opened restaurant will set its prices much lower than those of competition but high enough in order not to has loss of revenue once it has established itself in the market and control attracts the majority of the segment's customers it will begin to raise its prices aiming at a much higher income.
Marketing Mix Strategy: Price is only one of several tools that businesses use to achieve it marketing objectives. In order for a company to be successful it has to coordinate its prices with the product design, distribution and promotion tactics and in this way form an effective and stable marketing program. The elements composing the marketing mix are closely related to each other and any changes or decisions affecting one of them will have effect on the others. For example Hotels that wish to promote themselves as an All-inclusive and distribute their rooms through tour operators need to built enough margins into their room price to be able to cover its other expenses like wages, utilities and suppliers as well as promotion costs while still generating enough income for operational purposes such as maintenance, repairs or equipment purchase.
Costs: Having referred to costs it is important to say that the overall costs of a business can also be a base for a company to develop its product price. As described in the example above a business wants to cover its production, promotion and distribution costs as well as acquiring enough revenue a fair amount of money to present to its investors. There are many businesses and operations that try to become the low cost producers of their industry. For example Goodies has developed a system of producing it fast food items with great efficiency. Any new fast food chain or franchise will have difficulties competing with the low prices Goodies already offers compared to costs. Effective low cost producers manage to achieve saving money on costs through the use of efficiency rather than decrease of quality as companies with lower costs can set lower prices. Some however prefer to keep their prices at same levels as those of competitors allowing their low cost ration to generate greater profit.
Costs within a business take two forms, fixed and variable. Fixed costs is a standard amount of money the company will have to pay on an annual bases regardless of it's production levels (rent, interest, wages etc). Variable costs on the other hand are production related and generally increase and fall depending of the final output of the business (raw material costs, transportation costs etc). The total costs of an operation is the sum of these two categories.
Organizational Considerations: Companies depending on their size and philosophy handle pricing in different ways, but it is always the management which decides who will be responsible for determining the price of products. In small businesses it is the top management that sets prices for their product. Larger companies posses a marketing and sales department which evaluates and sets the prices for goods and services following the guidelines set by the management. For example a hotel sales department develops a monthly average report containing rates and occupancies; the management examines and approves the plan and proceeds based on these reports. Once the objective is set the hotel manager in cooperation with the sale manager try to achieve these objectives. However in periods of low demand the hotel will have difficulties reaching the target goal while in periods of high demand the hotel will likely exceed target revenue. And while managers have this freedom of pricing depending on the season or individual group in the end of the financial period they are responsible for achieving the set pricing and occupancy reports.
Market and Demand: As I already explained costs set the base for prices, but the maximum a price can reach is set by market demand. Costumers and channel buyers like tour wholesalers are the ones who balance product prices against the benefits they offer. For that reason before setting prices a marketer must understand the current relations between the price and demand related with target product.
Cross-Selling and Upselling: Cross selling is an effective revenue management technique; it is the practice of selling additional products that are of different nature along with the company's main product. For example a hotel cross sells rooms, food and beverages, executive support such as fax, different kinds of extra services depending on the nature of the hotel (spa, amusement park etc) it can also sell retail products like clothes, towels or china.
Upselling is another method of effective revenue management; it involves training employees related with sales and reservations to offer a more expensive product instead of making a sale of a cheaper product or service.
While it is easy to change the price of a product and is often seen as an easy solution to a complex problem, it is hard to understand if the increase or decrease of the price will be the correct thing to do. Pricing decisions need good understanding of costumers, market factors, the economic environment and competition.
Costumer Perceptions of Price and Value: The bottom line is that the costumer is the one who will decide if the price of a product is correct based on its overall quality. When pricing a product the business must consider how the consumers perceive the price and how it affects their decision to buy something. The business must also consider which target market they will target because consumer believes differ from market to market even in the same segment. For example a Cheese Burger in a fast food operation like McDonald's offering little quality gives it a price of 1€ and targets generally teenagers and students who wish to eat fast and cheap as their resources are limited. On the other hand a Cheese Burger in a restaurant like Applebees targeting people between 24-35 as their main costumers, offer quantity and quality as well as a nice dining experience price a Cheese burger at 12 €.
Analyzing the Price-Demand Relationship: In general this relation is rather simple when a price of a product raises the demand is likely to fall, because in most cases people's personal income will not allow the majority of the market to continue buying the product. While if a price drops the demand for a product rises this tells us the relationship between the Price and Demand is an inverse relation. Even in a monopoly if the products price rises too high people will stop buying an start seeking alternatives, even in cases of luxury hotels a slight increase of price might leave demand unaffected or provoke a slight increase (since a low price Hardly indicates the hotel offers luxury service) but if the price raised too high demand will fall as less people will be willing to spend such a high amount.
Price Elasticity of Demand: If demand for a product does not change much with small price increases or decreases then demand is inelastic, if a price change has a big effect on demand then the demand is called elastic. In regard of products that are unique (monopoly) or if it indicates prestige, high quality or exclusiveness consumers are less sensitive to price changes and will continue to purchase the product. Costumers will also remain loyal to a product when its price rises if alternatives are hard to find. In situation where demand is classified as elastic businesses consider lowering their prices in order to raise their total revenue.
There are several factors which also affect the sensitivity of consumers to change in products price.
- Unique value effect, this strategy aim to make costumers assume the product a business offers is in truth better and different from compared to other similar products existing in the market. For example there is a restaurant in Germany offering enormous amounts of food as a single menu item, such portions are in most cases double and triple compared to we usually receive in restaurants, same is applied to beverages.
- Substitutive awareness effect, if consumers are unaware there is an alternative product suiting their needs exists or is hard to find they will prefer purchasing what is easy to find and are familiar with despite the price increase. For example people arriving at a resort are usually unfamiliar with what exists in its surrounding area they will prefer to use the hotel restaurant for their meals even though there might be a business somewhere near by charging much less for a meal but the consumers are unwilling to spend the extra resources and time to find it as in the end the sum (transportation back and forth, the meal and time invested to find it) may equal or even exceed the price of the hotel meal.
- Business expenditure effect, When someone other than the consumer pays for the product, consumers are less price sensitive. This is why businesses try to figure out ways to attract other companies to use their products for its employees. Companies send their executives to incentives, seminars, and exhibitions in other locations or countries. Airlines using this strategy give special offers to business travellers offering a second Business class ticket at decreased tare for every one Purchased at normal rate. In this way executives having their ticket already bought by the company can take an additional person with them if they wish to pay for another ticket with the discount or the business.
- End Benefit effect, Consumers are more price sensitive in situations when the product's price accounts for the greater share of the final benefit of purchasing the product. For example a family from Greece paying around 3,000 € for their trip to Paris won't mind spending an additional 2,000 € to stay at Euro Disney as they would like to have as much fun as possible during their vacation. A local family however will likely seek out cheaper means of entertainment rather than having to spend around 500€ for a single day at the amusement park. That is why Euro Disney must be careful while dealing with locals or outside visitor having a different fees or special rates for daily visits or monthly entrance cards.
- Total expenditure effect, because the more money a consumer spends on a product the more price sensitive it becomes in regard of its price changes. This strategy is more useful when selling low price products or products that offer cost savings to volume users.
- Sunk investment effect, consumers who have an investment in products that they currently use are less expected to stop purchasing that particular product because of a price change. For example if Pireos Bank was subsequently using the conference facilities of King Gorge Hotel for its manger meetings for 6 years now, it is unlikely the Bank will seek to cooperate with another hotel for its next incentive. That is because KGH and its staff have by now learned the arrival patterns of the managers the menu the bank prefers, the setup of the conference room they like most and all the detail they need to know to organize a perfect meeting for the executives of Pireos Bank.
- Price Quality effect, customers tend to equate price with quality, particularly when they had no previous interaction or experience with the product or service. For example if someone would be going for the first time to Athens and wished to stay at a luxurious hotel, it is likely he would not book at a hotel offering a price of 60€ per night even it if was Grand Britain. That would happen because in that persons mind quality is possibly associated with a higher price as happens with most people, thus he would look for something different.
Competitor's Price and Offers: When a business is aware of its competitors' product prices and offers it can use this information to base it's own prices and strategies. For example If Corfu palace hotel is perceived by guests to offer the same product as the Corfu Imperial; the CPH will have to adjust its prices similar to those of the Imperial in order not to lose these costumers.
2. Companies set prices by selecting a general pricing approach, explain briefly the different pricing strategies with examples from the hospitality industry.
Cost base pricing--- This method focuses on the cost of the product in order to determine its selling price by adding a standard mark up to the cost of the product. An F&B manager is likely to use this method when trying to have a standard cost for his food items for example if he wants the production cost of the plate to be 20% of the total revenue he will multiply the food's cost by 5 to set his selling price.
Competition based pricing--- This method bases price establishment based on what prices competitors charge for similar services paying less attention to the demand or costs associated with the product or service. Hotels on less popular islands belonging to the same category usually have similar prices differing slightly among each other if the product they offer is similar during low season period where demand is considerably low, even during high season the room rates are likely to maintain similarities.
Prestige Pricing--- Hotels, restaurant and bars wishing to position themselves as luxurious and elegant enter the market setting their prices high enough to support that position. In order to create a sense of exclusiveness and attract a specific target market it will set its room rates at a high rate trying to attract prestigious clients and creating its image.
Market skimming pricing--- This method is based on changing the product price to a higher one during periods of time when the market is price insensitive. For example Hotels on Corfu charge their maximum rate during Easter when the demand for accommodation is very high or exceeds room supply.
Market penetration pricing--- This method implies the establishment of a low but profitable initial product price in order to penetrate the market and quickly establish the business obtaining a good share of the segment. For example Marriott hotels use this strategy when they first open in order to attract as much guests as possible and once they have obtained the majority of the market share they slowly raise their prices.
Product bundle pricing--- This method compels the business to group several of its products together in a package and offer it at a decreased price in order to encourage consumers to buy the special offer and products they would not normally purchase. Many city hotels following this method of pricing create special packages or weekend offers including several services offered along with the room like spa or meals at a decreased price.
Volume discounts--- Hotels have special discounts and different rates for consumers who are likely to rent a big number of rooms for a single period throughout the year. Such special prices are provided to associations and corporate meeting planners.
Discounts based on time of purchase--- hotels use this method; it implies the use of seasonal discounts for consumers making purchases during out of season or low demand periods.
Discriminatory pricing--- this method implies the business has a set of two or more prices for the same product and these prices are allocated for different target markets. For example in the hotel bar the Pina-Colada cocktail costs 10€ and we establish a ladies night sometime during the week when ladies can buy the cocktail at 7€.