For any product, price is the value placed on goods or services being

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1 Pricing Strategies ~ YOU WILL LEARN To explain the concept of price. To identify typical pricing strategies. To describe how hospitality and tourism businesses use discounting. WHY IT'S IMPORTANT Understanding the various methods used to price goods and services is the first step in assigning prices to products that will increase sales. KEY TERMS price prestige pricing markup cost-plus pricing PREDICT Describe in your own words the importance of accurate pricing. price the value placed on goods or services being exchanged What Is Price? For any product, price is the value placed on goods or services being exchanged. There are several terms for prices in hospitality and tourism industries: airfare, cruise passage, rack rate, toll, tariff, tuition, tip, commission, and tax. All prices are associated with goods and services. Understanding price is important for marketers and managers. High prices can drive customers away, but low prices may not be enough to cover costs and increase sales. The Value of Price How much are you willing to pay for tickets to see your favorite band in concert? Are you willing to pay as much for tickets to a neighbor's ballet recital? You probably are not because you may value seeing your favorite band more than watching your neighbor dance. Value is in the eye of the beholder-or in this case, the consumer. The consumer determines if exchanging money (the price of the ticket) is worth the benefit or value (seeing the concert or ballet). Price is more than just the cost of an item. It is also the value that the item holds for the consumer. Pricing Hospitality & Tourism Anumber of techniques are used to assign prices to hospitality and tourism products. Airlines use a class system to categorize the costs of airfare-first class, business class, and coach. Cruise lines assign cabin prices based on size and location. Hotels offer room categories such as standard and deluxe. Car rental companies determine price by automobile type, such as compact, economy, or luxury. In addition, special prices, or rates, are offered to travel agents, tour operators, other intermediaries, and to customers who book through the Internet. Restaurant Pricing Restaurants have several pricing options. Prices might be setala carte for single menu items, such as appetizers, entrees, or dessert. A restaurant might provide a prix fix menu, which offers several courses for one set price. 224 Unit 3 Marketing Hospitality & Tourism Pricing Strategies Some typical pricing strategies include promotional pricing, psychological pricing, market-penetration pricing, breakeven pricing, costbased pricing, discounting, and other special pricing strategies.

2 Promotional Pricing Hospitality and tourism businesses use promotional pricing strategies to generate sales during traditionally slow periods. Early-bird specials at restaurants and happy-hour specials at clubs are good examples of promotional pricing. Knowing that business may be sparse between 4 P.M. and 6 P.M., restaurants use special promotions to attract customers. The concept usually works because customers coming in for the special will order additional food or beverage items apart from the promotion. Losses incurred from lower-priced promotional items will be made up by purchases of other items. Lodging Packages Lodging properties also use promotional pricing. They create special packages that include more than just overnight accommodations. Instead of simply discounting the price of a hotel room, hotel managers create special events that give guests a reason to book rooms. Events might include New Year's Eve parties, dinner and movie deals, or weekend getaways that include in-room treats. Packaging several products together for one price adds value for the customer and creates a positive image for the business. Psychological Pricing The price of a product has a psychological impact on customers. Many people believe that an expensive item is high quality, or that an inexpensive item may be poor quality. Price and quality perception are very closely linked in the minds of many consumers. Hotels and restaurants that focus on establishing a luxury image use prestige pricing, which is pricing based on consumer perception. A high price may be linked to a product in order to communicate quality to consumers. Wi-Fi Hotspots Wireless fidelity, or "wi-fi," is high-speed wireless Internet access. Many hotels and restaurants provide wi-fi access points known as "hotspots" so that customers with laptops or handheld computers can connect to the Internet. Some businesses charge a fee for this service, while others offer wi-fi access at no cost. According to the deli/restaurant chain Schlotzsky's, offering free wi-fi service has been good for business, which now extends beyond the lunch hour. _List the pros and cons of offering free wireless Internet access after reading information through marketingseries.glencoe.com. prestige pricing pricing based on consumer perception...c: SPECIAL PRICES Hotels offer special promotional prices for special-occasion events. What might be included in the price of a New Year's Eve party at a hotel? ~ marketingseries.glencoe.com Chapter 11 Pricing Products 225

3 THE Elec Name Your Price According to a study in 2003, 75 percent of travelers who use the Internet visit three or more Web sites before purchasing their tickets. Their decisions depend on price, not brand loyalty. Online travel sites, such as Priceline and Hotwire, take advantage of the price-minded travel consumer. These name-your-price travel sites allow the user to request a certain price for a ticket, provide credit-card details, and then purchase the ticket. Online travel services are reaching millions of users. However, there are drawbacks for some consumers, such as no refunds for unused tickets and inconvenient flight times..find out more about the pros and cons of name-yourprice travel sites through marketingseries.glencoe.com. markup the difference between the retail or wholesale price and the cost of an item CONNECT Would you pay more for a meal in a restaurant that has luxurious decor? cost-plus pricing pricing products by calculating all costs and expenses and adding des; red profit Market-Penetration Pricing Some companies will price their products at or below cost just to enter the market and gain a market share quickly from competitors. This pricing is called market-penetration pricing. Using this pricing method, a business can gain entry into the market by attracting high numbers of price-sensitive buyers. Breakeven Pricing For breakeven pricing, a business determines the price of a product or service at which it will break even. To break even, the price must generate enough revenue to cover the costs and expenses of the product. Consider the costs and expenses of a small, ten-room bed-andbreakfast inn. To break even on providing a room for one night, the owner must charge enough money to cover all costs of operating the facility. These costs may include: Mortgage Utilities Insurance Employee salaries Food and beverages Office supplies Marketing expenses By knowing the breakeven point, the owner has a benchmark, or standard level, for determining room prices throughout the year. If the costs and expenses (breakeven point) total $75, then the price of that room should not go below that amount, or the inn will lose money. Cost-Based Pricing One of the easiest methods used to set price is markup. Markup is the difference between the retail or wholesale price and the cost of an item. A retailer buys goods from the wholesaler or manufacturer and then marks them up for resale to customers. The markup is the difference between what the wholesaler charges, including shipping and labor costs, and the retail price to the customer. Each retailer wants to cover the cost of the item and make a profit. Cost-Plus Pricing When using cost-plus pricing, the goal is the same-to make a profit. Cost-plus pricing is pricing products by calculating all costs and expenses and adding desired profit. 226 Unit 3 Marketing Hospitality &Tourism ~ marketingseries.glencoe.com

4 Discounting Discounting is a strategy used to reward consumer behavior, such as booking early, buying off-season, or buying in volume. Prices are adjusted by a certain percentage, or special rates are assigned to specific periods. For example, in the lodging industry, there are seasonsthe high season, the low season, and the seasons in between. The high season commands the highest rates. The in-between season is referred to as the shoulder season. Low-season and shoulder-season rates are adjusted to attract customers during these slower periods. Cruise Discounts The cruise industry also uses discounting. Cruise passengers who book early, typically 6 to 12 months prior to sailing, are offered reduced prices. This is to encourage them to commit to a specific sailing date. ONLINE ON TARGET The travel Web site Orbitz discovered that 91 percent of Americans with Internet access prefer comparison shopping hotels online. The 2003 Orbitz survey, fielded by Harris Interactive, also revealed that travelers believe they will get the lowest rates on hospitality and tourism Web sites. Airline Adjustments Airlines adjust their rates by the time of day, day of the week, or month of the year. The lowest rates are usually for early-morning, or red-eye, flights and weekend departures. Rates for routes to seasonal destinations are also adjusted according to the time of year. The World on a Click G\ Many travelers want the best V< deal, but they may not know Expedia.com@ how to find it. Enter Expedia.com. When the world was just beginning to discover the Internet, the idea of booking flights and hotel reservations online was unfamiliar. Despite the risks, Microsoft launched Expedia in 1996 and provided an online resource for trip planning. Expedia allows consumers to compare many hotels, cars, air tickets and cruises-and book online. By the 21" century, Expedia had a winner with the #l-rated travel Web site for do-it-yourself business or leisure travelers. The innovative travel service is also the fourth largest travel agency in the United States. Expedia and its network of partners work together to secure great prices, availability, and choices for consumers. Partners include more than 20,000 merchant hotels through North America, Canada and Asia, plus a wide variety of travel-service providers. PRICING EXPERTS Technology has made Expedia possible with its award-winning Expert Searching and Pricing (ESP) technology, providing travel and lodging options online. With many newcomers to the travel Web-site business, which is expected to outpace traditional travel agencies, Expedia.com continues to expand and help people explore the world. 1. How has Expedia applied technology to reduce travel prices? 2. What pricing strategies has Expedia employed? Chapter 11 Pricing Products 227

5 ~~1 Price Discrimination In December 2003, the European Commission questioned 18 European airline companies about their online ticket-pricing policies. Complaints by residents of various European countries stated that these airlines adjusted their prices based on the country in which the buyer lived. The ticket could cost up to 300 percent more than the same ticket sold to a person living in a different country. Should these airlines be forced to refund a portion offares that were overpriced? Why or why not? Special Pricing Strategies Special pricing techniques are practiced in the hospitality and tourism industries. These methods include price lining, bundle pricing, loss-leader pricing, and yield management. (See Figure 11.1.) Price Lining Price lining is selling all the products in a product line at specific price points. For example, a car rental business may offer three levels of cars for rent: economy, midsize, or luxury. Bundle Pricing Bundle pricing involves selling several items as a package for a set price. Purchased separately, the items would cost more than the price of the package. This strategy is used frequently in the tourism industry because it benefits both consumers and businesses. Loss-Leader Pricing Loss-leader pricing is pricing an item at cost or below cost to draw customers or capture the attention of customers. Restaurants often employ this strategy by offering two-for-one deals on entrees, hoping that customers will spend more on alcohol, appetizers, and dessert. Yield Management Yield-management pricing is pricing items at different prices to maximize revenue when limited capacity is involved. Hotels use this pricing strategyto fill rooms during slow periods. To be effective, a property must be able to estimate occupancy for a specified period. Pricing Strategies GOOD DEALS Many businesses offer products using bundle pricing. In hospitality and tourism, bundle pricing gives travelers and businesses many options for good deals. What would be the pros and cons of bundle pricing when choosing a vacation package? Price Lining \~"..,.. '- p -,1;-- ::, ~.:- '~'" -,~ - ~,~~ Bundle Pricing Loss-Leader Pricing Yield-Management Pricing $15/day $109/night $15 for two $99 Compact 1 room meals January 25 (regularly $15 (advance $22/day $129/night for one meal) booking) Midsize 1 room + breakfast + $199 $30/day spa treatment March 25 Luxury 228 Unit 3 Marketing Hospitality &Tourism

6 The ULtimate HosteL Nestled in the Blue Mountains region of New South Wales, Australia, the town of Katoomba is famous for scenic surroundings. As a World Heritage site, Katoomba also lays claim to one of the world's best youth hostels. Like other hostels, the YHA (Youth Hostels Association) Backpackers Hostel provides many young tourists with cheap accommodations if they share rooms with other travelers. Adults may pay as little as $20 a night; guests under 18 pay less. Formerly a cabaret club, Katoomba's hostel combines artsy surroundings with modern facilities, such as computer service, game and reading rooms, videos, laundry, and a full kitchen. Agiant refrigerator provides a "free shelf' for food that is left behind. When not socializing atthe hostel, guests can explore the mountains. The more ambitious travelers can "bushwalk," rock climb, or ride horses. Others might prefer to take a tour of the nearby national park or local museums. It is a "gorgeous, magical place," comments one happy customer. ''I'll definitely be back!" Why do you think youth hostels can charge so little and still stay in business? Value, Price, and Strategy Like most commercial businesses, travel and tourism businesses use a variety of pricing strategies to attract customers. It is important to know the value of a product or service before pricing it. Value differs from one consumer to another. QUESTION Why do businesses use loss-leader pricing? RESPOND to what you've read by answering these questions. 1. What is cost-plus pricing? 2. How do hospitality and tourism businesses use discounting? _ 3. Describe the concept of yield management. Chapter 11 Pricing Products 229