Question

ABC hotel has 200 rooms and has a policy to determine its room rates based on consumers capacity to pay. For example busniess clients pay $1,200 per night and group tours $900 per night. The incremental cost of servicing a room is worked out at $110 per room. On average, most guest stay for three (3) nights. Rooms division manager is trying to establish if four (4) week advance reservation should be taken for a group booking of 40 rooms and three (3) nights of 7th , 8th and 9th June 2018. According to the reservation record, 80 rooms for the three (3) nights of 7th , 8th , and 9th , June 2018 are already booked by various business clients, and the historical trends of the past four (4) years suggest that 90% of the remaing 120 rooms would be sold to other busniess clients. Your are required to a) Prepare a detailed recommendation document explaining the important facts and figures to support if the group tour booking of 40 rooms for three (3) nights, of 7th , 8th and 9th June 2018 should be accepted or rejected while considering the revenue maximisation, effect of revpar, incremental and relevant cost in preparing the recommendation documents b) In the highly competitive environment, tourism and hospitality busniess can aspire to optimise revenue for the long term survival. Discuss various pricing strategies and their effect on tourism and hospitality businesses as a whole focus on the pricing strategy in tourism and hospitality business and highlight their strengths and weaknesses as reported in the published literature.

Answer 1

Pricing Stratergies

PremiumPricing

Businesses use a premium pricing strategy when they're introducing a new product that has distinct competitive advantages over similar products. A premium-priced product is priced higher than its competitors.

Premium pricing is most effective in the beginning of a product's life cycle. Small businesses that sell goods with unique properties are better able to use premium pricing.

To make premium pricing palatable to consumers, companies try to create an image in which consumers perceive that the products have value and are worth the higher prices. Besides creating the perception of a higher quality product, the company needs to synchronize its marketing efforts, its product packaging and even the decor of the store must support the image that the product is worth its premium price.

Penetration Pricing

Marketers use penetration pricing to gain market share by offering their goods and services at prices lower than those of the competitors. Marketers want to get their products out in the market so that the products raise consumer awareness and induce buyers to try the products.

Although this lower price strategy may result in losses for the company -- at first -- but marketers expect that after achieving a stronger market penetration that they will raise prices to a more profitable level.

Economy Pricing

An economy pricing strategy sets prices at the bare minimum to make a small profit. Companies minimize their marketing and promotional costs. The key to a profitable economy pricing program is to sell a high volume of products and services at low prices. Large companies, such as Walmart, are able to take advantage of this low-price strategy, but small businesses will have difficulty selling enough products at low prices to stay in business.

Price Skimming

Price Skimming is a strategy of setting prices high by introducing new products when the market has few competitors. This method enables businesses to maximize profits before competitors enter the market, when prices then drop.

Psychological Pricing

Marketers use psychological pricing that encourages consumer to buy products based on emotions rather than on common-sense logic. The best example is when a company prices its product at $199 instead of $200. Even though the difference is small, consumers perceive $199 as being substantially cheaper. This is known as the "left-digit effect."

Bundle Pricing

Businesses use bundle pricing to sell multiple products together for a lower price than if they were purchased separately. This is an effective strategy to move unsold items that are simply taking up space. Bundling also creates the perception in the mind of the consumer that he's getting a very attractive value for his money.

Bundle pricing works well for companies that have a line of complimentary products. For example, a restaurant could offer a free dessert with an entree on a certain day of the week. Older video games that are reaching the end of their lives are often sold with a Blu-ray to sweeten the deal.

Companies need to study and develop pricing strategies that are appropriate for their goods and services. Certain pricing methods work for introducing new products whereas other strategies are implemented for mature products that have more competitors in the market.

Setting pricing for tourism businesses is a strong mix of marketing strategy and financial analysis. Is there a formula for developing pricing for tourism businesses?

Not really – tourism products are very rarely identical, often because of location, but also because of the people and the components that make up the experience you provide a traveller. It can be incredibly diverse and pricing strategies can evolve as a tourism business develops it’s brand and market share. Even star ratings for accommodation only give a general guide for travellers on what the pricing will be – there are not set criteria.

So the purpose of this article is not about helping you with a formula to devise your pricing, but more of an outline of the things you should consider, components of your pricing strategy, different pricing types and ways to stimulate demand.

Things to consider when setting your pricing strategy

How unique is your business? The more unique your tourism product the more flexibility you will have to decide your pricing.
What value added services do you provide inclusive of the experience?
What market do you want to attract and what positioning in the market do you want to establish?
What are your operating costs (fixed and variable)? Using your costs, get your accountant to help you calculate your break-even point and therefore what your minimum pricing should be for profit goals (estimates of revenue, occupancy rates etc will be needed).
For most tourism businesses setting prices will be more market based – that is, what do competitors with similar products and services charge within your market? Be careful however, you must be aware of your own financial position (debt levels, cash flow etc) before you can decide whether you should compete in this way. Ideally being competitive is not price driven, it’s product driven.

Where to start

Knowledge of your break-even point is an important place to start, but on launch of a new tourism business it may be that pricing is set lower than your longer term pricing expectations in order to attract volume, credibility and establish your brand. Then as you become more established with a regular booking base you can consider increasing prices.

Of course this is wholly dependent on your overall marketing strategy. For tourism businesses that cater to the exclusive/luxury traveller pricing may not fluctuate much at all. While those targeting the budget travel market may not have too much room to move on pricing and they will rely on volumes of bookings.

Pricing Components

Your pricing strategy may be made up of the following components:

Rack Rates

All tourism businesses should have a rack rate – this is your “full rate” before any discounts are applied and typically is what is provided to wholesalers and printed on brochures for the season ahead. For activity and attraction operators their full rate is more likely to be charged all the time without any day to day discounting, however accommodation operators – particularly those in the middle of the market will be changing pricing almost daily for the month or 2 months ahead to fill gaps.

Seasonal Pricing

Using a mix of pricing throughout the year to cover low, high, and shoulder seasons is a standard way for tourism businesses to cater for differing levels of demand due to the time of year. Typically these will be the same date periods each year but may also apply for school holiday dates and for local events where the dates vary each year.

Last Minute Pricing

A common method for accommodation suppliers to fill those last minute gaps in inventory availability, last minute pricing is basically discounting daily prices according to forward bookings and promoted on last minute booking websites.

Common Pricing Types

Per Person pricing: A set price per person e.g Adult and Children prices. Commonly used by activity/attraction and transport operators or backpacker accommodation and camp sites. Options may include an adult, child and senior citizen price.
Per Unit pricing: – A set price for 1 unit of the product e.g. Price per night, this is the standard way to price accommodation, usually the advertised price is for 2 people so if the accommodation fits more than 2 guests it can have a mix of the per person pricing with extra adult and extra child rates.
Single or double occupancy – common for B&B’s there is a single rate and a double rate (which is not double that of the single rate).

Discounting

While discounting has it’s place, and often unavoidable in a competitive market such as tourism, be very wary about continually discounting your prices to stimulate demand – it can become a rocky road to reducing profitability or even missing that vital break-even point. Be selective with last minute pricing deals – don’t make every day reduced, just select those where you really do need extra bookings. Consider adding conditions to a discounted price like a minimum stay or number of travellers in the booking. While a booking is better than no booking at all, customers do become used to a certain price level and you therefore run the risk of not only making it hard for you to charge your normal rack rates, but it will also devalue your product – remember perception is everything in tourism!

Package Deals

Developing packages with complimentary tourism partners in your area or with value added components is a good way to stimulate demand without having to discount. Strike up deals with local businesses to provide a full package and share business with each other – you should be able to get their products or services at a “net” rate so the package pricing is better than if they had purchased each component separately. Packaging can also be used to target niche markets effectively e.g golf weekend, food and wine tours, pampering packages etc.

Commissions

Many bookings will come via some sort of third party who will charge you a commission such as a retail travel agent, wholesaler, inbound tour operator or online travel agent (OTA). Many tourism operators are tempted to add the value of the commission on to the pricing for these providers but this should actually be considered in the setting of your rack rates anyway – if you have different pricing across different distribution channels it just confuses both travellers and can jeopardise industry relationships, so keep it simple.