Services and non-profit marketing | Management Optional Notes for UPSC PDF Download

Introduction

Price is not merely a result of market forces; it is a crucial element of marketing and promotion, playing a vital role in the marketing mix. A marketing manager must recognize that price communicates something about the nature of a product or service to the consumer. Skillful management of price, coupled with product quality and promotional messages, can activate sales in new markets or increase market share at the expense of competitors. Understanding how customers interpret the price of goods and services, including tourism, is essential. This unit delves into various components of pricing, pricing objectives, price setting, and factors influencing pricing.

Understanding Value

At the core of pricing is the concept of value, representing what a consumer believes they will gain. While the term 'value' is loosely used, research indicates that it is highly personal and idiosyncratic. Zeithaml's exploration identified four broad expressions of value: low price, alignment with personal preferences, quality in relation to price, and a balance between what is given and received. This unit adopts the definition of net value, which is the sum of perceived benefits minus perceived costs. A positive difference between benefits and costs results in a greater net value, influencing customer purchasing decisions.

Understanding Costs

• To comprehend the concept of net value, understanding the costs associated with a service like tourism is crucial. Potential tourists may incur monetary costs, time, physical effort, sensory costs, and psychic costs. Monetary cost, expressed in terms of price paid, is only one aspect. Time involves opportunity cost, physical effort entails disruption to established life patterns, sensory costs relate to discomforts during travel, and psychic costs may involve unfavorable perceptions or fears. Customers evaluate competing services by comparing net values, considering the perceived benefits against the associated costs.
• Consumers weigh the benefits and costs to determine the net value of tourism. While pricing theorists argue that all costs need to be recovered, the organization's cost of rendering services sets a floor for prices. The perceived value of the product establishes a ceiling, beyond which prices may be deemed too high. Competitor prices for similar or substitute products become a key determinant within the range set by perceived value and cost parameters.

Cost: The Internal Influence on Prices

• In this section, let's explore how costs impact prices. The gross profit for a travel agent is the difference between the prices paid for travel services, administrative costs, and the prices charged to customers, including commissions. Tour operators incur costs related to airlines, hotels, surface and local transport, as well as internal costs like rent, utilities, salaries, and marketing expenses. These are termed overhead costs as they apply even if no services are sold.
• To comprehend costs better, they are classified into variable costs (VC) and fixed costs (FC). Variable costs vary with the quantity of services produced and sold, while fixed costs remain constant regardless of production levels. For instance, reservation costs in a hotel are variable, while office rent is a fixed cost. The total cost for a service includes both fixed and variable costs.
• The concept of the breakeven point helps understand the impact of costs on pricing. It is the sales point where total revenue equals total costs, resulting in zero profit or loss. Calculating the breakeven point aids marketers in assessing how different prices affect this equilibrium, determining desired profit levels, and understanding the number of services needed to cover costs. An example is provided in Figure for a museum considering three entry fee options.

• Accountants use the term "contribution," representing selling price minus variable costs. Contribution illustrates how well variable costs are covered by a given price. In situations where attracting customers at prices covering full costs is challenging, pricing below full cost in the short run may contribute positively to ongoing fixed costs. Off-season pricing by tourist resorts is an example, offering prices below regular rates to attract customers and contribute to fixed costs.
• Understanding various costs a tourist may incur and how marketers analyze the cost of producing and selling tourism services is crucial. Costs set a lower limit below which most organizations would not consider selling products unless utilizing spare capacity or unutilized operations. However, pricing is a complex interplay of demand, prices, and consumer willingness to pay under specific conditions. Simply adding a markup to costs for pricing oversimplifies this intricate relationship.

Prices and Demand

In addition to the concepts of value and cost discussed earlier, two fundamental concepts related to individual demand and elasticity of demand in the context of tourism need understanding before delving into the process of price setting.

Individual Demand and the Tourism Product:

• When individuals decide to avail themselves of tourism services, their decisions are, to some extent, influenced by the price of the services. The quoted price for a specific tourism product allows consumers to assess quality, make comparisons with similar or substitute services, and facilitates decision-making. To generate demand for tourism, the price must be perceived as neither too low (indicating questionable quality) nor too high (deemed unaffordable). 
• Therefore, it's evident that demand for a particular tourism product is, at least in part, governed by the price consumers have to pay, and how they perceive this price. Different people may have varying perceptions of a stated price, making pricing a tool to attract specific types of customers for a given tourism product. Thus, setting a certain price level can, to some extent, define the type of demand a product will face.

The elasticity of Demand:

• Aggregate demand for a tourism product results from the total demand patterns of individual customers, which constantly change based on price, time availability, consumer resources, and competition levels. Price elasticity of demand refers to the extent to which a change in price alone influences the level of aggregate demand. This concept can be better understood by examining Figure 2 below. 
• Assuming Q1 represents the quantity of a given tourism product (e.g., a package tour by a tour operator) sold at the price P1, if the tour operator can lower the price to P2 through favorable agreements with airlines and hotels, the quantity of tours bought increases to Q2. In this case, demand responds positively to the price change, indicating elastic demand. However, it's crucial to note that demand responsiveness to a price change is beneficial only if the revenue lost due to a price reduction is outweighed by the increase in the total number of units sold, resulting in a net revenue increase. 

• The figure also illustrates the elasticity of demand by depicting a negative impact on demand; as the price rises to P3, demand decreases to Q3. It's essential to understand that not all tourism products display elastic demand. For instance, in business travel, reducing the prices of executive class air tickets may not necessarily increase the frequency of travel for business travelers to specific destinations at specific times, as their travel is dictated by specific business needs. In such cases, the price of the product is a relatively unimportant variable in influencing purchase decisions.

Pricing Objectives

When organizations embark on the process of determining prices, it is essential for them to have a clear understanding of what they aim to achieve with their pricing strategies in the context of their overall marketing strategy. Pricing, fundamentally, is a tool employed to meet broader marketing objectives. These objectives could range from maximizing revenue or profit to gaining the largest share of a specific tourist market. Once organizations identify their pricing objectives, it becomes relatively straightforward for them to determine the actual figures at which they want their products to sell. The pricing objectives in the tourism sector can broadly be categorized into four groups:

Revenue or Cost-Oriented Pricing Objectives

• These objectives are tied to generating the maximum surplus, minimizing costs to maximize returns, or achieving a specific target level of profits. Under this objective, a tourism firm would adopt pricing strategies aimed at maximizing revenue or achieving a specific return on the investment made. For instance, a hotel offering holiday packages might set a price to earn a 20% return on the investment made to produce those packages. 
• Similarly, a tour operator may set a price to maximize total revenue (units sold x price per unit). It's crucial to consider the elasticity of demand in this context, as sometimes lowering the price per unit can maximize revenue when demand is highly elastic.
• However, there are challenges with this approach. Maximizing revenue in the short run might hinder long-term market development, customer patronage, or attracting the desired customer segment. Additionally, determining the costs allocated to each tourism package, especially when seeking a specific target return on investment, can be challenging.

Operations-Oriented Pricing Objectives

Tourism, being an industry with seasonal or fluctuating demand, faces the challenge of perishability of services. To address this, tourism marketers often adopt operations-oriented pricing objectives. Prices are varied over time to ensure that demand aligns with available supply at any given point, optimizing the use of available capacity. New entrants may introduce special prices during off-seasons to maximize patronage rather than focusing solely on profits.

Demand Oriented Pricing Objectives

• This pricing objective aligns with the concept of consumers' willingness to pay. Demand-oriented pricing aims to discover, through marketing research, what the market is willing to pay for a specific tourism package. Prices are set based on the consumer's capacity to pay, allowing tourism marketers to implement differential pricing and reach different consumer segments.
• Differential pricing is exemplified in ocean liners offering cruises, where different classes of cabins are priced accordingly. Hotels and holiday resorts also leverage differences in demand intensity during weekends and weekdays or peak and off-seasons to create varied pricing for these periods, attracting different sections of consumers.

Competition-Oriented Pricing Objectives

• In highly competitive markets, tourism organizations sometimes base pricing decisions on competitors' charges, especially if price is a significant factor in consumer choice. This is common in the airline sector, travel agencies, and tour operators business. Prices set by competitors act as limits, and organizations aim to achieve competitive parity. However, prices in such situations are relatively sticky, with most competitors following the market rate. Initiating price reductions often lead to quick retaliation, canceling out any anticipated advantages.
• In competition-oriented pricing, some organizations may assume the role of price leadership, where changes in industry costs lead one organization to raise prices, and others follow suit. This is often referred to as 'Follow the Leader' pricing. It's important to note that the more similar the services offered by tourism providers in a given sector, the less freedom individual organizations have in setting their own prices. Differentiated tourism products provide relatively more insulation from competitive pressures.

Price Setting in Practice

Now that you have a grasp of the concepts of value, cost, demand, and competition in the context of pricing, let's delve into how tourism organizations practically make their pricing decisions. The primary considerations, as highlighted earlier, revolve around cost, perceived value, and competition. While cost and perceived value set the lower and upper limits, the level chosen between these limits is often determined by the pricing strategies of competitors. Various pricing practices are employed by tourism organizations in pursuit of their broader pricing objectives, which were discussed earlier. Organizations can strive for market leadership through low prices, adopt niche marketing strategies, effectively differentiate their products, or tailor their marketing objectives to a specific segment of consumers.

Markup Pricing

This is the most basic pricing method, involving the addition of a standard markup to the cost of the service. The total cost of offering the service is estimated, and a standard markup is applied to arrive at the selling price. As an example, consider a tour operator with the following expectations regarding demand and cost:

Now, assume that the tour,operator wants to earn 20% markup on his sales. The price to be charged is given by 

The tour operator plans to charge Rs. 5625 per person, ensuring a profit of Rs. 1125, which is equivalent to a 20% profit margin. The success of this pricing strategy relies on attracting 50 tourists at the specified price. However, the approach of standard markups may not align with market dynamics, as it doesn't consider factors like current demand, perceived value, and competition. Despite its prevalence due to ease of calculation, standard markup pricing may not always result in optimal pricing.

Target Rate of Return Pricing

• Target Rate of Return Pricing, observed notably in the accommodation sector, involves the marketer setting a price to achieve a specific target rate of return on the organization's investment. The target return price is determined using a formula.

• Once again, the marketer assumes that customers will be willing to make a purchase at a price that yields a specific percentage of return for them. This pricing approach, however, overlooks the elasticity of demand, and the impact of competitive prices may not yield realistic results in all marketing situations. Perceived Value Pricing involves market-oriented pricing, where marketers seek to comprehend the value of their product from the consumer's perspective. Products like safari tours, adventure tours, and executive hotel services are tailored to specific consumer segments after analyzing what they value most in these services. Pricing is then determined based on an assessment of the perceived value by the consumer for the given service offer and what they would be willing to pay for the provided quantity and convenience.

Value Pricing

• With increased competition in the tourism sector, companies in the hotel and travel industry are inclined to offer value for money. Value pricing differs from perceived value pricing, as it focuses on providing more value for a given price to the consumer. In contrast, perceived value pricing revolves around charging as much as consumers' perceptions of the product allow.

Going Rate Pricing

• This pricing technique aligns with competition-oriented pricing objectives. Organizations set prices based on what the competition is charging rather than considering their own demand and costs. Tourism marketers may consciously decide to price their product at the same, slightly higher, or lower level than their competitors, with the main consideration being within the range of the going rate. This is evident in the private airline sector in India, where prices for the same sectors are almost similar.

Premium Pricing

• In this scenario, a tourism organization chooses to sell its products above prevailing market prices to convey a high-quality image or emphasize the unique nature of its offering. This strategy is often employed when the product is unique, relatively new to the market, carries status connotations, or the company itself has a specific reputation that enables it to charge a premium.

Cheap Value Pricing

• Common in highly competitive segments of the tourism market, this pricing practice aims to undercut the competition. The expectation is high turnover at low prices, offsetting the low unit profits. New organizations trying to establish a presence in the market or competitors seeking rapid market share expansion typically adopt this low or penetrative pricing strategy.

Psychological Pricing

• Tourism marketers occasionally incorporate psychological factors into their pricing strategy alongside economic concepts.
• The relationship between the pricing and perceived quality of luxury cruises highlights that higher-priced tours are often associated with unfounded perceptions of superior quality. Recognizing this phenomenon, top-tier tourism marketers create high-quality products but sometimes set prices that may not proportionately reflect the quality differentiation. In situations where limited information about the product is available, particularly with new destinations and unexplored locales, high pricing serves as an indicator of superior quality and becomes a status symbol for those willing to make such purchases.
  • In the pricing strategy, it's common to observe tour packages priced at Rs.4999 instead of Rs.5000, as it is believed that pricing in the 4000 range may be more appealing to consumers.
  • Promotional pricing is employed by tourism organizations under certain circumstances, where products are temporarily priced below the usual rates, sometimes even below cost. The goal is to stimulate demand and attract consumers with the hope of encouraging repeat purchases.

Promotional pricing may take various forms

• Loss Leader Pricing: In this approach, one component of the product mix is priced significantly lower than its usual rate to increase consumer traffic. The intention is that once customers are drawn in by the low-priced "loss leader," they may be inclined to explore and purchase other offerings from the company's product range.
• Special Event Pricing: Tourism suppliers often establish special prices during holidays, festivals, or significant events, taking advantage of the increased propensity of people to travel during these periods. Holiday packages or travel arrangements may be discounted to attract a higher number of customers than usual.
• Contract Rebates: When selling corporate or long-term travel packages, tourism firms may offer free travel on specific circuits after a certain volume of business has been achieved. Essentially, this involves providing a lower price for bulk purchases based on the miles traveled or the number of tourism packages bought by a company or individual.

Discounting Tactics In Tourism Pricing 

Discounting tactics in tourism pricing have become widespread in response to the highly competitive nature of the industry, although it remains a controversial practice in tourism marketing. The concept of a fixed price has limited relevance in today's tourism marketing landscape, where hotel reception staff have the discretion to adjust prices, travel agents split commissions with clients, and tour operators negotiate seats on flights or last-minute bookings for holidays. While discounting can attract deal-prone consumers in the short term, there's a risk that they may easily switch to a more favorable offer. Although discounts are common, constant competitive discounting can lead to lower overall industry returns.

Various types of discounts are prevalent in the tourism sector:

• Discount for Cash Payment: This involves providing a discount for settling invoices early or offering different rates for cash and credit payments, with the balance representing the cash discount.
• Quantity Discounts or Bulk Discounts: Commonly used, these discounts provide marketers with economies of scale, allowing them to pass on some of the cost savings to customers. Negotiations between tour suppliers and travel agents often involve these discounts, especially for business clients or group travelers.
• Trade Discount: Given to individuals employed in the trade, these discounts include those offered by airlines to travel agents or by hotels to airline staff and tour operators.
• Seasonal Discount: Due to the seasonal demand for services like holidays and pleasure travel, this type of discount is common. It allows consumers to benefit during off-peak seasons, helping offset the variable costs of running services during these periods.
• Distressed Stock and Similar Discounts: Practices like advance and late saver discounts are prevalent, with early bookings providing benefits to marketers and late saver discounts clearing unsold stock, such as unoccupied hotel rooms or unsold airline seats.

Discounting schemes can only succeed when there is price elasticity in a given buying situation, meaning lower prices attract a higher number of customers. To attract customers, the discount offered must be significant enough to be perceived as a bargain. Some organizations gradually reduce prices in stages until all stocks are cleared, while psychological discounts involve artificially high list prices with attractive bargains to create a perceived bargain for consumers. Discounting remains a powerful tool for market manipulation in the tourism sector, allowing quick responses to changes in market situations or demand profiles.

Other Influences On Pricing 

Apart from the factors of demand, consumer perceptions of value, and internal cost influences, there are some other elements that impact pricing decisions, and the organization has relatively limited control over these. The key ones include:

• The economic health of a specific region: Travel is significantly influenced by the disposable income of individuals at a given point in time, which, in turn, is affected by economic cycles such as inflation, stagnation, and depression. These are external factors that may impact the demand for tourism, and organizations in the tourism sector must adjust their market and pricing strategies to align with these economic cycles.
• Demand elasticity for travel and tourism programs.
• The nature of the target market: This factor determines the type of travel product individuals will purchase, the prices at which they are willing to buy, their natural inclination for non-business travel activities, and the preferences for holidays or destinations.
• Level of competition in the tourism market and the substitutability of alternative tourism packages available.