How does a company /

organisation determine the

selling prices of its
products.?
Definition of Value –
Conceptualising…

Value =
Product + Service + Location + Ambience + Image
Price

So, it is not always the numerical part of the formula

that counts…
Pricing Objectives
Two types: -
 Sales-oriented – based on the market’s
capacity to buy…
(what the customers can spend, how much can the customer can
really pay or what value the customer gives for the product /
service)
 Profit-oriented- based on the owner’s
requirement of the profits…
( how much profit the owner want to make and how would he
make it happen by selling the product / services.)
Consider how the prices of hotel rooms are finalised…
Assignment
Sales oriented:
Why are Oberoi Raj vilas rooms very expensive?

To find out the answer, Discuss – how much the guest is ready
to pay for the brand, architecture, and extensive services, and
also find out who are these guests ( foreigners). – this is the
reason why Oberoi Raj Vilas rooms are very expensive. …

Profit-oriented-
Consider how the prices of Mc burgers finalised…
To find out the answer, Discuss – how many burgers the
company sells in a day and what is the profit margin per
burger…
Determinants of Price
 Demand
– Price sensitivity
– Relevant range
 Supply
– Goods
– Labor
– Capital
 Competition
Pricing Method – Cost-based

Multiplier = 1  Desired food cost %

Tentative selling price = Food cost  Multiplier
Pricing Method – Cost-based
An Example…

Multiplier = 1  Desired food cost %

Tentative selling price = Food cost  Multiplier

E.g.
Desired food cost % = 40%
Shrimp dinner food cost = Rs.6
Multiplier = 1  40% = 2.5
Tentative selling price = Rs.6  2.5 = Rs.15
Pricing Method – Demand-based
 Skimming
 Penetration pricing
Break-even Analysis
 Break-even point (BEP)
–Total revenue = total costs
( It is the pricing in which the firm tries to determine
the price at which it will break even for example –
if the fixed cost is Rs. 1000 and the cost per unit
of the product is Rs. 10, then the firm must sell
the product at a minimum of Rs. 10 each and sell
at least 100 pieces to break even. – find out what
would be the selling price if 50 pieces are sold …
( Rs. 20 at least) )
MARKET CONDITION APPROACH
In this method of pricing rooms the
management looks at comparable hotels in
the geographical market and sees what they
are charging for the same product. The
rates are then fixed in comparison with
these hotels.
Selecting the Final Price
 Price range
 Price changes
Hotel Pricing
 Cost-based
– Hubbart formula
This approach considers operating costs, desired profits, and expected
number of rooms sold.
This approach starts with desired profit, adds income taxes, then adds
fixed charges and management fees, followed by operating overhead
expenses and direct operating expenses

 Room rate range –

Room prices are differentiated by the type of the rooms, suite rooms very expensive,
deluxe rooms – medium priced…

 Discounting
prices are determined by different seasons – slack and peak…

 Yield management
A yield management system is used to maximise a hotels yield or profits.
This is done by the rates the hotel will charge and the number of rooms
available for each rate based or projected occupancies for a given period.
These systems help hotels achieve the maximum contribution margin
based on the demand of the hotel rooms.
Consider why an airlines charges different rates to different customers…
Package Prices
 Appeal to specific market
To promote the product to a specific segment , manipulate the selling
process in accordance to the target client)
 Enhance customer satisfaction
To manipulate prices in such a way so that the customers are satisfied
– may be lower the rates or raise the rates to increase prestige value.
-Increase revenue
to manipulate the prices in a way so that the desired revenue is
achieved. – like a resort hotel ( monopolistic) suddenly hikes the
room prices to increase total revenue.

-Increase demand during off season – example-

lower the prices of the rooms of a hotel situated in a city during
low business months.
Case study - pricing
Case study - pricing