The board of a small hotel group in Dorset and Hampshire need to select a pricing strategy for their new brochure. Dorset and Hampshire is a seasonal area with a higher occupancy in the summer time then the winter. This would have an effect on the pricing strategy eventually chosen. Pricing is the only element of the marketing mix that does not represent cost. Therefore it is very important to gain the correct strategy otherwise the business can loose revenue or face closure. There are different pricing methods involved, these are, cost orientated pricing, market orientated pricing, profit orientated pricing and competitor pricing. The marketing manager wishes to use market orientated pricing, whilst the accountant wishes to use cost orientated pricing. The following analysis will show the various methods that can be used for pricing along with the advantages and disadvantages for each.
COST ORIENTATED PRICING
The accountant wishes the hotel group to use cost orientated pricing. This includes four different methods which are; cost plus pricing, factor pricing, break even pricing and actual cost approach. These are all based around the cost of the product or service.
Cost Plus Pricing
This is the most basic form of cost orientated pricing. It involves a % mark-up on an established price. The basic equation for this is;
P = C + F(C) P – Price
C – Costs
F – % mark-up
The % mark-up will depend on what other ‘costs’ need to be covered that may not already have been covered. As there are different types of ‘costs’ these can then be altered to show, full cost, direct cost and gross margin pricings.
The Term Paper on Pricing and Costing Methods
Organizations today more than ever before must ensure that they reduce costs as well, as the time used to avail products and services to the market. Since planning as well as the estimation of costs are critical to businesses it is important that organizations chose the best pricing and costing techniques. (Seonen, 2006). The implication here is that the fundamental goal of any business concern is ...
Full Cost;
Cost Base
Mark-Up
Direct Material Direct Labour
Direct Expenses Overhead Expense
Net Profit
Direct Cost;
Cost Base
Mark-Up
Direct Material Direct Labour
Direct Expenses Overhead Expense
Net Profit
Gross Margin;
Cost Base
Mark-Up
Direct Material Overhead Expense
Net Profit
Factor Pricing
This is a modification of the cost plus pricing method. In this method a ‘factor’ (which is any number above 1) is applied to the initial costs to obtain a selling price. This method is often used when pricing menus and a different factor would be applied to each item.
Break Even Pricing
This method is based on the demand for the product staying the same. It uses the variable costs, quantity sold and fixed costs to establish a price that will obtain neither a profit nor a loss. Theoretically if demand falls then a loss will be incurred and if demand increases then a profit will be gained.
PRICE = VARIABLE COSTS x QUANTITY SOLD + FIXED COSTS
QUANTITY SOLD
Actual Cost Approach
This method entails estimating a sales revenue, choosing a profit target, and removing costs involved (excluding actual product costs) this will give the total amount that can be spent on the product.
PRODUCT COST CEILING = SALES REVENUE – (DETAILED COSTS + PROFIT)
MARKET-ORIENTATED PRICING
The marketing manager wishes to use the market orientated pricing method. This form of pricing uses a mixture of demand, costs and competitors whilst still watching for the profitability. There are four different types of market orientated pricing, these are; Prestige, loss leader, Psychological pricings. There is also yield management which will be discussed further on.
Prestige Pricing
This method ties together price and quality. For a high quality product, consumers will be prepared to pay more for it.
The Term Paper on Cost Centres, Profit Centres, Investment Centres
... significant bearing when calculating revenues, costs and profits of responsibility centres. The choice of transfer pricing method is important because it ... the unit. The measurement of profit is also compounded by the use of transfer prices and agreeing on its ‘ ... prices, choose which markets to sell in, make product-mix and output decisions and select suppliers.’3 A profit centre differs form a cost ...
Loss Leader Pricing
This method can be practised where one product can create revenue from another product.
Psychological Pricing
This method understands that customers have a set price range which they can spend within for goods or services.
YIELD MANAGEMENT
This method is based around demand and is usually used with hotel rooms. The equation to ascertain demand is;
牋牋牋牋ROOM NIGHTS SOLD x ACTUAL AVERAGE room rate = YIELD
ROOM NIGHTS AVAILABLE ROOM RATE POTENTIAL
Yield management involves a group of different pricing policies and classes which can be applied to a product or service throughout different seasons and market segments to maximise revenue. This is commonly used within the accommodation management and allows the room inventory to be managed effectively with the elasticity of demand to maximise the profit margin.
OTHER FACTORS
Competitor-Oriented Pricing
The most commonly used is “follow-the-leader”. This is required normally in highly competitive areas where if one hotel is charging a low price, other hotels will lower their price so as to be competitive. This is beneficial to the customer, but may leave the company with a very much reduced profit margin.
Profit-Orientated Pricing
It is important to make a profit in a business, with which to pay investors an amount that makes it worth while them placing their money at risk. This should be higher then a bank offers in interest. These are based on the Hubbard Formula and ensure the rate of return by including how much profit is wanted prior to deciding on the selling price. Rule of a Thousand can also be used where for every 00 spent on buildings, around a will be gained from each room.
Conclusion
As can be seen there are many ways to decide on how to price a product or service. The way which is chosen will depend on what product / service needs to priced and how much former knowledge is known. Each method has advantages and disadvantages.
Cost orientated pricing is useful but is limited as it only takes into account the costs. It is also not specific about which costs are taken into consideration, whether it is fixed, variable or overheads. It also does not take into consideration the location and customer expectations.
The Business plan on Management Control Cost Accounting Training
Introduction Management control is to ensure that the organization achieves its objectives. Once the objectives have been agreed, action plans should be drawn up so that the progress can be directed towards the ends specified in the objectives. Such objectives are used to make comparison with alternatives in decision making & are also the critical elements in evaluating the success or failure ...
Market orientated pricing is also useful as it takes into consideration the sales of different departments and the needs of the consumer. However it does not contain much factual information regarding the costing of a product or service.
Other factors that can be used are more beneficial to either the customer or the investor, rather then the company.
RECOMMENDATIONS
All the methods of pricing show that different factors can be used. Therefore if one method had to be chosen on its own then Yield Management would be the most useful. Yield management would be the process of establishing, with the marketing mix and segment the different seasons and to establish different pricing policies throughout the financial year. Yield management if used properly can provide extra revenue on the budgeted forecast revenue, it will maximise the occupancy percentage during the low season with a preferential room rate or special package, whereas it will increase the room rate through the high season when the demand is high.
Low, peak, high and prime seasons should be carefully implemented with the elasticity of demand. The yield management will be even more effective considering the different variables, a perishable inventory, the ability to sell the product in advance, low marginal sales costs, high marginal production costs, advance booking system, information on the market segment, an overbooking policy, good information on internal and external data. However a mixture of cost orientated pricing and market orientated pricing would also be useful for the small hotel chain, as individually the pricing strategies do not work very well as they miss out vital information.
Bibliography
1. Management Accounting for Hotels and Restaurants. Richard Kotas. Surrey University Press. ISBN 0-903384-58-
2. Hospitality Management Accounting. M. Coltman. V.N.R. ISBN 0-442-00542-3
The Essay on Cost Management & Cost Control
In broad sense, both the terms have the same meaning. Yet cost management seems to connote broader perspective. Cost control to an un-initiated may mean cutting down the incurrence of cost or expenditure every time or in every situation. In reality it is not always so. In many specific situations, many times, one has to spend or incur cost in order to gain or make more money. It is in fact like an ...
