HTM 370 Chapter 8 - Hospitality Tourism Management 370...

Info icon This preview shows pages 1–3. Sign up to view the full content.

Hospitality & Tourism Management 370 CHAPTER 8 Cost Approaches to Pricing Prices influence the profitability of a firm. Four main factors are essential for price determination: 1. Demand Demand sets the upper limit or ceiling of price. It determines what customers are willing to pay. Elasticity of demand to changes in price is an important issue in setting prices. The price elasticity of demand is measured as the change in quantity demanded per unit change in price. In numerical terms, Price elasticity of demand = (% change in Quantity Demanded)/ (% change in Price) For instance, a budget hotel increases its room price from 20$ to 22$ per room night (10%). Consequent to this price increase, the demand declined from 100 to 950 rooms (5%). The price elasticity of demand for this motel would be (5%/10%) or 0.5. The airline and lodging industry recognize seasonal fluctuations in demand and price their products accordingly. Such demand-based approach to pricing is called yield management . 2. Costs Another important factor to consider in pricing is cost. Costs set the lower limit or floor of price. 3. Objectives Business objectives or goals of a firm constitute the third price setting factor. Objectives or goals provide the overall environment for setting prices. A 10% profit objective annually, for instance, provides a price-setting environment for a business firm. Such environment differs significantly if a firm happens to be a non-profit organization. 4. Competition
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Competition provides the fourth important price-setting factor. A firm’s competition sets the benchmark for comparing its various pricing alternatives. Skimming and penetrating price policies are examples substantiating this fact.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern