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2007 Annual International CHRIE Conference & Exposition
338
Types of Pricing Applied in the Hospitality in the Hospitality Industry
Hospitality firms use various methods to set prices for their products. Hospitality managers select different
pricing approaches based on one or a combination of several factors: a firm’s cost structure, competitors’ prices, and
customer value perceptions of hospitality products. Cost-based pricing usually involves marking-up techniques of
actual variable costs (product costs) at a certain desired product cost percentage. This pricing method is commonly
used to set menu prices in restaurants. Alternatively, pricing methods based on customers’ value perceptions of
hospitality products exclude the consideration of costs and attempt to provide value by offering high quality at low
prices (Lewis & Shoemaker, 1997; Shoemaker, Lewis, & Yesawich, 2006).
Furthermore, several price adjustment strategies, such as volume, and based-on-time -of-purchase
discounting, as well as discriminatory pricing, are used in the hospitality industry (Kotler, Bowen, & Makens, 2003).
Discriminatory pricing is a method of setting prices at different levels based on the elasticity of demand of
individual market segments. Price differentiations are not sustained by a difference in costs or quality, but rather are
the result of the unique characteristics of individual market segments. Discriminatory pricing methods permit
charging lower prices to price sensitive customers and asking full prices from inelastic market segments (Kotler,
Bowen, & Makens, 2003). Several basic conditions have to exist in order to apply price discrimination successfully:
first, various market segments must be identifiable and appreciate services differently; second, firms practicing price
discrimination should know their costs well in order not only to maximize revenues but, more importantly, profits.
Third, a firm that deals in perishable products must have the ability to sell products in advance according to
fluctuating demands. Finally, price discriminatory approaches must be well comprehended and accepted by the
customer.
Price discriminatory methods have become standard operating procedures for many hospitality firms.
Discriminatory pricing should always apply methods that are beneficial to the customers and to the hospitality firm.
Therefore, firms must always offer sufficient benefits in exchange for restrictions and provide sufficient information
about how to obtain price discounts. A popular example of discriminatory pricing is yield management, a pricing
approach that involves charging various room rates to different market segments. Finally, many hospitality firms set
their prices by considering demand and costs as secondary factors and set prices according to the “going rates” of
competitors.
Hospitality firms can also apply Price Sensitivity Measurement (PSM) methods, which reveal how
relationships between price and quality affect customers’ perceptions of value (Lewis & Shoemaker, 1997). In
addition, price sensitivity measurement data combined with Activity-Based Cost (a cost accounting system that
traces overhead costs to individual products) allows for designed profits and is defined as Activity-Based Pricing
(Daly, 2002). This study will contribute to the under researched subject of restaurant pricing by presenting the first
part of a two part Activity-Base Pricing (ABP) study, which will for the first time combine market derived price
points with Activity-Based Cost estimations (all cost except taxes). The first part of the ABP study will apply Price
Sensitivity Measurement (PSM) methods, which reveal how relationships between price and quality affect
customers’ perceptions of value. This part of the study will establish optimal price points for a buffet restaurant,
adopting methodologies from Lewis and Shoemaker (1997), who applied Price-Sensitivity Measurements to the
association meeting market. Next, we will discuss the PSM concept.
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