What is the meaning / definition of Competition Based Pricing in the hospitality industry?
The term competition based pricing, also known as competitive pricing refers to the process of a company pricing its product/ service (in hotels rooms, food & beverages) according to the competitors. Competition Based pricing should be part of your Revenue Management Strategy
In industries which have preceded in the industry life cycle competition based pricing often forces smaller uncompetitive companies into bankruptcy. In general, competitive pricing often occurs when many companies are offering similar products or services to their market. When this happens and companies aren’t able to differentiate themselves from their competitors the last factor they can adjust to win customers is price. Therefore, this type of pricing is rather a last resort – especially for hotels – as they should aim to differentiate themselves by their offerings, whereby they can charge a premium for their service.
Therefore, this rather happens with commodities or products that have less “status” differentiation. In the luxury hotel market for example, competition based pricing may actually hurt the hotel in the long-term as their clientele actually chooses for them due to their price being related to their exceptional offerings.
On the other hand, Budget hotels & hostels deal with price sensitive clientele whereby the price stands in the foreground. These establishments are able to increase demand easily by lowering their price as customers are “hunting” for bargains. Therefore, within highly competitive cities budget hotels are constantly orienting themselves on their competitors. This drives down prices, in favour of the consumer.
Competition based pricing comes with advantages and disadvantages for companies, following this pricing strategy.
Advantages:
– It avoids price competing on prices lower than competitors.
– It is able to drive business in times where “some” business is better than “none”
Disadvantages:
– May harm brand image
– May lead to losses, due to not focussing on covering the overhead costs and increasing margins.
– Price reduction will automatically increase demand if product is not up to par.
– May get you distracted from other business tasks
– It doesn’t work in all markets
– It’s difficult for small businesses, as larger companies are more capable of reducing cost per customer.
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