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The University of Johannesburg under Property Management created a separate Business Unit within its organisation to generate additional income for the university. These units all provide accommodation to visiting academics, a standard rate is charged and the pricing structure is similar to that of the hospitality industry. Despite a tough economic environment, DPM achieved positive operating results during the year under review. Very tight budgetary controls, rising utility bills, uncertainty around the funding of and increased cost of higher education, insourcing of staff, and the shift in the socioeconomic circumstances of the Universities are some of the factors impacting on the financial performance of DPM.
As the Operations Manager of DPM it's my responsibility to effectively and efficiently manage and develop university accommodation, manage costs effectively in order to ensure budget adherence, prepare and manage the budget for all units, and ensure management and utilisation of the financial and other resources within accordance to UJ policies, rules, and procedures. Therefore the content of the problem focus on the pricing structure of these units provides a more sustainable approach the organisation can use to determine pricing, in addition to the pricing structure DPM, needs to identify how these modifications in pricing will impact the microeconomic market model.
Setting prices is inevitable in any business. If the business units under DPM is to succeed and be self-sufficient, evaluating the pricing structure and the amount charged matters. Consequently the right pricing is imperative to succeed and will affect the decision making process.
In this section DPM will identify fundamental approaches that can be used to determine an improved pricing structure.
In order to attain the above, the following objectives are set,
- Exploring the pricing theory and concept of pricing for services in the generic literature and in the hospitality industry specific. The literature review aims to draw a clear understanding to approaches pricing decisions, factors influencing pricing decisions, and practices used in service settings.
In the financial evaluation process, the main concern is fixed and variable costs, along with the examination of marginal costs and revenue in aim with maximizing profits. Price significantly affects the results of sales and capacity of relevant departments. It provides income development, determines the level of competitiveness of products, facilitates mutually beneficial relationships between businesses and consumers, as well as other market players (Solntsev, 2012). The price is a critical tool in satisfying the needs of consumers on one hand, and improving the profitability of the enterprise on the other hand. The price should match the quality of goods, which is determined by consumers. If the price is too high, then consumers will realize that they do not get the equivalent for the money spent. If the price is too low, then consumers will question the quality of goods, because they realize that in most cases a lower price may mean lower quality level. A careful analysis of factors which affect the pricing decision regarding products and services is a challenging task and it depends on the validity of the strategic and tactical decisions regarding pricing policy. An efficient pricing policy includes not only the analysis of the initial market price of products and services, but also payment methods, types of discounts, price differentiation based on several criteria (Malska, Pandyak and Zanko, 2011).
Price is an interrelated method between a certain currency and goods or services for purchasing purpose, but in reality price is very complicated aspect on the international financial market (McAfee and Johnson, 2005). Every product is estimated by the major indicator such as quality of the product that diversifies the degree of product price and decision of purchasing process (McAfee and Johnson, 2005; Rittenberg and Tregarthen, 2009). In the basic economic law the price is stemmed from the interrelations of supply and demand. These two variables are the basic instruments for providing analysis of economic and financial situation of the particular company or firm (McAfee and Johnson, 2005). Demand is the quantity of product, that consumer is capable to obtain it through the purchasing process at certain price. Supply is the quantity of product, that producer wants to sell at various prices (Schiller, 1991; 2005). The principle of settling price has direct correlation with the quantity of product, whenever the price is high, then demand is low and vice versa if the price is low, then demand is high. After the analysing of buyers and seller desires then the next stage appears an exchange of goods or services that is satisfied to some extend both of the side. This resulting price is referred to as the equilibrium price. In principle of equilibrium price means the parity between the quantities of a good that producer delivered and the quantity demanded that customers are able to purchase (Schiller, 1991; 2005). (See Figure 1).
In the case of any changing in price will lead to different consequences. When the price is decreased below P1, it means the quantity demanded is over the quantity supplied. In result the consumers will be worried about purchasing a particular product, because the seller will unable to supply and it creates product shortage on market. Thus the consumers should spend more money in order to buy product. Supplier must increase deliveries of production in order to fill enough the products on market. Conversely, if the price is increased above P1, then in this situation a market is becoming in surplus, where the quantity supplied is over the quantity demanded. In this situation seller should decrease the price in order to clear the market of excess supplies, whereas consumers should be encouraged to raising their consumptions in order to decline the price. In both of consequences the price will become equal between supply and demand (Rittenberg and Tregarthen, 2009).
Demand-based pricing / customer -based pricing refers to a pricing method in which the price of a product is finalized according to its demand. If the demand of a product is more, an organization prefers to set high prices for products to gain profit; whereas, if the demand of a product is less, the low prices are charged to attract the customers. The success of demand-based pricing depends on the ability of marketers to analyse the demand. This type of pricing can be seen in the hospitality industries. The Units prices for services do not have to be permanently set. They can be adjusted, depending on demand. This would allow flexibility for DPM, DPM could possibly alter rates charged depending on a certain period of the year, e.g. in the beginning of the semester when the University opens and demand for accommodation is high, the rate would increase and during the last semester when demand is low the rate could decrease. This pricing is fitted to the customers willingness to pay
Competition-based Pricing, Economics Discussion (2019) states that a competition-based pricing refers to a method in which an organization considers the prices of competitors' products to set the prices of its own products. The organization may charge higher, lower, or equal prices as compared to the prices of its competitors. Using this method would require understanding of the pricing strategy of the other units within UJ. This pricing method could be implemented by DPM, for example DPM could possibly charge the same or a lower rate for accommodation charged by their competitors. If other units are pricing their service at a lower price, then DPM can either increase or decrease the rate, depending on what DPM wants to achieve. This pricing method leads to big revenue and a high occupancy rate, but focus on the market share can lead to inappropriate rate cuttings.
Price is one of the key issues of microeconomic theory, especially in financial and accounting fields, because it has impact on two main directions, the first one is on satisfaction of customers' needs and the second one is on increasing the profitability of companies. Thus, DPM has a Financial Business Partner (Accountant) that works on establishing the pricing policy. Within the hospitality industry, the pricing policy is the base of creating, developing and managing the pricing strategies. Therefore, pricing strategies play a significant role in the hotel industry in order to set up and manage the right price for goods and services on the marketplace in order to maximize revenue for short or long term (Drury, 2008; Monroe, 2003). However, the prices are generated in line with each Units competitive position in the market aiming to achieve high profitability among other departments. That's why, accounting, sales & marketing managers gather information and provide deep analyses of the important market segments by using economic tools, such as elasticity of demand and supply, total cost, marginal cost and revenue, in order to evaluate the current or future situation of the hotel.
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