Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1 Chapter...

Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1

Chapter 5

Exploring Business Models: Pricing and Revenue Management


Learning Objectives - Chapter 5

Determine three foundations to pricing a service

Compare cost based to activity based pricing

Manage customer perceptions of non-monetary costs of obtaining service

Examine how revenue management can improve profitability

Reflect on the key ethical concerns in service pricing

Study seven key questions for price schedule design


Effective Pricing Is Central to Financial Success


What Makes Service Pricing Strategy Different and Difficult?

Harder to calculate financial costs than a manufactured good

Difficulty in defining a “unit of service”

Services hard to evaluate

Customers may be prepared to pay more for faster delivery

Delivery through physical or electronic channels—may create differences in perceived value


Alternative Objectives for Pricing(Table 5.1)

Revenue and profit objectives

Seek profit Cover costs

Patronage and user-based objectives

Build demand Build a user base


Pricing Strategy Stands on Three Legs


The Pricing Tripod (Fig 5.2)

Pricing strategy

CostsCompetition

Value to customer


Cost-Based Pricing: Traditional vs. Activity-Based Costing Traditional costing approach

Labour and infrastructure costs are considered fixed costs Service firms have higher ratio of fixed to variable costs

found in manufacturing Cost reduction decisions often cut these costs which leads to

reduced service levels and unhappy customers

Activity-based costing (ABC)

Sets of delivery activities and related costs Firms can pinpoint profitability of different services, channels

etc

When looking at prices, customers care about value to themselves, not what service production costs the firm


Competition-Based Pricing

When customers don’t see a difference between competitive offerings, they choose the cheapest

Price competition is reduced when

Non- price related costs of using competing alternatives are high

Personal relationships matter Switching costs are high Time and location specificity reduce choice

When competing on price take into account the entire cost to customers including:

All related financial and non-monetary costs PLUS switching costs

Compare this cost to the competition


Value-Based PricingUnderstanding Net Value (Fig 5.4)

Customers evaluate competition by comparing their perceived benefits to their perceived outlays

Service pricing strategies should enhance perceived value by:

Reducing uncertainty Relationship enhancement Low cost leadership Manage value perception

Perceived benefits

Time e

Effort

Perceived outlays


Reduce Related Monetary and Non-Monetary Costs

Incremental financial outlays Includes the price of purchasing service and other

expenses Expenses associated with search, purchase activity, usage

― E.g. Two theatre tickets also requires the cost of parking, babysitters etc.

Non-monetary costs Time costs Physical costs Psychological (mental) costs Sensory costs (unpleasant sights, sounds, feel, tastes, smells)


Defining Total User Costs (Fig 5.6)

Physical effort

Psychological burdens

Sensory

burdens

Necessary

follow-up

Problem

solving

Incidental expenses

Operating costs

Purchase

Time

Money

* Includes all five cost categories

Search costs*

Purchase and service encounter

costs

After costs*


Trading Off Monetary and Non-monetary Costs (Fig 5.7)


Revenue Management: What It Is and How It Works


Revenue Management (RM)

RM charges more for customers booking service closer to time of consumption instead of on a first come first served basis Charge different value segments different prices for same product

Predicts how many customers will use a given service at a specific time at each of several different price levels and then allocates capacity at each level or price bucket

If booking pace for a higher-paying segment is stronger than expected, additional capacity is allocated to this segment and taken away from the lowest- paying segment

Rate fences allow customers to self segment on the basis of service characteristics and willingness to pay.

This helps companies restrict lower prices to customers willing to accept certain restrictions


Key Categories of Rate Fences (1)Table 5.2

Rate Fences Examples Physical (product-related) Fences Basic product Class of travel (business/economy

class)

Size and furnishing of a hotel room

Seat location in a theatre

Amenities Free breakfast at a hotel, airport pickup, etc.

Free golf cart at a golf course

Service level Priority wait-listing

Increase in baggage allowances

Dedicated service hotlines

Dedicated account management team



Nonphysical FencesTransaction Characteristics

Time of booking or reservation

Requirements for advance purchase

Must pay full fare two weeks before departure

Location of booking or reservation

Passengers booking air tickets for an identical route in different countries are charged different prices

Flexibility of ticket usage

Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price)

Nonrefundable reservation fees



Nonphysical Fences (cont’d)Consumption Characteristics

Time or duration of use

Early-bird special in restaurant before 6PM

Must stay over on Saturday for airline, hotel

Must stay at least 5 days

Location of consumption

Price depends on departure location, especially in international travel

Prices vary by location (between cities, city centre versus edges of city)



Nonphysical Fences (cont’d)Buyer Characteristics

Frequency or volume of consumption

Member of certain loyalty tier with the firm get priority pricing, discounts, or loyalty benefits

Group membership Child, student, senior citizen discounts

Affiliation with certain groups (e.g., alumni)

Size of customer group

Group discounts based on size of group


Relating Price Buckets and Fences toDemand Curve (Fig 5.9)

Price per seat

Capacity of 1st class cabin

Capacity of aircraft No. of seats demanded

1st class

Full fare economy (no restrictions)

1 - week advance purchase

1 - week advance purchase, Saturday night stay

3 - week advance purchase, Saturday night stay

Specified flights, book on Internet, no changes/refunds

Late sales through consolidators/Internet, no refunds

3-week advance purchase, Saturday night stay, $100 for changes

* Dark areas denote amount of consumer surplus (goal of segmented pricing is to reduce this)


Ethical Concerns in Service Pricing


Designing Fairness into Revenue Management

Design clear, logical, and fair price schedules and fences

Use high published prices and present fences as opportunities for discounts rather than quoting lower prices and using fence as basis to impose surcharges

Communicate consumer benefits of revenue management

Use bundling to “hide” discounts

Take care of loyal customers

Use service recovery to compensate for overbooking


Putting Service Pricing into Practice


Pricing Issues: Putting Strategy into Practice (Table 5.3)

How much to charge?

What basis for pricing?

Who should collect payment?

Where should payment be made?

When should payment be made?

How should payment be made?

How to communicate prices?


The three foundations to pricing a service are costs, competition and value to customer

Activity based pricing is better than traditional pricing approaches

Incremental financial outlays and non-monetary such as physical effort play a role in customers price perception

Revenue management can improve profitability by allocating service capacity to high paying customers and creating restrictions for low paying customers

Key ethical concerns in service pricing rest on clear, logical and fair pricing

There are seven key questions for price schedule design

Summary - Chapter 5

Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1 Chapter...

Documents

Transcript of Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1 Chapter...