Services Marketing Chapter 5

7/30/2019 Services Marketing Chapter 5

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Pricing & Revenue Management

Services Marketing - SZABIST


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Role of Pricing

Various terms for Pricing Difficulties in Services Pricing

Understanding of costs

Value Created for Customers Competitors Pricing

Pricing and Financial Success

Role of Marketing in Revenue Generation Traditional Approach to Pricing



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Three Basic Price Structures and

Difficulties Associated with Usage for Services

PROBLEMS:1. Costs difficult to trace

2. Labor more difficult to

price than materials

3. Costs may not equal value

PROBLEMS:1. Small firms may charge too

little to be viable

2. Heterogeneity of services

limits comparability

3. Prices may not

reflect customer

value

PROBLEMS:1. Monetary price must be adjusted to reflect

the value of non-monetary costs

2. Information on service costs less available to

customers, hence price may not be a central factor


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Pricing of Services


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Difference between Services & Goods`

Limited or inaccurate reference point ofservice

Monetary price is only one of the prices (Timecost, Search cost, Convenience cost)

Price is a good indicator of quality of Service


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Pricing Strategy :

It is a strategic tool that organizations use

to differentiate their products from

competitors and thereby gain the

competitive edge to capture the market.


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STEPS in designing the PRICING STRATEGY

Develop marketing strategy - perform marketing

analysis, segmentation, targeting, and positioning.

Make marketing mix decisions - define the service,

distribution, and promotional tactics.

Estimate the demand curve - understand how

quantity demanded varies with price.


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Calculate cost - fixed and variable costs associated with theservice

Understand environmental factors - evaluate likely competitor

actions, understand legal constraints, etc

Set pricing objectives - for example, profit maximization,revenue maximization, or price stabilization (status quo)

Determine pricing - using information collected in the abovesteps, select a pricing method, develop the pricing structure, anddefine discounts

STEPS in designing the PRICING STRATEGY


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Price ~ Quality

In the absence of other forms of

communication from the company, price

becomes the sole decisive factor in selection

of a service

High risk services customers associate price

with service assurance eg. ?


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Cost Based Pricing


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Cost Based Pricing

Price = Direct Cost + Overhead Cost + Margin

Direct Cost = Material + labour used to produce theservice

Overhead costs are apart from the fixed cost

Used in Services like Advertising , Contracting , etc.


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Cost-Based Pricing

Establishing the Cost of Service Fixed Cost

Semi Variable Cost

Variable Cost

Contribution Margin

Determining and Allocating Cost in MultiserviceFacility

Break-even Point Price sensitivity

Market size

Maximum capacity



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Cost-Based Pricing

Traditional Approach FC + SVC + VC

Activity Based Costing (ABC)

Mandatory Activities Discretionary Activities

Unit Level Activity costs

Batch Level Activity costs Overall Operation costs



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Fee for Service

Cost of the time involved in providing

the service.

Eg. Professional services where charges areper hour like consultants, lawyers

psychologists etc.


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Competition Based pricing


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Competition Based pricing

This approach is based on using the competitors

price as the point of reference

When services are standard across providers. Eg: Fitness

clubs, Driving classes, Computer classes etc. In oligopolies where there are few large service providers :

Airlines

Going-rate Pricing


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Price Signaling

Found in markets where there are a number ofcompetitors. If any one company offers a lowercost advantage others immediately match theprice. Eg. Airlines.

In this type of pricing strategy the charges offeredare the ones that are prevalent in the market forthe same type of service. Eg. Tourist bus services,Car hires etc.


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Competition-Based Pricing

Factors Increasing Price Competition Number of Competitors

Number of Substitutes

Competitions Distribution & Substitution

Increasing Surplus Capacity

Factors Decreasing Price Competition

Non-price-related costs

Personalization, Customization and Switching Costs Time & Location Specificity



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Demand/Value based pricing


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Demand/Value Based pricing

Unlike in cost based and competition based pricing,

demand based pricing is customer focused and not

company or market focused.

This type of pricing is fixed keeping in mind what thecustomers are likely to pay for theperceived value

offered by the service.

For the determination of demand based pricing non

monetary costs also have to be considered, as these

contribute to the perception of value.


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Value-Based Pricing Enhancing Gross Value

Reduce Uncertainty

Benefit-Driven Pricing

Flat Rate Pricing

Relationship Pricing

Discounts

Price & Non-price Incentives

Bundled Services

Low-Cost Leadership

Differentiate Low Cost & Low Quality

Ensure Profits

Managing the Perception of Value



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Value-Based Pricing

Reducing Related Monetary & Nonmonetary Costs Monetary Costs

Nonmonetary Costs

Time Costs

Physical Costs Psychological Costs

Sensory Costs

Search Costs

Purchase & Use Costs Post-consumption Costs



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Pricing Strategies When the

Customer Defines Value as Low Price

Value is Low Price

Discounting

Odd Pricing

Synchro-pricing

Penetration Pricing


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Customer Defines Value as

Everything Wanted in a Service

Value is Everything

I Want in a Service

Prestige Pricing

Skimming Pricing


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Customer Defines Value as

Quality for the Price Paid

Value is the QualityI Get for the Price I Pay

Value Pricing

Market Segmentation

Pricing


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Pricing Strategies

When the Customer Defines Value as

All that is Received for All that is Given

Value is All thatI Get for Allthat I Give

Price Framing

Price Bundling Complementary Pricing

Results-based Pricing


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Price Wars

Price wars are frequent in industries where

Cost differentiation opportunities exists Capital is intensive and products are

homogeneous


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Revenue Management

How revenue management works Reserving Capacity for High Yield Customers

Effect of Competitors Pricing on Revenue

Management Price Elasticity



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Designing rate fences

Physical fences Basic product

Amenities

Service level

Nonphysical fences

Transaction characteristics

Consumption characteristics

Buyer characteristics



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Ethical Concerns

Government Regulations Perceived Fairness & Trust

Designing Fairness into Pricing Strategy

Clarity Highly published

Communicate benefits

Use bundling

Retain loyal customers

Service recovery



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Implementing Services Pricing

Pricing Issues How much should be charge for this service?

What should be the basis of pricing?

Who should collect payment?

Where should payment be made?

How should payment be made?

How should prices be communicated?


Services Marketing Chapter 5

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