Lecture Four
• Distributing Services Through
Physical and Electronic
Channels (Chap 5)
• Setting Prices and
Implementing Revenue
Management (Chap 6)
Service Quality MKTG 1268
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JAN 2013 Semester
This lecture:
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Another heavy lecture week.
Two chapters involved (5 and 6)
Rather technical in nature especially for Chapter Six
(revenue management)
Last week focused on Positioning and Product
This week focus on two additional Ps
Place
Price
Distributing Services Through Physical
and Electronic Channels
Chapter Five 3
• Distributing Services Through Physical and
Electronic Channels
Overview Of Chapter 5
Distribution in a Services Context
Distribution Options for Serving Customers: Determining Type of Contact
Place and Time Decisions
Delivering Services in Cyberspace
The Role of Intermediaries
Distributing Services Internationally
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Distribution in a Services Context
In a services context, we often move nothing
Experiences, performances and solutions are not being physically shipped and stored
More and more informational transactions are conducted through electronic and not physical channels
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So what is being distributed?
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The three interrelated elements of distribution are:
Information and promotion flow
To get customer interested in buying the service
Negotiation flow
To sell the right to use a service
Product flow
To develop a network of local sites
Distribution Options for Serving Customers
Customers visit service site Convenience of service factory locations and operational
schedules important when customer has to be physically present
Service providers go to customers Unavoidable when object of service is immovable
Needed for remote areas
Greater likelihood of visiting corporate customers than individuals
Service transaction is conducted remotely Achieved with help of logistics and telecommunications
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Six Options For Service Delivery (Table 5.1)
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Channel Preferences Vary Among Customers
For complex and high-perceived risk services, people tend to rely on personal channels
Individuals with greater confidence and knowledge about a service/channel tend to use impersonal and self-service channels
Customers who are more technology savvy
Customers with social motives tend to use personal channels
Convenience is a key driver of channel choice
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Place and Time Decisions
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The place and time decisions must reflect customer
needs and expectations, competitive activity and the
nature of the service operation.
The strategies employed may also differ between
those used to deliver the supplementary elements and
the core product.
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For some types of specialty services, customers
are willing to travel farther from their homes
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Place and Time Decisions
Places Of Service Delivery (1)
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Automated Kiosks (we will cover the topic on Self
Service Technology in a later lecture)
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Office Buildings as Multi-purpose Facilities
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Multi-purpose Facilities : Gas Stations and
Supermarkets
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Place and Time Decisions
Places Of Service Delivery (2)
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When Should Service Be Delivered?
Traditionally, schedules were restricted
Service availability limited to daytime, 40-50
hours a week
Today situation has changed
For flexible, responsive service operations:
- 24/7 service – 24 hours a day, 7 days a
week, around the world (see Service Insights 5.2)
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Delivering Services in Cyberspace 20
Distribution of Supplementary Services in Cyberspace
Five of the supplementary services are information-based
These services can all be distributed electronically. They are: Information
Consultation
Order-taking
Billing
Payment
Distribution of information, consultation and order-taking has reached very sophisticated levels in global service industries (e.g., hotels, airlines, car rental companies)
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Information and Physical Processes of
Augmented Service Product (Fig 5.14)
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Service Delivery Innovations Facilitated by Technology
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e-Commerce: Move to Cyberspace
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Role of Intermediaries 26
Splitting Responsibilities For Supplementary Service
Elements (Fig. 5.19)
Challenges for original supplier
Act as guardian of overall process
Ensure that each element offered by intermediaries fits overall service concept
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Franchising (1)
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• Popular way to expand delivery of effective service concept, without a high level of monetary investments compared to rapid expansion of company-owned and -managed sites
• Franchisor provides training, equipment and support marketing activities. Franchisees invest time and finance, and follow copy and media guidelines of franchisor
• Growth-oriented firms like franchising because franchisees are motivated to ensure good customer service and high-quality service operations
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Franchising : Subway
Franchising (2)
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Distributing Service Internationally 31
Distributing Services Internationally : How to Enter
International Markets? 32
The key determinants are the control of intellectual property (IP) and sources of value creation, as well as the degree of required customer interaction required.
If IP and value creation source is high and degree of customer interaction is low, then exporting directly would be the mode of entry.
At the other extreme, with low need to control IP and the source of value creation lies within the firm and the level of customer interaction required is high, then entry through direct foreign investment is desirable (see Figure 5.22).
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Distributing Services Internationally : How to Enter
International Markets?
People processing services require direct contact with customers
Export service concept
- Acting alone or in partnership with local suppliers
e.g., chain restaurants, hotels, car rental firms
Import Customers
- Inviting customers from overseas to firm’s home country
e.g., hospitals catering to “medical tourism”
Transport customers to new locations
- Passenger transportation (air, sea, rail, road)
How Service Processes Affect International Market
Entry (1) 34
How Service Processes Affect International Market
Entry (2)
Possession processing involves services to customer’s physical possessions
- e.g., repair and maintenance, freight transport
Information-based services include mental processing services and information processing services
Export the service to a local service factory
- Hollywood films shown around the world
Import customers
Export the information via telecommunications and transform it locally
- Data can be downloaded via CDs or DVDs
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© Pearson Education South Asia Pte Ltd 2013. All rights reserved 36
Summary of Chapter 5: Distributing Services
• Distribution in services often involve moving nothing and many
information-based services can be distributed electronically
• Options for service delivery include:
Customers visit the service site
Service providers go to their customers
Service transaction is conducted remotely
• Channel preferences vary among customers
• Place and time decisions include where services should be delivered in bricks-and-mortar context, when it should be delivered
© Pearson Education South Asia Pte Ltd 2013. All rights reserved 37
Summary of Chapter 5: Distributing Services
• Delivery in cyberspace is facilitated by technology
and e-commerce allows 24-hour delivery, saving time
and effort
• Intermediaries play roles in distributing services
Franchising brings both advantages and disadvantages to the
firm
• The mode of entering international markets depends
on the control of IP and sources of value creation
Setting Prices and Implementing Revenue
Management
Chapter Six 38
Overview Of Chapter 6
Effective Pricing is Central to Financial Success
Pricing Strategy Stands on Three Legs
Revenue Management: What it is and How it Works
Ethical Concerns in Service Pricing
Putting Service Pricing into Practice
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What Makes Service Pricing Strategy Different and
Difficult?
Harder to calculate financial costs of creating a
service process or performance than a manufactured
good
Variability of inputs and outputs: How can firms
define a “unit of service” and establish basis for
pricing?
Importance of time factor – same service may have
more value to customers when delivered faster
Customers find service pricing difficult to understand,
risky and sometimes even unethical
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Revenue and Profit Objectives Seek profit
Cover costs
Patronage and User-Based Objectives Build demand
- Demand maximization
- Full capacity utilization
Build a user base
- Stimulate trial and adoption of new service
- Build market share/large user base
Objectives for Pricing of Services (Table 6.1)
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The Pricing Tripod (Fig. 6.3)
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Three Main Approaches to Pricing
Cost-Based Pricing Set prices relative to financial costs (problem:
defining costs)
Activity-Based Costing
Pricing implications of cost analysis
Value-Based Pricing Relate price to value perceived by customer
Competition-Based Pricing Monitor competitors’ pricing strategy (especially if
service lacks differentiation)
Who is the price leader - does one firm set the pace?
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Cost-Based Pricing - Railways
Cost-Based Pricing:
Traditional vs. Activity-Based Costing
Traditional costing approach Emphasizes expense categories (arbitrary overheads
allocation)
May result in reducing value generated for customers
ABC management systems Link resource expenses to variety and complexity of
goods/services produced
Yields accurate cost information
When looking at prices, customers care about value to themselves, not what service production costs the firm
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Fixing prices for budget airlines in order to cover costs and increase
load factors in order to break even
Value-Based Pricing
Understanding Net Value (Fig. 6.7)
Value exchange will not take place unless customer sees positive net value in transaction
Net Value = Perceived Benefits to Customer (Gross Value) minus All Perceived Outlays (Money, Time, Mental/Physical Effort)
Monetary price is not only perceived outlay in purchasing, using a service
When looking at competing services, customers are mainly comparing relative net values
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What is the real value? Confusing the customer
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What value are you really getting from this transaction?
Value-Based Pricing:
Managing Perception of Value
Need effective communication and personal explanations to explain value
Reduce related-monetary costs
Cut time spent searching for, purchasing and using service
Reduce non-monetary costs
Time Costs
Physical Costs
Psychological (Mental) Costs
Sensory Costs (unpleasant sights, sounds,
feel, tastes, smells)
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Defining Total User Costs (Fig. 6.11)
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Value-Based Pricing: Approaches to Reducing Non-
monetary and Related-monetary Costs
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service e.g. eliminate/redesign unpleasant/ inconvenient
procedures
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service Unpleasant sights, sounds, smells, feel, tastes
Suggest ways for customers to reduce other monetary costs
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Trading Off Monetary and Non Monetary Costs
(Fig. 6.12) 54
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Competition-Based Pricing:
When Price Competition is Reduced
Non-price-related costs of using competing
alternatives are high
Personal relationships matter
Switching costs are high
Time and location specificity reduces choice
• Managers should not only look at competitor’s prices
dollar for dollar, but should examine all related
financial and non-monetary costs
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Personalized services could prevent switching to competitors
services
Revenue Management: What It Is and How it
Works 57
What is Revenue Management all about in a
Services context? 58
Revenue management allocates
perishable capacity units to existing
demand in a way that maximizes
revenues, not patronage.
Revenue management for services
Revenue management can be applied if:
Capacities are relatively fixed and perishable
Different market segments exist
Service is sold in advance
Variable and uncertain demand
Low marginal sales variable cost but high marginal
production cost
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With high fixed cost
structures, golf
courses need to
implement effective
revenue management
systems
Maximizing Revenue from
Available Capacity at a Given Time (1)
Most effective when:
Relatively high fixed capacity
High fixed cost structure
Perishable inventory
Variable and uncertain demand
Varying customer price sensitivity
Revenue management is price customization
Charge different value segments different prices for same product based on price sensitivity
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Maximizing Revenue from
Available Capacity at a Given Time (2)
Revenue management uses mathematical models
to examine historical data and real time
information to determine
What prices to charge within each price bucket
How many service units to allocate to each bucket
Rate fences deter customers willing to pay more
from trading down to lower prices (minimize
consumer surplus)
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Price Elasticity (Fig. 6.15)
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Price Elasticity : customers are willing to pay higher prices for their
favorite shows
Key Categories of Rate Fences: Physical (1) (Table 6.2)
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Key Categories of Rate Fences: Non-physical (1) (Table 6.2)
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Key Categories of Rate Fences: Non-physical (2) (Table 6.2)
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Key Categories of Rate Fences: Non-physical (3) (Table 6.2)
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Relating Price Buckets and Fences to
Demand Curve (Fig. 6.17)
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Tickets purchased in advance typically cheaper
Fares can change quickly
Saturday night stay discount
Minimum stay restrictions (e.g. overnight)
Non-refundable tickets have lower fares
Last minute “deals” / internet fares
One-way tickets cost more than ½ roundtrip
Frequent flyer miles
Bulk discounts to companies
Intentional Overbooking
Pricing Practices in Airlines
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Use of Different Pricing Buckets
► High Priced/Refundable Tickets (High Price Buckets)
Fully Refundable
Few if any restrictions
Mean fare = $631
26% of tickets
► Medium Price/Nonrefundable/Unrestricted Tickets (Medium Price Buckets)
Nonrefundable, but
No travel or stay restrictions
Mean fare = $440
32% of tickets
► Low Price/Nonrefundable/Restricted Tickets (Low Price Buckets)
Nonrefundable
Travel and/or stay restrictions
Mean fare = $281
42% of tickets
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How Revenue Management is applied to
selling of Concert Tickets
Case Study 72
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THE LION KING Seen by over 50 million people
around the world, Disney’s
internationally-acclaimed
musical THE LION KING will
have its Southeast Asian
Premiere when it opens March
2011 at the Sands Theater at
Marina Bay Sands®.
THE LION KING explodes with
glorious colours, stunning
effects and enchanting music
including Elton John and Tim
Rice’s Academy Award-winning
‘Can You Feel The Love Tonight’.
At its heart is the powerful and
moving story of Simba - the epic
adventure of his journey from
wide-eyed cub to his destined
role as King of the Pridelands.
(courtesy of Ms Perlyn Sim)
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Ticket Prices DATE
8 Shows A Week
Tue - Fri, 8pm
Sat and Sun, 2pm & 8pm
DURATION
Approx 2 hrs 30 mins
INTERVAL
Approx 20 mins
VENUE(S)
Sands Theater at Marina Bay Sands
TICKET PRICE (Exclude Booking Fee)
Platinum - S$240 (Includes a drink and a gift)
A Reserve - S$185
B Reserve - S$165
C Reserve - S$125
D Reserve - S$85
E Reserve - S$65
F Reserve - $165 (Restricted View)
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Revenue Management In Action
30 October 2011
(Sun) 8:00 PM
PRICE CATEGORIES (In Singapore Dollars)
CAT 1
(Plantinum)
CAT 2
(A)
CAT 3
(B)
CAT 4
(C)
CAT 5
(D)
CAT 6
(E)
STANDARD
S$240.00
S$185.00
S$165.00
S$125.00
S$85.00
S$65.00
15% Group
(10 tix &
above)
-
S$157.25
S$140.25
S$106.25 - -
Early Bird
Upgrade (10
Days in
Advance)
-
S$165.00
S$125.00 - - -
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Why Restrictions on Ticket Prices?
S$555 ( $185 cheaper for A Reserve) and S$495 ($165 cheaper for B
Reserve) for OCBC Family Package of 2 Adults & 2 Children (Up to 16 years old)
[Payment must be made with a Singapore Issued OCBC Credit / Debit Cards]
[Promotion is not applicable to Friday and Saturday evening shows]
[Promotion is applicable from 2 Aug to 20 Sep 2011]
[Promotion is applicable for shows in August and September only]
Free Seat Upgrades when you book at least 10 days in advance
[Valid for A and B Reserve tickets only] - $240 and $185 ticket prices
[Purchase must be made at least 10 days in advance]
[Upgrade from B Reserve to A Reserve – Save S$20]
[Upgrade from C reserve to B Reserve – Save S$40]
[Discount is not applicable to Friday and Saturday evening shows]
15% Discount for 10 tickets and above
[Purchase must be made at least 10 days in advance]
[Discount is applicable for A, B & C Reserve only]
[Discount is not applicable to Friday and Saturday evening shows] 77
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Why Special Prices for Seniors & Students?
Through Marina Bay Sands Box Offices & SISTIC Authorised Agents
25% Discount for Senior Citizen (65 years old and above)
[Discount is applicable to Wednesday evening shows only]
[Discount is applicable from 2 Aug 2011 onwards]
25% Discount for Students (OCBC Credit Card Holders)
[Upon presentation of valid Student Pass]
[Payment must be made with an OCBC Credit Card]
[Discount is applicable to Wednesday evening shows only]
[Discount is applicable from 2 Aug to 20 Sep 2011]
[Discount is applicable for shows in August and September only]
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Key Categories of Rate Fences:
Application to Theatre Seating
Difference in seating proximity to the
stage: Cat 1 cost 3.6x more than Cat 4
Food and beverage lounge for first class
seats during concert break
Provide free parking or valet parking for
first-class seats
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Key Categories of Rate Fences:
Application to Theatre Seating
Discounts for 10 days advance booking
Discount Tickets cannot be used on Fri and Saturday evenings shows) 80
Key Categories of Rate Fences: Non-physical (3) (Table 6.2) By Buyer Characteristics
Discounts for group of 10 or more
Special Prices for senior citizens & students (wed evenings shows only)
Special Prices for OCBC Credit Card Holders - Family Packages (2 Adults & 2 Child)
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Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate as they assume that higher price indicates better quality
Many services have complex pricing schedules
Hard to understand
Difficult to calculate full costs in advance of service
Quoted prices not the only prices
Hidden charges
Many kinds of fees
Too many rules and regulations
Customers feel constrained, exploited
Customers face unfair fines and penalties
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Problems faced by customers as a result of
complex pricing structures and terms
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Designing Fairness into Revenue Management
1. Design clear, logical and fair price schedules and fences
2. Use high published prices and present fences as
opportunities for discounts (rather than quoting lower
prices and using fence as basis to impose surcharges
3. Communicate consumer benefits of revenue
management
4. Use bundling to “hide” discounts
5. Take care of loyal customers
6. Use service recovery to compensate for overbooking
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Bundling prices – cruise packages
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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?
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Putting Service Pricing into Practice (1)
• How much to charge?
Pricing tripod model is a useful to use for costs, price
sensitivity of customers and competitors
Depends on whether discounts are offered
Any psychological pricing points used?
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Putting Service Pricing into Practice (2)
• What basis for pricing?
Completing a task
Admission to a service performance
Time based
Monetary value of service delivered
(e.g., commission)
Consumption of physical resources
(e.g, food and beverages)
Distance-based (e.g., transportation)
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Putting Service Pricing into Practice (3)
• Who should collect payment?
Service provider or specialist
intermediaries
Direct or non-direct channels
• Where should payment be made?
Conveniently-located intermediaries
Mail/bank transfer
Credit card payment through internet,
phone, fax
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Putting Service Pricing into Practice (4)
• When should payment be
made?
In advance
Once service delivery has been
completed
• How should payment be made?
Cash
Check
Charge Card (Debit / Credit)
Tokens or vouchers
Stored value card
© Pearson Education South Asia Pte Ltd 2013. All rights reserved 91
Putting Service Pricing into Practice (5)
• How to communicate prices?
Relate the price to that of
competing products
Use salespeople and customer
service representatives
Good signage at retail points
Ensure price is accurate and
intelligible
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© Pearson Education South Asia Pte Ltd 2013. All rights reserved 93
Summary of Chapter 6:
Pricing and Revenue Management (1)
• Pricing objectives can include
Generating revenues and profit
Building demand
Developing user base
• Three main foundations to pricing a service
Cost-based pricing
Value-based pricing
Competition-based pricing
© Pearson Education South Asia Pte Ltd 2013. All rights reserved 94
Summary of Chapter 6:
Pricing and Revenue Management (2)
• Cost-based pricing seeks to recover costs plus a margin for profit; includes both traditional and activity-based costing
• Value-based pricing should reflect net benefits to customer after deducting all costs
• Firm must be aware of competitive pricing but may be harder to compare for services than for goods
• Revenue management Maximizes revenue from a given capacity at a point in time
Helps manage demand and set prices for each segment closer to perceived value
Involves use of rate fences to deter segments willing to pay more from trading down to lower prices
© Pearson Education South Asia Pte Ltd 2013. All rights reserved 95
Summary of Chapter 6:
Pricing and Revenue Management (3)
• Ethical issues in pricing
Customers are vulnerable when service is hard to evaluate
Many services have deliberately complex pricing schedules
Fees and hidden charges catch customers by surprise
Too many rules and regulations
• Questions to ask when putting service pricing into practice
How much to charge?
What should the specified basis for pricing be?
Who should collect payment
Where should payment be made?
When should payment be made?
How should payment be made?
How should prices be communicated to the right target market?
Sample Exam Essay Question
96
You are about to open a chiropractic practice. You need to develop a pricing schedule for your service. You are sensitive towards consumers’ ethical concerns with regard to pricing.
What are some of the ethical concerns that consumers may have and what can you do to overcome these concerns specific to your business?
What are the seven questions you need to address in order to design an effective pricing strategy for your business? Please provide your recommendations and response to each of the seven questions.
Practice Question: Why is pricing more difficult for services
marketing?
Pricing is more complex in services than in
manufacturing because it’s more difficult to calculate
the financial costs involved in serving a customer than
it is to identify the labor, materials, storage, and
shipping costs associated with producing a physical
good.
The variability of inputs and outputs means that units
of service may not cost the same to produce, nor will
they be of equal value to customers if quality is not
consistent.
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The inability to inventory services also places a
premium on balancing demand and supply, a task
where pricing plays a large part. Time may influence
customers’ perceptions of value. Customers may be
willing to pay more for a service delivered fast than
one delivered more slowly (such as express photo
development or laundry services)
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Practice Question: Why is pricing more difficult for services
marketing?
Practice Question: What is Revenue management?
How does it work?
• Revenue management is concerned with strategies for maximizing the revenue that can be derived from the sale of available capacity at any given time. It is particularly important for organizations whose capacity is relatively fixed, which serve large numbers of customers from multiple market segments, and which face wide swings in demand as well as competitive pricing pressure.
• In revenue management, the challenge is to work within the constraints listed above to maximize revenue yield by discriminating among its target market and carefully controlling the matching demand and capacity. Different prices are charged at different times, different service segments and for different markets. Hotels and airlines are important examples.
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• The challenge is to capture sufficient customers to fill all or most of the firm’s perishable capacity without excessive price discounting that creates consumer surplus for customers, who would have been willing to pay more. Mathematical modeling plays an important role in yield management. Advances in software and computing power have made it possible for firms to use historical databases to predict the probability of future demand levels at different prices, thus making better pricing decisions.
100
Practice Question: What is Revenue management?
How does it work?
Practice Essay Question
101
(a) Explain the concept of revenue management.
(b) How might revenue management be applied
to the following services:
i. consulting services
ii. restaurant
iii. a golf course
Application : Consulting •Have a dedicated account management team for the large accounts. Account managers often understand the service needs and pricing points of their clients rather well, and are therefore able to effectively position and price services. •Use differential pricing, bundle items, and introduce special promotions so that lower prices are offered during low demand periods to shift demand patterns. •Predict demand and capacity utilization, and adjust prices and business development activities accordingly. During periods of high-predicted utilization, only actively pursue high priced/high margin projects, and during periods of low predicted utilization, pursue even merely cost-covering projects to maintain the capacity and cover fixed costs.
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•Advance reservations only with credit card guarantees. •Overbooking to compensate for no-shows and cancellations. •Implement a table management system. •Improve communication between host and seaters. •Do not suggest dessert and coffee during peak hours. •Use differential pricing, bundle items, and introduce special promotions so that lower prices are offered during low demand periods to shift demand patterns. •Decrease table size to allow more customer parties to be seated.
Application: Restaurant
103
•Multi-tiered membership systems with exclusives benefits
(e.g., free golf cart at the golf course or free breakfast) for the
top tier customers.
•Billing of payment
•Group membership or group discounts based of size of
groups.
•Use differential pricing, bundle items, and introduce special
promotions so that lower prices are offered during low
demand periods to shift demand patterns.
Application : Golf Course
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