sq lecture four : distributing services & setting prices and implementing revenue management...

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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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

© Pearson Education South Asia Pte Ltd 2013. All rights reserved 13


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



Places Of Service Delivery (2)

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).


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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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


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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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


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


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?


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?



• 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)



• 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



• 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



• 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


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




• 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




• 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

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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.

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Practice Question: What is Revenue management?

How does it work?

Practice Essay Question

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(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

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•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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