Services Marketing
Chapter 6: Setting Prices and Implementing Revenue Management
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Services Marketing 7/e
Chapter 6 Page 1
Overview Of Chapter 6
Services Marketing
Effective Pricing is Central to Financial Success Pricing Strategy as Represented by the Pricing Tripod Revenue Management: What it is and How it Works Ethical Concerns in Service Pricing Putting Service Pricing into Practice
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Services Marketing 7/e
Chapter 6 Page 2
Services Marketing
Effective Pricing is Central to Financial Success
Slide 2011 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6 Page 3
What Makes Service Pricing Strategy Different and Difficult?
Services Marketing
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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Objectives for Pricing of Services
Services Marketing
Revenue and Profit Objectives
Seek profit Cover costs
Patronage and User-Based Objectives
Build demand
Demand maximization Full capacity utilization
Build a user base
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Stimulate trial and adoption of new service
Build market share/large user base
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Services Marketing 7/e
Chapter 6 Page 5
Services Marketing
Pricing Strategy As Represented by the Pricing Tripod
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Services Marketing 7/e
Chapter 6 Page 6
The Pricing Tripod
Services Marketing
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Services Marketing 7/e
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Floor and Ceiling of Price
Services Marketing
Value to customer
Competition
Costs
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Services Marketing 7/e
Chapter 6 Page 8
Three Main Approaches to Pricing
Services Marketing
Cost-Based Pricing
Set prices relative to financial costs Activity-Based Costing
Value-Based Pricing
Relate price to value perceived by customer
CompetitionBased Pricing
Monitor competitors pricing strategy Dependent on the price leader
Pricing implications of cost analysis
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Services Marketing 7/e
Chapter 6 Page 9
Cost-Based Pricing: Traditional vs. Activity-Based Costing
Traditional costing approach
Services Marketing
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
BUT, customers care about value to themselves, not what service production costs the firm
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Value-Based Pricing: Understanding Net Value
Services Marketing
Net Value = Perceived Benefits to Customer (Gross Value) minus All Perceived Outlays (Money, Time, Mental/Physical Effort) Consumer surplus: difference between price paid and amount customer would have been willing to pay in absence of other options Competing services are then evaluated via comparison of net value
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Services Marketing 7/e
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Value-Based Pricing: Strategies for Enhancing Net Value
Enhance gross value benefits delivered
Add benefits to core product Enhance supplementary service Manage perceptions of benefits delivered
Services Marketing
Reduce costs incurred by
Reducing monetary costs of acquisition and usage Cutting amount of time required to evaluate, buy, use service Lowering effort associated with purchase and use
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Services Marketing 7/e
Chapter 6 Page 12
Defining Total User Cost
Services Marketing
Money Search Costs* Time Physical Effort Purchase and Service Encounter Costs Operating Costs Incidental Expenses Purchase
Psychological Burdens
Sensory Burdens
Necessary Post Purchase Costs* Follow-up Problem Solving
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* Includes all five cost categories
Chapter 6 Page 13
Competition-Based Pricing
Services Marketing
Price competition increases due to:
Increasing competition Increase in substituting offers Wider distribution of competitor Increasing surplus capacity in the industry
However under these circumstances, price competition can decrease:
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High non-price-related costs of using alternatives Personal relationships matter Switching costs are high Time and location specificity reduces choice Managers should examine all related financial and non-monetary costs
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Competitive-Based Pricing
Services Marketing
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Services Marketing 7/e
Chapter 6 Page 15
Services Marketing
Revenue Management: What it is and How it works
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Services Marketing 7/e
Chapter 6 Page 16
Maximizing Revenue from Available Capacity at a Given Time
Most effective in the following conditions:
High fixed cost structure Relatively fixed capacity Perishable inventory Variable and uncertain demand Varying customer price sensitivity
Services Marketing
Revenue management (RM) is price customization
Charge different value segments different prices for same product based on price sensitivity
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Services Marketing 7/e
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Maximizing Revenue from Available Capacity at a Given Time
Services Marketing
RM 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
Services Marketing
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Services Marketing 7/e
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Key Categories of Rate Fences: Physical (Product-Related) Fences
Product-Related Fences
Rate Fences Basic Product Examples
Services Marketing
Class of travel (Business/Economy class)
Size and furnishing of a hotel room
Seat location in a theater
Amenities Service Level
Free breakfast at a hotel, airport pick up, etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team
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Key Categories of Rate Fences: Non Physical Fences
Transaction Characteristics
Rate Fences Time of booking or reservation Examples
Services Marketing
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) Non-refundable reservation fees
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Chapter 6 Page 21
Key Categories of Rate Fences: Non Physical Fences
Consumption Characteristics
Rate Fences Example
Services Marketing
Time or duration of use
Early bird special in restaurant before 6pm
Must stay over on Sat for airline, hotel Must stay at least five days
Location of consumption Price depends on departure location, especially in
international travel
Prices vary by location (between cities, city centre vs. edges of city)
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Services Marketing 7/e
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Key Categories of Rate Fences: Non Physical Fences
Buyer Characteristics
Rate Fences Frequency or volume of consumption Group membership Size of customer group
Services Marketing
Examples
Member of certain loyalty tier with the firm get priority pricing, discounts or loyalty benefits Child, student, senior citizen discounts Affiliation with certain groups (e.g., Alumni) Group discounts based on size of group
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Services Marketing 7/e
Chapter 6 Page 23
Relating Price Buckets and Fences to Demand Curve
Services Marketing
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Chapter 6 Page 24
Services Marketing
Ethical Concerns in Service Pricing
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Services Marketing 7/e
Chapter 6 Page 25
Ethical Concerns in Pricing
Services Marketing
Many services have complex pricing schedules
hard to understand difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited customers unfairly penalized when plans change
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Designing Fairness into Revenue Management
Services Marketing
Design clear, logical, and fair price schedules and fences Use high published prices and present fences as opportunities for discounts Communicate consumer benefits of revenue management
Use bundling to hide discounts
Take care of loyal customers
Use service recovery to compensate for overbooking
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Chapter 6 Page 27
Services Marketing
Putting Service Pricing into Practice
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Pricing Issues: Putting Strategy into Practice
Services Marketing
1. How much to charge?
2. What basis for pricing?
3. Who should collect payment? 6. How should payment be made?
4. Where should payment be made?
5. When should payment be made? 7. How to communicate prices?
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Services Marketing 7/e
Chapter 6 Page 29
Putting Service Pricing into Practice
Services Marketing
How much to charge?
Pricing tripod provides a useful starting point A specific figure must be set for the price Need to consider the pros and cons, and ethical issues
1. How much to charge?
What basis for pricing?
Completing a task Admission to a service performance Time based Monetary value of service delivered (e.g., commission)
2. What basis for pricing?
Consumption of physical resources (e.g., food and beverages)
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Putting Service Pricing into Practice
Services Marketing
Who should collect payment?
Service provider or specialist intermediaries Direct or non-direct channels
3. Who should collect payment?
Where should payment be made?
Conveniently located intermediaries
Mail/bank transfer
4. Where should payment be made?
When should payment be made?
In advance Once service delivery has been completed
Slide 2011 by Lovelock & Wirtz Services Marketing 7/e
5. When should payment be made?
Chapter 6 Page 31
Putting Service Pricing into Practice
Services Marketing
How should payment be made?
Cash Token Stored value card Electronic fund transfer Charge Card (Debit/Credit) Vouchers
6. How should payment be made?
How to communicate prices?
Relate the price to that of competing products Ensure price is accurate and intelligible
Slide 2011 by Lovelock & Wirtz Services Marketing 7/e
7. How to communicate prices?
Chapter 6 Page 32
Summary
Services Marketing
Pricing objectives can include
Generating revenues and profit, building demand, and developing user base
Three main foundations to pricing a service
Cost-based pricing Competition-based pricing Value-based pricing
Firm must be aware of competitive pricing but may be harder to compare for services than for goods
Slide 2011 by Lovelock & Wirtz Services Marketing 7/e Chapter 6 Page 33
Summary
Services Marketing
Revenue management
Maximizes revenue from a given capacity at a point in time Manage demand and set prices for each segment closer to perceived value Use of rate fences
Ethical issues in pricing
Complex pricing schedules Unfairness and misrepresentation in advertising Hidden charges Too many rules and regulations
Slide 2011 by Lovelock & Wirtz Services Marketing 7/e Chapter 6 Page 34
