Service pricing wk_7

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Service pricing wk_7

  1. 1. Service Pricing Tom Chapman
  2. 2. Indicative Content <ul><li>Pricing Strategies </li></ul><ul><li>Problems associated with pricing services </li></ul><ul><li>Influences on Price </li></ul><ul><li>Price discrimination </li></ul><ul><li>Relating Price and Value </li></ul>
  3. 3. Pricing Strategies <ul><li>Revenue & Profit Objectives </li></ul><ul><ul><li>Seek Profit </li></ul></ul><ul><ul><li>Cover Costs </li></ul></ul><ul><li>Patronage & User Base </li></ul><ul><ul><li>Build Demand </li></ul></ul><ul><ul><li>Build a user base </li></ul></ul>
  4. 4. The Pricing Tripod Pricing Strategy Costs Competition Value to Customer
  5. 5. Cost Based Pricing <ul><li>Difficult to establish costs of intangibles </li></ul><ul><li>Services tend to have a higher fixed cost ratio to variable costs. Why? </li></ul><ul><li>ABC (Activity based cost) </li></ul><ul><li>Ignores the competition </li></ul><ul><li>Useful where the service is uncertain </li></ul><ul><li>Ignores customer perception of value </li></ul>
  6. 6. Service pricing strategies for Value Value is low price Discounting Odd Pricing Synchro Pricing Penetration Pricing Value is all that I get for all that I give Price framing Price Bundling Complimentary Pricing Results-based pricing Value is the quantity I get for the price I pay Value Pricing Market Segmentation Pricing Value is everything I want in a service Prestige Pricing Skimming Pricing (Zeithaml, V. (1988) Consumer Perceptions of Price, Quality, and Value: A means-End Model and Synthesis of Evidence Journal of Marketing. 52(July), 2 –21 .
  7. 7. How do you communicate value? <ul><li>Reduce uncertainty </li></ul><ul><ul><li>Benefit driven pricing </li></ul></ul><ul><ul><li>Flat rate pricing </li></ul></ul><ul><li>Enhance relationships </li></ul><ul><ul><li>Relationship pricing </li></ul></ul><ul><ul><ul><li>Bulk discounts </li></ul></ul></ul><ul><ul><ul><li>Bundled pricing </li></ul></ul></ul><ul><li>Low cost leadership </li></ul><ul><ul><li>The challenge of cost v quality </li></ul></ul><ul><li>Value perception management </li></ul><ul><ul><li>Credence services? </li></ul></ul><ul><ul><li>Price v speed of service </li></ul></ul>
  8. 8. User Costs Search costs Purchase & use costs After costs Sensory Time Problem-solving Follow-up Psychological Physical Money Incidental expenses Purchase price Lovelock, 1999
  9. 9. Competition Based Pricing Going rate pricing Sealed-bid pricing
  10. 10. High Price Competition when - <ul><li>Large number of competitors </li></ul><ul><li>Large number of substitutes </li></ul><ul><li>Wide distribution of offers </li></ul><ul><li>Surplus capacity in industry </li></ul><ul><ul><li>Think Porters 5 Forces </li></ul></ul><ul><ul><li>Think Globalisation </li></ul></ul><ul><ul><li>Think Internet </li></ul></ul>
  11. 11. Reduced Price Competition - <ul><li>Non-price related costs of alternatives are high </li></ul><ul><li>Personalisation, Customisation & Switching costs matter </li></ul><ul><li>Time & Location reduce choice </li></ul>
  12. 12. Revenue / Yield Management <ul><li>Supply & Demand forecasting </li></ul><ul><li>Reserve Capacity </li></ul><ul><li>Price Elasticity </li></ul><ul><li>Rate Fences </li></ul><ul><ul><li>Physical </li></ul></ul><ul><ul><li>Non-physical </li></ul></ul>
  13. 13. Rate Fences <ul><li>Physical </li></ul><ul><ul><li>Basic Product </li></ul></ul><ul><ul><li>Amenities </li></ul></ul><ul><ul><li>Service Level </li></ul></ul><ul><li>Non-Physical </li></ul><ul><ul><li>Transactional Characteristics </li></ul></ul><ul><ul><li>Consumption Characteristics </li></ul></ul><ul><ul><li>Buyer Characteristics </li></ul></ul>
  14. 14. Yield Management <ul><li>Effective When- </li></ul><ul><ul><li>Relatively fixed capacity </li></ul></ul><ul><ul><li>High fixed cost structure </li></ul></ul><ul><ul><li>Perishable inventory </li></ul></ul><ul><ul><li>Variable / uncertain demand </li></ul></ul><ul><ul><li>Varying customer price sensitivity </li></ul></ul>
  15. 15. Ethical Concerns <ul><li>Clear, logical & fair pricing schedules </li></ul><ul><li>Use high published prices and frame fenced as discounts </li></ul><ul><li>Communicate benefits </li></ul><ul><li>Use bundles to hide discounts </li></ul><ul><li>Take care of loyal customers </li></ul><ul><li>Use service recovery to compensate for overbooking </li></ul>
  16. 16. Service Pricing in Practice <ul><li>How much should be charged? </li></ul><ul><li>What should be the basis of pricing? </li></ul><ul><li>Who should collect payment? </li></ul><ul><li>Where should payment be made? </li></ul><ul><li>When should payment be made? </li></ul><ul><li>How should payment be made? </li></ul><ul><li>How should prices be communicated to the target market? </li></ul>
  17. 17. Pricing Strategies <ul><li>New Service Pricing </li></ul><ul><li>Portfolio Pricing </li></ul><ul><li>Tactical Pricing </li></ul><ul><li>Public Sector Pricing </li></ul><ul><li>Internal Market Pricing </li></ul>
  18. 18. New Service Pricing Strategy <ul><li>Price Skimming </li></ul><ul><li>Saturation Pricing </li></ul><ul><li>Evaluating Options </li></ul><ul><ul><li>Market research </li></ul></ul><ul><ul><li>Competitive actions </li></ul></ul><ul><ul><li>Government regulation </li></ul></ul><ul><li>Leader or follow </li></ul>
  19. 19. Service Portfolio Pricing <ul><li>Optional additional services </li></ul><ul><li>Captive services </li></ul><ul><li>Competing Services </li></ul><ul><li>Price Bundling </li></ul>
  20. 20. Tactical Pricing <ul><li>Short term competitive advantage </li></ul><ul><li>Remove unplanned excess supply </li></ul><ul><li>Defend against new entrants </li></ul><ul><li>Method of differential pricing </li></ul><ul><ul><li>Time </li></ul></ul><ul><ul><li>Place </li></ul></ul><ul><ul><li>Segments </li></ul></ul><ul><li>Motivate intermediaries </li></ul>
  21. 21. Public Sector Pricing <ul><li>External benefits difficult to appropriate from consumers </li></ul><ul><li>Benefits to society may be as large as the benefits to the individual consumer </li></ul><ul><li>Pricing as a means of social policy </li></ul>
  22. 22. Internal Market Pricing <ul><li>Cross billing / inter-departmental costing </li></ul><ul><li>Does not necessarily reflect market pricing </li></ul><ul><li>Real market may not exist </li></ul>
  23. 23. Pricing Problems <ul><li>Demand based </li></ul><ul><ul><li>Monetary price must be adjusted to reflect the value of non-monetary costs </li></ul></ul><ul><ul><li>Information on service costs are less available to customers, hence price may not be a central factor </li></ul></ul><ul><li>Cost based </li></ul><ul><ul><li>Costs are difficult to trace </li></ul></ul><ul><ul><li>Labour is more difficult to price than materials </li></ul></ul><ul><ul><li>Costs may not equal value </li></ul></ul><ul><li>Competitor based </li></ul><ul><ul><li>Small firms may charge too little to be viable </li></ul></ul><ul><ul><li>Heterogeneity of services limits comparability. </li></ul></ul><ul><ul><li>Prices may not reflect customer value </li></ul></ul>

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