SQ Lecture Four : Distributing Services & Setting Prices and Implementing Revenue Management (Ch 5 and 6)
JAN 2013 Semester 1 Service Quality MKTG 1268 Lecture Four • Distributing Services Through Physical and Electronic Channels (Chap 5) • Setting Prices and Implementing Revenue Management (Chap 6)
This lecture:2 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 Channels3 Chapter Five Distributing Services Through Physical and Electronic Channels
Overview Of Chapter 54 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
Distribution in a Services Context5 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
So what is being distributed?6 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 Customers7 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
Six Options For Service Delivery (Table 5.1)8 8
Channel Preferences Vary Among Customers9 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
Place and Time Decisions11 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.
For some types of specialty services, customers are willing to travel farther from their homes12
When Should Service Be Delivered?19 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)
Distribution of Supplementary Services in Cyberspace21 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)
Information and Physical Processes of Augmented Service Product (Fig 5.14)22 22
Service Delivery Innovations Facilitated by Technology23
Splitting Responsibilities For Supplementary ServiceElements (Fig. 5.19)27Challenges for original supplier Act as guardian of overall process Ensure that each element offered by intermediaries fits overall service concept 27
Franchising (1)28 • 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
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).
How Service Processes Affect International Market Entry (1)34 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 (2)35 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
38 Chapter Six Setting Prices and Implementing Revenue Management
Overview Of Chapter 639 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
What Makes Service Pricing Strategy Different and Difficult?40 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
Objectives for Pricing of Services (Table 6.1)41 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
Three Main Approaches to Pricing44 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?
Cost-Based Pricing: Traditional vs. Activity-Based Costing46 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
Fixing prices for budget airlines in order to cover costs and increase load factors in order to break even47
Value-Based Pricing Understanding Net Value (Fig. 6.7)48 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
What is the real value? Confusing the customer49
What value are you really getting from this transaction?50
Value-Based Pricing: Managing Perception of Value51 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)
Value-Based Pricing: Approaches to Reducing Non- monetary and Related-monetary Costs53 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
Trading Off Monetary and Non Monetary Costs (Fig. 6.12)54 54
Personalized services could prevent switching to competitors services56
Revenue Management: What It Is and How it57 Works
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 servicesRevenue 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 59
With high fixed cost structures, golf courses need to implement effective revenue management systems60
Maximizing Revenue from Available Capacity at a Given Time (1)61 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
Maximizing Revenue from Available Capacity at a Given Time (2)62 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)
Relating Price Buckets and Fences to Demand Curve (Fig. 6.17)69 69
Pricing Practices in Airlines 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 Overbooking70 70
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 tickets71 71
72 Case Study How Revenue Management is applied to selling of Concert Tickets
(courtesy of Ms Perlyn Sim) Seen by over 50 million people THE LION KING 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.73 73
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)74 74
Revenue Management In Action PRICE CATEGORIES (In Singapore Dollars) 30 October 2011 (Sun) 8:00 PM CAT 1 CAT 2 CAT 3 CAT 4 CAT 5 CAT 6 (Plantinum) (A) (B) (C) (D) (E) STANDARD S$240.00 S$185.00 S$165.00 S$125.00 S$85.00 S$65.00 15% Group (10 tix & - - - S$157.25 S$140.25 S$106.25 above) Early Bird Upgrade (10 - - - - Days in S$165.00 S$125.00 Advance)76 76
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]77 [Discount is not applicable to Friday and Saturday evening shows] 77
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]78 78
Key Categories of Rate Fences: Application to Theatre SeatingDifference in seating proximity to thestage: Cat 1 cost 3.6x more than Cat 4Provide free parking or valet parking forfirst-class seatsFood and beverage lounge for first classseats during concert break79 79
Key Categories of Rate Fences: Application to Theatre SeatingDiscounts for 10 days advance bookingDiscount Tickets cannot beused on Fri and Saturday 80evenings shows)
Key Categories of Rate Fences: Non-physical (3) (Table 6.2) By Buyer CharacteristicsSpecial Prices for OCBC Credit CardHolders - Family Packages (2 Adults& 2 Child)Special Prices for senior citizens &students (wed evenings showsonly)Discounts for group of 10 or more 81
Ethical Concerns in Pricing82 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
Problems faced by customers as a result of complex pricing structures and terms83
Sample Exam Essay Question96 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?97 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.
Practice Question: Why is pricing more difficult for services marketing?98 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)
Practice Question: What is Revenue management? How does it work?99 • 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.
Practice Question: What is Revenue management? How does it work?100 • 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.
Practice Essay Question101 (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 largeaccounts. Account managers often understand the serviceneeds and pricing points of their clients rather well, and aretherefore able to effectively position and price services.•Use differential pricing, bundle items, and introduce specialpromotions so that lower prices are offered during lowdemand periods to shift demand patterns.•Predict demand and capacity utilization, and adjust pricesand business development activities accordingly. Duringperiods of high-predicted utilization, only actively pursue highpriced/high margin projects, and during periods of lowpredicted utilization, pursue even merely cost-coveringprojects to maintain the capacity and cover fixed costs. 102
Application: Restaurant•Advance reservations only with credit card guarantees.•Overbooking to compensate for no-shows andcancellations.•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 introducespecial promotions so that lower prices are offeredduring low demand periods to shift demand patterns.•Decrease table size to allow more customer parties tobe seated. 103
Application : Golf Course•Multi-tiered membership systems with exclusives benefits(e.g., free golf cart at the golf course or free breakfast) for thetop tier customers.•Billing of payment•Group membership or group discounts based of size ofgroups.•Use differential pricing, bundle items, and introduce specialpromotions so that lower prices are offered during lowdemand periods to shift demand patterns. 104