demand and capacity management of services, pricing a service and distribution of service. service marketing

1. PRICING AND DISTRIBUTION OF
SERVICE
By:
Subhrat Sharma
Sahil Dhawan
Sumit Singh
Rajesh Kumar

2. Agenda
Demand and Capacity Management
Pricing the Services
Distribution of Services

3. Demand and Capacity Management
Issues for capacity-constrained
service: lack of inventory capabilities.
Variation in demand pattern.
Strategies to adjust supply and
demand.
Inventory Demand Through Waiting
Lines and Reservations
• Shifting demand to match capacity
• Adjusting capacity to meet demand.

4. Demand and Capacity Management
 One of service industry is hospitality industry :
 Prominent problem is seen in the hotels.
 Case of Ritz-Carlton Hotel in Phoenix, Arizona
 Challenge for the hotel is to fill 281 rooms 365 days of the year.
 The variation in demand is tremendous.
 Form November –mid April the demand is high but as the temp rises the demand falls
considerably.
 Hotels have a decent traffic of business travelers, so demand on weekends decreases.
 The focus is tomanage the peaks and valleys of these demands

5. Demand and Capacity Management
 The fundamental issues is “The lack of inventory capabilities”.
 Unlike manufacturing firms, service firms cannot built up inventories during the period of slow
demand to use later during high demands.
 And this happen because of basic nature of the service.
 So, Ritz-Carlton’s cannot move around to alternative location in the summer months.
 The lack of inventory capability combined with fluctuating demand leads to a variety of
potential outcomes:
 Excess demand
 Demand exceeds optimum capacity
 Demand and supply are balanced at the level of optimum capacity
 Excess capacity

6. Demand and Capacity Management
Source: C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy:
chap9, p261

7. Demand and Capacity Management
Time
Legal
Consulting
Accounting
Medical
Labor
Law firm
Accounting firm
Consulting firm
Health clinic
Equipment
Delivery service
Telecommunication
Network services
Utilities
Health club
Facilities
Hotels
Resturants
Hospitals
Airlines
Schools
Theatres
Chruches
Capacity Constraints

8. Demand and Capacity Management
Analyzing Demand patterns :
• Record Demand
• Demand may seem random, but analysis may
reveal a demand cycle for different segments
• Keep good records of transactions to analyze
demand patterns. For this we can use various
software . E.g. : “Feastic” does it for restaurants.

9. Demand and Capacity Management
Analyzing Demand patterns :
• Predictable cycles

10. Demand and Capacity Management
Analyzing demand patterns:
• Randomdemand fluctuations
• Underlying causes of randomly changing demand
levels
• Weather
• Health problems
• Accidents, Fires, Crime
• Natural disasters

11. Demand and Capacity Management
Strategies for matching capacity
with demand
Shifting demand to
match capacity
Shifting capacity to
match demand.

12. Demand and Capacity Management
Shifting demand to match capacity
• The strategy is to shift customers away from periods in
which demands exceeds capacity, by convincing them to
use the service during periods of slow demand.
• E.g.: happy hours in fast food chains, 50% discounts in
dominos in office hrs, all ladies night in cafes,
• This all is done to attract more customers to increase
demand and thus better utilize its productive capacity.

13. Demand and Capacity Management
Shifting demand to match capacity
 Demand too high
 Communicate busy days and times to
customers.
 Modify timing and locations of service
delivery
 Offer incentives for nonpeak usage
 Set priorities by taking care of loyal or
high-need customers first.
 Charge full price for the service –no
discounts.
 Demand too low
 Stimulate business from current
market segments.
 Advertise peak usage times and
benefits of non-peak use
 Vary how the facility is used.
 Differentiate on price.
 Vary service offering.

14. Demand and Capacity Management
Adjusting capacity to meet demand
• This strategy focuses on matching supply and demand
focuses on adjusting capacity.
• The main aim is to adjust, stretch and then align capacity
to match customer demand.
• During period of high demand organization seek to
expand capacity and in case of low demand it shrink the
capacity to not waste the resources.

15. Demand and Capacity Management
Adjusting capacity to meet demand
 Demand too high
 Stretch time, labor, facilities and
equipment temporarily.
 Use part-time employees
 Cross-train employees
 Hire part-train employees
 Request overtime work from
employees
 Subcontract or outsource activities.
 Rent or share facilities and equipment
 Demand too low
 Schedule downtime during periods of
low demand.
 Perform maintenance, renovations.
 Schedule vacations
 Schedule employee training
 Lay off employees
 Modify or move facilities and
equipment.

16. Demand and Capacity Management
Inventory Demand Through Waiting Lines and
Reservations
• When demand exceed supply
• Steps to take to inventory demand (keep for use later)
• Asking customers to wait in line (queue), usually on a
first-come first-served basis
• Offering customers the opportunity to reserve or book
capacity in advance

17. Demand and Capacity Management
Inventory Demand Through Waiting Lines and
Reservations
• Waiting lines
• Almost nobody likes to wait
• An average person may spend up to 30 minutes/day waiting in
line—equivalent to 20 months in an 80 year lifetime
• Not all queues take physical waiting in a single location
• Queues may be physical but geographically dispersed
• Some are virtual

18. Demand and Capacity Management
Source:C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy

19. Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• Benefits of reservations
• Controls and smooth the demand
• Data captured helps organizations
• Prepare financial projections
• Plan operations and staffing levels
• Benefits businesses. Allows management to make sure some time is kept free for
emergency jobs
• Pre-sells service
• Informs and educates customers in advance of arrival
• Saves customers from having to wait in line for service (if reservation times are honored)

20. Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• characteristics of well designed reservations
• Fast and user-friendly for customers and staff
• Answers customer questions
• Offers options for self service (e.g.Web)
• Accommodates preferences (e.g., room with view)
• Deflects demand from unavailable first choices to alternative times and locations

21. Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• Reservations strategies
• Reservations Strategies Should Focus on Yield
• Yield= actual revenue/potential revenue
• Yield analysis helps managers recognize opportunity cost of allocating capacity to one
customer/segment when another segment might yield a higher rate later
• Decisions need to be based on good information
• Detailed record of past usage
• Supported by current market intelligence and good marketing sense
• Realistic estimate of changes of obtaining higher rated business
• When firms overbook to increase yield,
• Victims of over-booking should be compensated to preserve the relationship

22. PRICING THE SERVICES

23. PRICING OF
SERVICES
• An effective pricing is central to financial success.
• Services organizations even use different terms to
describe the prices they set;
 universities talk about tuition
 Professional firms collect fees
 Banks impose interest & services charges- the list goes on.
• Consumers often find service pricing
 Different to understand- insurance products or hospital bills
 Risky- when you make a hotel reservation on 3 different days, you may be
offered 3 different prices.
 Sometimes even unethical- many bank customers complain about an array of
fees & charges they perceive as unfair.

24. OBJEVCTIVES OF PRICING OF SERVICES
REVENUE & PROFIT
OBJECTIVES
PATRONAGE & USER
BASED OBJECTIVES
Make the largest possible maximize demand, provided a
contribution or profit. Certain minimum level of revenue is
achieved.
Achieve a specific target
level, but do not seek to achieve full capacity utilization.
Maximize profits.
build market share and/or a
Cover fully allocated costs, large user base, especially if there are a
including corporate overhead. Lot of economies of scale that lead to
competitive cost advantage.
Cover costs of providing one FOR EXAMPLE:
particular service, excluding If development or fixed costs are high.
Overhead.

25. THREE FOUNDATIONS OF PRICING STRATEGY
 Once the pricing objectives are understood, we can focus on the
pricing strategy.
 The foundations of pricing strategy can be described as:
PRICING
STRATEGIES
COSTS
(to the
provider)
COMPETITORS
(PRICING)
VALUE TO
THE
CUSTOMERS

26. THREE FOUNDATIONS OF PRICING STRATEGY
 In many service industries, pricing used as to be viewed from financial and
accounting standpoint; therefore, cost-plus pricing often was used.
 In these three pricing strategy, the costs a firm needs to recover usually
sets a minimum price, or floor, for specific service offering.

27. APPROACHES TO PRICING SERVICES
COST BASED PRICING
(PRICE= DIRECT COST+ OVERHEAD COST+
PROFIT MARGIN)
COMPETITION BASED PRICING
1. When services are standard across providers, such as in dry cleaning
industry:
2. In oligopolies with a few large service providers, such as in airline or
rental car industry.
DEMAND BASED PRICING
• Involves setting prices consistent with customer perception of
value: prices are based on what customers will pay for the
service provided.

28. Three Basic Price Structures and
Difficulties Associated with Usage for Services
PROBLEMS:
1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
PROBLEMS:
1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
PROBLEMS:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor

29.  COST-BASED PRICING
In this approach, a company determines expenses from raw materials
and labor, adds amounts or percentages for overhead and profits.
PRICE= DIRECT COSTS+ OVERHEAD
COSTS+ PROFITS MARGIN
direct costs=> materials & labor that are associated with
delivering the service.
overhead costs=> share of fixed costs.
profit margin=> percentage of full costs
(DIRECT+OVERHEAD COSTS).

30. F
COMPETITION BASED PRICING
r market.
SITUATIONS WHEN THIS APPROACH IS USED
PREDOMINANTLY:
i. when services are standard across providers, such as in the dry
cleaning industry.
ii. in oligopolies with a few large service providers, such as in the
airline or rental car industry.
=> difficulties involved in provision of services sometimes make
competition based pricing less simple than it is in goods industries.

31. DEMAND BASED PRICING

involves setting prices consistent with customer perceptions of the
value: prices are based on what customer will pay for the services
provided.
=> services and goods differ with respect to this form of pricing is
that information on service costs may be less available to the
customers, making monetary price not as salient a factor in initial
service selection as it is in goods purchasing.

32. SUMMARY OF SERVICE PRICING STRATEGIES
FOR FOUR CUSTOMER DEFINITIONS OF VALUE
 Discounting
 Odd Pricing
 Synchro-pricing
 Penetration Pricing

33. In detail….
A. Pricing strategies when the customers means “Value Is Low Price”
DISCOUNTING:
Service providers offer discounts or price cuts to communicate to price-sensitive
buyers that they are receiving value.
ODD PRICING:
It is the practice of pricing services just below the exact dollar amount to make
buyers perceive that they are getting a lower price.
SYNCHRO-PRICING:
It is the use of price to manage demand for a service by capitalizing on customers
sensitivity to prices.
PENETRATION PRICING:
In which new services are introduced at low prices to stimulate trial and
widespread use.
This strategy is appropriate when;
i. Sales volume of the service is very sensitive to price, even in the early stage of
introduction.
ii. It is possible to achieve economies in unit costs by operating at large volumes.

34. B.
Pricing strategies when the customer means “Value Is Everything I
Want In a Service”
PRESTIGE PRICING:
It is a special form of demand-based pricing by service marketers who
offer high-quality or status services.
For certain services- restaurants, health clubs, airlines and hotels- a
higher price is charged for the luxury end of the business.
SKIMMING PRICING:
Skimming, a strategy in which new services are introduced at high
prices.
In this situation, customers are more concerned about obtaining the
service than about the cost of the service, allowing service provider
to skim the customers most willing to pay the highest prices.

35. C. Pricing strategies when the customers means “Value Is The
Quality I Get For The Price I Pay”
VALUE PRICING:
It involves assembling a bundle of services that are desirable to a
wide group of customers and then pricing them lower than they
would cost alone.
MARKET SEGMENTATION PRICING:
with this strategy, a service marketer charges different prices to
groups of customers for what are perceived to be different quality
level of service, even though there may not be corresponding
differences in the costs of providing the service to each of these
groups.

36. D. Pricing strategies when the customer means “Value Is All That I Get
For All That I Give”
PRICE BUILDING:
When customers find value in a package of services that are interrelated, price
bundling is an appropriate strategy . Bundling allows customers to pay less than
when purchasing each of the services individually.
COMPLEMENTARY PRICING:
this strategy includes 3 related strategies;
i. CAPTIVE PRICING=> the firm offers abase service or product and then
provides the supplies or peripheral services needed to continue using the
service.
ii. TWO PART STRATEGY=> the service price are broken into a fixed fee
plus variable usage fees.
iii. LOSS LEADERSHIP=> is the term typically used in retail stores
provides place a familiar service on special largely to draw the customer
to the store and reveal other levels of services available at high prices.

37. DISTRIBUTION OF SERVICES

38. APPLYING THE FLOW MODEL OF
DISTRIBUTION TO SERVICES
 Distribution embraces three interrelated elements:
 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

39. DISTINGUISHING BETWEEN DISTRIBUTION
OF SUPPLEMENTARY AND CORE SERVICES
Distribution relates to both core services and
supplementary services
 Core services for people processing and possession processing services require
physical locations
 Core services for mental stimulus processing and information processing can be
distributed electronically
 Supplementary services can be tangible or intangible in nature; latter can be
distributed widely and cost-effectively via nonphysical channels
 Telephone
 Internet

40. INFORMATION AND PHYSICAL PROCESSES
OF AUGMENTED SERVICE PRODUCT
Payment
Information
processes
Billing
Exceptions
Information
Consultation
Safekeeping
Order-taking
Physical
processes
Core
Hospitality

41. 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
 More expensive and time-consuming for service provider
 Service transaction is conducted remotely
 Achieved with help of logistics and telecommunications

42. SIX OPTIONS FOR SERVICE DELIVERY
Customer goes to service organization
Service organization comes to customer
Customer and service organization transact
remotely (mail or electronic
communications)
Availability of Service Outlets
Theater
Barbershop
Bus service
Fast-food chain
House painting
Mobile car wash
Credit card
company
Local TV station
Mail delivery
Broadcast network
Telephone
company
Type of Interaction between Customer
and Service Organization
Single Site Multiple Sites

43. 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 with social motives tend to use personal channels
 Convenience is a key driver of channel choice

44. PLACES OF SERVICE DELIVERY
 Cost, productivity, and access to labor are key determinants to locating a service
facility
 Locational constraints
 Operational requirements
- Airports
 Geographic factors
- Ski resorts
 Need for economies of scale
- Hospitals

45. THE CHALLENGE OF DISTRIBUTION IN
LARGE DOMESTIC MARKETS
 Marketing services (i.e., physical logistics) face challenges due to:
 Distances involved (geographic areas)
 Existence of multiple time zones
 Multiculturalism(especially, immigrants and indigenous people)
 Differences in laws and tax rates
 Large U.S. companies counter this by:
 Targeting specific market segments
 Seeking out narrowmarket niches
 Serving multiple segments across a huge geographic area is biggest marketing
challenge

46. PLACES OF SERVICE DELIVERY
 Mini-stores
 Creating many small service factories to maximize geographic coverage
- Automated kiosks
 Separating front and back stages of operation
- Taco Bell
 Locating in multipurpose facilities
 Proximity to where customers live or work
- Service stations
- Service Perspectives

47. TIME OF SERVICE DELIVERY
 Traditionally, schedules were restricted
 Service availability limited to daytime, 40 to 50 hours a week
 Sunday historically considered as a rest day in Christian tradition,
Saturday in Jewish tradition, and Friday in Muslimtradition
 Today
 For flexible, responsive service operations:
- 24/7 service—24 hours a day, 7 days a week, around the world
 Some organizations still avoid 7-day operations, for example:
- Atlanta-based Chick-fil-A
“Being closed on Sunday is part of our value proposition”

48. SERVICE DELIVERY INNOVATIONS
FACILITATED BY TECHNOLOGY
 Technological Innovations
 Development of “smart” mobile telephones and PDAs as well as Wi-Fi high-speed Internet
technology that links users to Internet from almost anywhere
 Voice-recognition technology
 Websites
 Smart cards
- Store detailed information about customer
- Act as electronic purse containing digital money
 Increase accessibility of services
 Deliver right information or interaction at right time
 Create and maintain up-to-date real-time information

49. E-COMMERCE: MOVE TO CYBERSPACE
 Internet facilitates 5 categories of “flow”
 Information
 Negotiation
 Service
 Transactions
 Promotion
 Electronic channels offer complement/alternative to traditional physical channels
 Convenience (24-hour availability, save time, effort)
 Ease of obtaining information online and searching for desired items
 Better prices than in many bricks-and-mortar stores
 Broad selection

50. E-COMMERCE: MOVE TO CYBERSPACE
 Recent Developments link Websites, customer management (CRM) systems, and
mobile telephony
 Integrating mobile devices into the service delivery infrastructure can be used as
means to:
 Access services
 Alert customers to opportunities/problems
 Update information in real time

51. SPLITTING RESPONSIBILITIES FOR
SUPPLEMENTARY SERVICE ELEMENTS
As created by
originating firm
As enhanced
by distributor
As experienced
by customer
Core + = Core
Core product Supplementary
services
Total experience
and benefits
Challenges for original supplier
 Act as guardian of overall process
 Ensure that each element offered by intermediaries fits overall service concept

52. FRANCHISING
 Popular way to expand delivery of effective service concept
 Franchising is a fast growth strategy, when
 Resources are limited
 Long-term commitment of storemanagers is crucial
 Local knowledge is important
 Fast growth is necessary to preempt competition
 Study shows significant attrition rate among franchisors in the early years of a
new franchise system
 One-third of all systems fail within first 4 years
 Three-fourths of all franchisors cease to exist after 12 years

53.  Disadvantages of franchising
 Some loss of control over delivery system and, thereby, over how
customers experience actual service
 Effective quality control is important yet difficult
 Conflict between franchisees may arise especially as they gain
experience
 Alternative: license another supplier to act on the original supplier’s
behalf to deliver core product, for example:
 Trucking companies
 Banks selling insurance products

54. References:
 Zeithaml, Valarie A; Mary Jo Bitner, Dwayne D. Gremler and Ajay Pandit (2011).
Service Marketing: Integrating Customer Focus across Firm 6e; McGraw Hill
Education (India) Pvt. Ltd, New Delhi. Chapter 15,12 and 17.
 Lovelock,Christopher; JochenWirtz and Jayanta (2011) Service Marketing-
People, Technology, Strategy, 7e.: Pearson, New Delhi.
 harbert.auburn.edu/~lettwil/servch4
 http://www.entrepreneur.com/encyclopedia/pricing-a-service