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developing service productdeveloping service product
1.
2.
Essentials of Services
Marketing, 2nd Edition Instructor Supplements
3.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 3 Developing Service Product: Setting Prices and Implementing Revenue Management
4.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 4 Chapter 6 Outline 6.1 Effective Pricing is Central to Financial Success 6.2 Pricing Strategy Stands on Three Legs 6.3 Revenue Management: What it is and How it Works 6.4 Ethical Concerns in Service Pricing 6.5 Putting Service Pricing into Practice
5.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 5 6.1 Effective Pricing is Central to Financial Success
6.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 6 6.1 Effective Pricing is Central to Financial Success 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 • Note opening vignette on dynamic pricing – see ScoreBig and airline pricing
7.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 7 6.1 Effective Pricing is Central to Financial Success Objectives for Pricing of Services (Table 6.1) • 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
8.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 8 6.2 Pricing Strategy Stands on Three Legs
9.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 9 6.2 Pricing Strategy Stands on Three Legs The Pricing Tripod (Fig. 6.3)
10.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 10 6.2 Pricing Strategy Stands on Three Legs 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 – bottom line – have to cover costs – being the low-price competitor requires careful analysis • Value-Based Pricing – Relate price to value perceived by customer – see p. 154 • Competition-Based Pricing – Monitor competitors’ pricing strategy (especially if service lacks differentiation) – Who is the price leader - does one firm set the pace?
11.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 11 6.2 Pricing Strategy Stands on Three Legs 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 (Activity-based costing) management systems – Link resource expenses to variety and complexity of goods/services produced – Yields accurate cost information Example: One hotel room - besides direct costs, what overhead costs have to be applied – depreciation, manager salaries, insurance, etc. OR – how do you price a client service – an hour with personal trainer – besides labor cost, how much of facility cost needs to be covered? • When looking at prices, customers care about value to themselves, not what service production costs the firm
12.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 12 6.2 Pricing Strategy Stands on Three Legs 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
13.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 13 6.2 Pricing Strategy Stands on Three Legs 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)
14.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 14 6.2 Pricing Strategy Stands on Three Legs Defining Total User Costs (Fig. 6.11)
15.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 15 6.2 Pricing Strategy Stands on Three Legs 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
16.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 16 6.2 Pricing Strategy Stands on Three Legs Trading Off Monetary and Non-Monetary Costs (Fig. 6.12)
17.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 17 6.2 Pricing Strategy Stands on Three Legs 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 – what is the total package that the competition offers the potential customer?
18.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 18 6.3 Revenue Management: What it is and How it Works
19.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 19 6.3 Revenue Management: What it is and How it Works 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
20.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 20 6.3 Revenue Management: What it is and How it Works 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)
21.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 21 6.3 Revenue Management: What it is and How it Works Price Elasticity (Fig. 6.15)
22.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 22 6.3 Revenue Management: What it is and How it Works Key Categories of Rate Fences: Physical (Table 6.2)
23.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 23 6.3 Revenue Management: What it is and How it Works Key Categories of Rate Fences: Non-Physical (1) (Table 6.2)
24.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 24 6.3 Revenue Management: What it is and How it Works Key Categories of Rate Fences: Non-Physical (2) (Table 6.2)
25.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 25 6.3 Revenue Management: What it is and How it Works Key Categories of Rate Fences: Non-Physical (3) (Table 6.2)
26.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 26 6.3 Revenue Management: What it is and How it Works Relating Price Buckets and Fences to Demand Curve (Fig. 6.17)
27.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 27 6.4 Ethical Concerns in Service Pricing
28.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 28 6.4 Ethical Concerns in Service Pricing 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
29.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 29 6.4 Ethical Concerns in Service Pricing Designing Fairness into Revenue Management • Design clear, logical and fair price schedules and fences • Use high published prices and present fences as opportunities for discounts (rather than quoting lower prices and using fence as basis to impose surcharges • Communicate consumer benefits of revenue management • Use bundling to “hide” discounts • Take care of loyal customers • Use service recovery to compensate for overbooking – compensation, offer substitute, ticket for the future, etc.
30.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 30 6.5 Putting Service Pricing into Practice
31.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 31 6.5 Putting Service Pricing into Practice 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?
32.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 32 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (1) • How much to charge? – Pricing tripod model is useful to use for costs, price sensitivity of customers and competitors – Depends on whether discounts are offered – Any psychological pricing points used?
33.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 33 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (2) • 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) – Should price-bundling be used?
34.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 34 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (3) • 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
35.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 35 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (4) • 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
36.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 36 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (5) • 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
37.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 37 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
38.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 38 Summary of Chapter 6: Pricing and Revenue Management (2) • 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
39.
© Pearson Education
South Asia Pte Ltd 2013. All rights reserved 39 Summary of Chapter 6: Pricing and Revenue Management (3) • 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?
40.
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