Transcript Chapter 6

Services Marketing, 7e, Global Edition
Chapter 6:
Setting Prices and
Implementing
Revenue Management
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 1
Overview Of Chapter 6
1. Effective Pricing is Central to Financial Success
2. Pricing Strategy as Represented by the Pricing Tripod
3. Revenue Management: What it is and How it Works
4. Ethical Concerns in Service Pricing
5. Putting Service Pricing into Practice
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 2
1. Effective Pricing is
Central to Financial Success
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Services Marketing 7/e
Chapter 6– Page 3
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,
e.g.,相同房間不同價，不公平。太早下訂，後來不能去
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Chapter 6– Page 4
Objectives for Pricing of Services,
定價訂不好，要飯要到老！
 1. Revenue and Profit Objectives
 Seek profit
 Cover costs
 2. Patronage and User-Based Objectives
 Build demand
-
Demand maximization, 賣座，滿場，吸引其他顧客
-
Full capacity utilization
 Build a user base
-
Stimulate trial and adoption of new service, 初期價格折扣
-
Build market share/large user base
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Services Marketing 7/e
Chapter 6– Page 5
2. Pricing Strategy As Represented
by the Pricing Tripod
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Services Marketing 7/e
Chapter 6– Page 6
The Pricing Tripod
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Services Marketing 7/e
Chapter 6– Page 7
Floor and Ceiling of Price
Value to customer
Competition
Costs
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Services Marketing 7/e
Chapter 6– Page 8
Three Main Approaches to Pricing
1. Cost-Based
Pricing
• Set prices
relative to
financial costs
2. Value-Based
Pricing
• Relate price to
value perceived
by customer
• Activity-Based
Costing (ABC)
3. CompetitionBased Pricing
• Monitor
competitors’
pricing strategy
• Dependent on the
price leader
• Pricing
implications of
cost analysis
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 9
Cost-Based Pricing: Traditional vs.
Activity-Based Costing
 Traditional costing approach
 Emphasizes expense categories (arbitrary overheads allocation,
DL, DM; FC, VC, BEA)
 May result in reducing value generated for customers (decrease
service employees, 大榮百貨陷入惡性循環)
 ABC management systems
 Link resource expenses to variety and complexity activity
(process) of goods/services produced
 Yields accurate cost information
BUT, customers care about value to themselves, not what service
production costs the firm
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 10
Cost-Based Pricing: Traditional vs.
Activity-Based Costing
 Traditional costing approach
 Emphasizes expense categories (arbitrary overheads alloca
 May result in reducing value generated for customers (decr
employees)
 ABC management systems
 Link resource expenses to variety and complexity of
goods/services produced
 Yields accurate cost information
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 11
Value-Based Pricing: Understanding Net Value
 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
Chapter 6– Page 12
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, 顧客看不到後勤支援的固
定成本！
 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,
e.g., 夥伴供應商折扣（停車費）改善流程，訓練服務員，到家服務
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Chapter 6– Page 13
Dynamic pricing,
E-(RE)tailing
 1. Customized / personalized pricing
 Auction:
 1. Traditional: bidders place bids
 2. Reverse: multiple suppliers quote the best price they are willing
to offer, shopbots help customer
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Chapter 6– Page 14
Defining Total User Cost
Money
Purchase
Time
Operating Costs
Physical Effort
Incidental Expenses
Search Costs*
Purchase and Service
Encounter Costs
Psychological Burdens
Sensory
Burdens
Necessary
Post Purchase Costs*
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Follow-up
Problem
* Includes all five
Solving
cost categories
Services Marketing 7/e
Chapter 6– Page 15
Competition-Based Pricing
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
Services Marketing 7/e
Chapter 6– Page 16
Competitive-Based Pricing:
C/P 值 (Capability/Price, Cost/Performance)
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Chapter 6– Page 17
3. Revenue Management:
(Yield Management)
What it is and How it works
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Services Marketing 7/e
Chapter 6– Page 18
Maximizing Revenue from Available Capacity at a Given Time
 Most effective in the following conditions:
 1. High fixed cost structure, Relatively fixed capacity, Perishable
inventory
 Variable and uncertain demand
 Varying customer price sensitivity
 Revenue management (RM) is price customization
 Charge different value segments different prices for same product
based on price sensitivity
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Chapter 6– Page 19
Easyinternetcafe,
entirely self-service, unmanned 網咖
 1. Capacity is perishable, 2. high fixed costs, 3. demand
varies by time, 4. different (customers) willing to pay
 Passes: 1. unlimited access, 2. dynamic pricing:
 Busy periods: no. of minutes decrease, line move faster
 Another time: price sensitive customers
 Airlines, 高鐵，旅館，理髮店？
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Chapter 6– Page 20
Maximizing Revenue from Available Capacity at a Given Time
 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
 Reserving capacity for high-yield customer: 洽公，渡假?
 Rate fences deter customers willing to pay more from
trading down to lower prices (minimize consumer surplus)
 One country / one market, Taiwan, USA
one country / many market, China, 一線都市房市泡沫，錢走向二線都市，
一線都市奶粉清潔用品貴，去二線都市買來賣 (P&G)
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Services Marketing 7/e
Chapter 6– Page 21
Price Elasticity
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Chapter 6– Page 22
Key Categories of Rate Fences: Physical (Product-Related) Fences
1. Product-Related Fences
Rate Fences
Examples
Basic Product
 Class of travel (Business/Economy class)
 Size and furnishing of a hotel room
 Seat location in a theater
Amenities
 Free breakfast at a hotel, airport pick up, etc.
 Free golf cart at a golf course
Service Level
 Priority wait listing
 Increase in baggage allowances
 Dedicated service hotlines
 Dedicated account management team
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Services Marketing 7/e
Chapter 6– Page 23
Key Categories of Rate Fences: Non Physical Fences
2. Transaction Characteristics
Rate Fences
Examples
Time of booking or
reservation
 Requirements for advance purchase
Location of booking or
reservation
 Passengers booking air tickets for an identical route in
different countries are charged different prices
 Must pay full fare two weeks before departure
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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Services Marketing 7/e
Chapter 6– Page 24
Key Categories of Rate Fences: Non Physical Fences
3. Consumption Characteristics
Rate Fences
Example
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
Chapter 6– Page 25
Key Categories of Rate Fences: Non Physical Fences
4. Buyer Characteristics
Rate Fences
Examples
Frequency or volume of
consumption
 Member of certain loyalty tier with the firm get
priority pricing, discounts or loyalty benefits
Group membership
 Child, student, senior citizen discounts
 Affiliation with certain groups (e.g., Alumni)
Size of customer group
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 Group discounts based on size of group
Services Marketing 7/e
Chapter 6– Page 26
Relating Price Buckets and Fences to Demand Curve
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Chapter 6– Page 27
4. Ethical Concerns in Service
Pricing
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Services Marketing 7/e
Chapter 6– Page 28
4. Ethical Concerns in Pricing
 Many services have complex pricing schedules (pilling)
 hard to understand, difficult to calculate full costs in advance of
service. 逾期還 DVD, 繳信用卡費, 取消飯店預約, new fees, hard to
compare
 Unfairness and misrepresentation in price promotions
 misleading advertising, hidden charges. shopping 團, 大車換小車
加錢
 Too many rules and regulations
 customers feel constrained, exploited, customers unfairly
penalized when plans change, 臨時被扣錢, 事先不知情，郵件未準時
寄達，非我能控制
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Chapter 6– Page 29
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
 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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Services Marketing 7/e
Chapter 6– Page 30
5. Putting Service
Pricing into Practice
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Services Marketing 7/e
Chapter 6– Page 31
Pricing Issues: Putting Strategy into Practice
1. How much to
charge?
2. What basis
for pricing?
3. Who should
collect
payment?
4. Where
should payment
be made?
5. When should
payment be
made?
6. How should
payment be
made?
7. How to
communicate
prices?
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 32
Putting Service Pricing into Practice
 How much to charge?
 Pricing tripod provides a useful starting point
1. How much
to charge?
 A specific figure must be set for the price
 Need to consider the pros and cons, and ethical issues
 What basis for pricing?
 Completing a task （論件）
2. What basis
for pricing?
 Admission to a service performance
 Time based （計時）
 Monetary value of service delivered (e.g., commission) (%)
 Consumption of physical resources(e.g., food and beverages)
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Chapter 6– Page 33
Putting Service Pricing into Practice
 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
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Services Marketing 7/e
5. When should
payment be
made?
Chapter 6– Page 34
Putting Service Pricing into Practice
 How should payment be made?
6. How should
payment be
made?
 Cash
 Token
 Stored value card
 Electronic fund transfer
 Charge Card (Debit/Credit)
 Vouchers
 How to communicate prices?
 Relate the price to that of competing products
7. How to
communicate
prices?
 Ensure price is accurate and intelligible
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 35
Summary
 Pricing objectives can include
 Generating revenues and profit, building demand, and developing
user base
 Three main foundations to pricing a service
 Cost-based pricing (minimum)
 Competition-based pricing (C/P 值)
 Value-based pricing (maximum, ceiling)
 Firm must be aware of competitive pricing but may be
harder to compare for services than for goods
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 36
Summary
 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, can be highly creative
 Use of rate fences
 Ethical issues in pricing
 Complex pricing schedules, Unfairness and misrepresentation in
advertising, Hidden charges
 Loss of trust, perceived unfairness, dissatisfaction
 Too many rules and regulations
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 6– Page 37