Transcript document
Chapter 9
Pricing and Revenue
Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 1
What Makes Service Pricing Strategy Different
(and Difficult)?
No ownership of services--hard for firms to calculate
financial costs of creating an intangible performance
Variability of inputs and outputs--how can firms define a
“unit of service” and establish basis for pricing?
Many services hard for customers to evaluate--what
are they getting in return for their money?
Importance of time factor--same service may have more
value to customers when delivered faster
Delivery through physical or electronic channels--may
create differences in perceived value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 2
Objectives of Pricing Strategies
Revenue and profit objectives
Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 3
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
Competition
Costs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Value to customer
Services Marketing 5/E
9- 4
Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs
(problem: defining costs)
Competition-Based Pricing
Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 5
Activity-Based Costing: Relating Activities to
the Resources They Consume
Managers need to see costs as an integral part of a firm’s
effort to create value for customers
When looking at prices, customers care about value to
themselves, not what production costs the firm
Traditional cost accounting emphasizes expense
categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to
create and deliver service (do they add value?)
Must link resource expenses to:
variety of products produced
complexity of products
demands made by individual customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 6
Net Value = (Benefits – Outlays)
(Fig. 6.3)
Effort Time
e
Perceived
Outlays
Perceived
Benefits
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 7
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty
service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
Relationship Pricing
non-price incentives
discounts for volume purchases
discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 8
Paying for Service:
The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any
of the five senses)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9- 9
Determining the Total Costs of a Service
to the Consumer (Fig. 6.4)
Price
Search Costs
Related Monetary
Costs
Time Costs
Purchase and
Use Costs
Operating Costs
Incidental
Expenses
Physical Costs
Psychological
Costs
Sensory Costs
After Costs
Necessary
follow-up
Problem
solving
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 10
Trading off Monetary and Non- Monetary Costs
(Fig. 6.5)
Which clinic would you patronize if you needed a chest
x-ray (assuming all three clinics offer good quality) ?
Clinic A
Clinic B
Price $45
Located 1 hour away
by car or transit
Next available
appointment is in 3
weeks
Hours: Monday –
Friday, 9am – 5pm
Estimated wait at
clinic is about 2
hours
Price $85
Located 15 min
away by car or
transit
Next available
appointment is in 1
week
Hours: Monday –
Friday, 8am – 10pm
Estimated wait at
clinic is about 30 45 minutes
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Clinic C
Price $125
Located next to
your office or
college
Next appointment
is in 1 day
Hours: Mo –Sat,
8am – 10pm
By appointment estimated wait at
clinic is about 0 to
15 minutes
9 - 11
Increasing Net Value by Reducing
Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 12
Revenue Management: Maximizing Revenue
from Available Capacity at a Given Time
Based on price customization - charging different customers
(value segments) different prices for same product
Useful in dynamic markets where demand can be divided
into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value
segment from purchasing more cheaply than willing to pay
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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 13
The Strategic Levers of
Revenue (Yield) Management
Price
Duration
Fixed
Predictable
Variable
Quadrant 1:
Quadrant 2:
Movies
Stadiums/Arenas
Function Space
Hotel Rooms
Airline Seats
Rental Cars
Cruise Lines
Unpredictable
Quadrant 3:
Quadrant 4:
Restaurants
Golf Courses
Continuing Care
Hospitals
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 14
Dealing with Common Customer Conflicts
Arising from Revenue Management
Customer conflict can arise from:
Marketing tools to reduce
customer conflicts:
Perceived Unfairness & Perceived
Financial Risk Associated with
Multi-Tier Pricing and Selective
Inventory Availability
Unfulfilled Inventory Commitment
Fenced Pricing
Bundling
Categorising
High Published Price
Well designed Customer Recovery
Programme for Oversale
Unfulfilled Demand of Regular
Customers
Unfulfilled Price Expectation of
Group Customers
Change in the Nature of the
Service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Preferred Availability Policies
Offer Lower Displacement Cost
Alternatives
Physical Segregation & Perceptible
Extra Service
Set Optimal Capacity Utilisation Level
Services Marketing 5/E
9 - 15
Price Elasticity (Fig. 6.6)
Price per
unit of
service
Di
De
De
Di
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 16
Key Categories of Rate Fences
Rate Fences
(Table 6.2)
Examples
Physical (Product-related) Fences
Basic Product
Amenities
Service Level
Class of travel (Business/Economy class)
Size and furnishing of a hotel room
Seat location in a theatre
Free breakfast at a hotel, airport pick up etc.
Free golf cart at a golf course
Priority wait listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 17
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences
Transaction Characteristics
Time of booking or
reservation
Location of booking or
reservation
Flexibility of ticket
usage
Requirements for advance purchase
Must pay full fare two weeks before departure
Passengers booking air tickets for an
identical route in different countries are
charged different prices
Fees/penalties for canceling or changing a
reservation (up to loss of entire ticket price)
Non refundable reservation fees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 18
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences (cont’d)
Consumption Characteristics
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, esp in
international travel
Prices vary by location (between cities, city
centre versus edges of city)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 19
Key Categories of Rate Fences
(Table 6.2 cont’d)
Non Physical Fences (cont’d)
Buyer Characteristics
Frequency or volume
of consumption
Group membership
Size of customer
group
Member of certain loyalty-tier with the firm get
priority pricing, discounts or loyalty benefits
Child, student, senior citizen discounts
Affiliation with certain groups (e.g. Alumni)
Group discounts based on size of group
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 20
Relating Price Buckets and Fences to the
Demand Curve (Fig. 6.7)
Price per
Seat
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
Late Sales through Consolidators/
Internet, no refunds
Capacity
of 1st-class
Cabin
Capacity
of Aircraft
No. of Seats Demanded
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 21
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate
or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 22
Pricing Issues:
Putting Strategy into Practice (Table 6.3)
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?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 23
Consumption follows the Timing of Payments
Frequency of
Health Club Visits
Annual Payment Plan
Quarterly Payment Plan
Frequency of
Health Club Visits
(Research Insight 6.1)
Semiannual Payment Plan
Monthly Payment Plan
Time Line
Time Line
Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,”
Harvard Business Review, September 2002, 90-96.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
9 - 24