1. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1 Chapter 5 Exploring Business Models: Pricing and Revenue Management

2. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 2 Learning Objectives - Chapter 5 Determine three foundations to pricing a service Compare cost based to activity based pricing Manage customer perceptions of non-monetary costs of obtaining service Examine how revenue management can improve profitability Reflect on the key ethical concerns in service pricing Study seven key questions for price schedule design

3. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 3 Effective Pricing Is Central to Financial Success

4. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 4 What Makes Service Pricing Strategy Different and Difficult? Harder to calculate financial costs than a manufactured good Difficulty in defining a unit of service Services hard to evaluate Customers may be prepared to pay more for faster delivery Delivery through physical or electronic channels may create differences in perceived value

5. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 5 Alternative Objectives for Pricing (Table 5.1) Revenue and profit objectives Seek profit Cover costs Patronage and user-based objectives Build demand Build a user base

6. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 6 Pricing Strategy Stands on Three Legs

7. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 7 The Pricing Tripod (Fig 5.2) Pricingstrategy Costs Competition Value to customer

8. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 8 Cost-Based Pricing: Traditional vs. Activity-Based Costing Traditional costing approach Labour and infrastructure costs are considered fixed costs Service firms have higher ratio of fixed to variable costs found in manufacturing Cost reduction decisions often cut these costs which leads to reduced service levels and unhappy customers Activity-based costing (ABC) Sets of delivery activities and related costs Firms can pinpoint profitability of different services, channels etc When looking at prices, customers care about value to themselves, not what service production costs the firm

9. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 9 Competition-Based Pricing When customers dont see a difference between competitive offerings, they choose the cheapest Price competition is reduced when Non- price related costs of using competing alternatives are high Personal relationships matter Switching costs are high Time and location specificity reduce choice When competing on price take into account the entire cost to customers including: All related financial and non-monetary costs PLUS switching costs Compare this cost to the competition

10. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 10 Value-Based Pricing Understanding Net Value (Fig 5.4) Customers evaluate competition by comparing their perceived benefits to their perceived outlays Service pricing strategies should enhance perceived value by: Reducing uncertainty Relationship enhancement Low cost leadership Manage value perception

11. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 11 Reduce Related Monetary and Non- Monetary Costs Incremental financial outlays Includes the price of purchasing service and other expenses Expenses associated with search, purchase activity, usage E.g. Two theatre tickets also requires the cost of parking, babysitters etc. Non-monetary costs Time costs Physical costs Psychological (mental) costs Sensory costs (unpleasant sights, sounds, feel, tastes, smells)

12. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 12 Defining Total User Costs (Fig 5.6) Physical effort Psychological burdens Sensory burdens Necessary follow-up Problem solving Incidental expenses Operating costs Purchase Time Money * Includes all five cost categories Search costs* Purchase and service encounter costs After costs*

13. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 13 Trading Off Monetary and Non-monetary Costs (Fig 5.7)

14. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 14 Revenue Management: What It Is and How It Works

15. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 15 Revenue Management (RM) RM charges more for customers booking service closer to time of consumption instead of on a first come first served basis Charge different value segments different prices for same product Predicts how many customers will use a given service at a specific time at each of several different price levels and then allocates capacity at each level or price bucket If booking pace for a higher-paying segment is stronger than expected, additional capacity is allocated to this segment and taken away from the lowest- paying segment Rate fences allow customers to self segment on the basis of service characteristics and willingness to pay. This helps companies restrict lower prices to customers willing to accept certain restrictions

16. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 16 Key Categories of Rate Fences (1) Table 5.2 Rate FencesExamples Physical (product-related) Fences Basic product Class of travel (business/economy class) Size and furnishing of a hotel room Seat location in a theatre Amenities Free breakfast at a hotel, airport pickup, etc. Free golf cart at a golf course Service level Priority wait-listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

17. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 17 Key Categories of Rate Fences (2) Table 5.2 Nonphysical Fences Transaction Characteristics Time of booking or reservation Requirements for advance purchase Must pay full fare two weeks before departure Location of booking or reservation Passengers booking air tickets for an identical route in different countries are charged different prices Flexibility of ticket usage Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Nonrefundable reservation fees

18. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 18 Key Categories of Rate Fences (3) Table 5.2 Nonphysical Fences (contd) Consumption Characteristics Time or duration of use Early-bird special in restaurant before 6PM Must stay over on Saturday for airline, hotel Must stay at least 5 days Location of consumption Price depends on departure location, especially in international travel Prices vary by location (between cities, city centre versus edges of city)

19. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 19 Key Categories of Rate Fences (4) Table 5.2 Nonphysical Fences (contd) Buyer Characteristics 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 Group discounts based on size of group

20. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 20 Relating Price Buckets and Fences to Demand Curve (Fig 5.9) Price per seat Capacity of 1 st class cabin Capacity of aircraft No. of seats demanded 1 st class Full fare economy (no restrictions) 1 - week advance purchase 1 - week advance purchase, Saturday night stay 3 - week advance purchase, Saturday night stay Specified flights, book on Internet, no changes/refunds Late sales through consolidators/Internet, no refunds 3-week advance purchase, Saturday night stay, $100 for changes * Dark areas denote amount of consumer surplus (goal of segmented pricing is to reduce this)

21. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 21 Ethical Concerns in Service Pricing

22. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 22 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

23. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 23 Putting Service Pricing into Practice

24. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 24 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?

25. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 25 The three foundations to pricing a service are costs, competition and value to customer Activity based pricing is better than traditional pricing approaches Incremental financial outlays and non-monetary such as physical effort play a role in customers price perception Revenue management can improve profitability by allocating service capacity to high paying customers and creating restrictions for low paying customers Key ethical concerns in service pricing rest on clear, logical and fair pricing There are seven key questions for price schedule design Summary - Chapter 5