2 Overview Of Chapter 6Effective Pricing is Central to Financial SuccessPricing Strategy as Represented by the Pricing TripodRevenue Management: What it is and How it WorksEthical Concerns in Service PricingPutting Service Pricing into Practice
3 Central to Financial Success Effective Pricing isCentral to Financial Success
4 What Makes Service Pricing Strategy Different and Difficult? Harder to calculate financial costs of creating a service process or performance than a manufactured goodVariability 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 fasterCustomers find service pricing difficult to understand, risky, and sometimes even unethical
5 Objectives for Pricing of Services Revenue and Profit ObjectivesSeek profitCover costsPatronage and User-Based ObjectivesBuild demandDemand maximizationFull capacity utilizationBuild a user baseStimulate trial and adoption of new serviceBuild market share/large user base
6 As Represented by the Pricing Tripod Pricing StrategyAs Represented by the Pricing Tripod
8 Floor and Ceiling of Price CostsValue to customerCompetition
9 Three Main Approaches to Pricing Cost-Based PricingSet prices relative to financial costsActivity-Based CostingPricing implications of cost analysisValue-Based PricingRelate price to value perceived by customerCompetition-Based PricingMonitor competitors’ pricing strategyDependent on the price leader
10 Cost-Based Pricing: Traditional vs. Activity-Based Costing Traditional costing approachEmphasizes expense categories (arbitrary overheads allocation)May result in reducing value generated for customersABC management systemsLink resource expenses to variety and complexity of goods/services producedYields accurate cost informationBUT, customers care about value to themselves, not what service production costs the firm
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 optionsCompeting services are then evaluated via comparison of net value
12 Value-Based Pricing: Strategies for Enhancing Net Value Enhance gross value – benefits deliveredAdd benefits to core productEnhance supplementary serviceManage perceptions of benefits deliveredReduce costs incurred byReducing monetary costs of acquisition and usageCutting amount of time required to evaluate, buy, use serviceLowering effort associated with purchase and use
13 Defining Total User Cost Physical EffortPsychological BurdensSensoryBurdensIncidental ExpensesOperating CostsPurchaseTime* Includes all fivecost categoriesPurchase and Service Encounter CostsSearch Costs*Post Purchase Costs*NecessaryFollow-upProblemSolvingMoney
14 Competition-Based Pricing Price competition increases due to:Increasing competitionIncrease in substituting offersWider distribution of competitorIncreasing surplus capacity in the industryHowever under these circumstances, price competition can decrease:High non-price-related costs of using alternativesPersonal relationships matterSwitching costs are highTime and location specificity reduces choiceManagers should examine all related financial and non-monetary costs
16 What it is and How it works Revenue Management:What it is and How it works
17 Maximizing Revenue from Available Capacity at a Given Time Most effective in the following conditions:High fixed cost structureRelatively fixed capacityPerishable inventoryVariable and uncertain demandVarying customer price sensitivityRevenue management (RM) is price customizationCharge different value segments different prices for same product based on price sensitivity
18 Maximizing Revenue from Available Capacity at a Given Time RM uses mathematical models to examine historical data and real time information to determineWhat prices to charge within each price bucketHow many service units to allocate to each bucketRate fences deter customers willing to pay more from trading down to lower prices (minimize consumer surplus)
20 Key Categories of Rate Fences: Physical (Product-Related) Fences ExamplesBasic ProductClass of travel (Business/Economy class)Size and furnishing of a hotel roomSeat location in a theaterAmenitiesFree breakfast at a hotel, airport pick up, etc.Free golf cart at a golf courseService LevelPriority wait listingIncrease in baggage allowancesDedicated service hotlinesDedicated account management team
21 Key Categories of Rate Fences: Non Physical Fences Transaction CharacteristicsRate FencesExamplesTime of booking or reservationRequirements for advance purchaseMust pay full fare two weeks before departureLocation of booking or reservationPassengers booking air tickets for an identical route in different countries are charged different pricesFlexibility of ticket usageFees/penalties for canceling or changing a reservation (up to loss of entire ticket price)Non-refundable reservation fees
22 Key Categories of Rate Fences: Non Physical Fences Consumption CharacteristicsRate FencesExampleTime or duration of useEarly bird special in restaurant before 6pmMust stay over on Sat for airline, hotelMust stay at least five daysLocation of consumptionPrice depends on departure location, especially in international travelPrices vary by location (between cities, city centre vs. edges of city)
23 Key Categories of Rate Fences: Non Physical Fences Buyer CharacteristicsRate FencesExamplesFrequency or volume of consumptionMember of certain loyalty tier with the firm get priority pricing, discounts or loyalty benefitsGroup membershipChild, student, senior citizen discountsAffiliation with certain groups (e.g., Alumni)Size of customer groupGroup discounts based on size of group
24 Relating Price Buckets and Fences to Demand Curve
26 Ethical Concerns in Pricing Many services have complex pricing scheduleshard to understanddifficult to calculate full costs in advance of serviceUnfairness and misrepresentation in price promotionsmisleading advertisinghidden chargesToo many rules and regulationscustomers feel constrained, exploitedcustomers unfairly penalized when plans change
27 Designing Fairness into Revenue Management Design clear, logical, and fair price schedules and fencesUse high published prices and present fences as opportunities for discountsCommunicate consumer benefits of revenue managementUse bundling to “hide” discountsTake care of loyal customersUse service recovery to compensate for overbooking
29 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?
30 Putting Service Pricing into Practice How much to charge?Pricing tripod provides a useful starting pointA specific figure must be set for the priceNeed to consider the pros and cons, and ethical issuesWhat basis for pricing?Completing a taskAdmission to a service performanceTime basedMonetary value of service delivered (e.g., commission)Consumption of physical resources (e.g., food and beverages)1. How much to charge?2. What basis for pricing?
31 Putting Service Pricing into Practice Who should collect payment?Service provider or specialist intermediariesDirect or non-direct channelsWhere should payment be made?Conveniently located intermediariesMail/bank transferWhen should payment be made?In advanceOnce service delivery has been completed3. Who should collect payment?4. Where should payment be made?5. When should payment be made?
32 Putting Service Pricing into Practice How should payment be made?CashTokenStored value cardElectronic fund transferCharge Card (Debit/Credit)VouchersHow to communicate prices?Relate the price to that of competing productsEnsure price is accurate and intelligible6. How should payment be made?7. How to communicate prices?
33 Summary Pricing objectives can include Generating revenues and profit, building demand, and developing user baseThree main foundations to pricing a serviceCost-based pricingCompetition-based pricingValue-based pricingFirm must be aware of competitive pricing but may be harder to compare for services than for goods
34 Summary Revenue management Ethical issues in pricing Maximizes revenue from a given capacity at a point in timeManage demand and set prices for each segment closer to perceived valueUse of rate fencesEthical issues in pricingComplex pricing schedulesUnfairness and misrepresentation in advertisingHidden chargesToo many rules and regulations