1. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 1 Chapter 6: Setting Prices and Implementing Revenue Management Services Marketing, 7e, Global Edition

2. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 2 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

3. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 3 1. Effective Pricing is Central to Financial Success 訂價訂的好，錢賺到久久。 若訂得不好，要飯要到老。

4. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 4 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” ? e.g., 製造與維修汽車或飛機引擎  Importance of time factor – same service may have more value to customers when delivered faster. e.g.,FBC  Customers find service pricing difficult to understand, risky, and sometimes even unethical. e.g., 相同房間不 同價。太早下訂後來不能去，不能退費。

5. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 5 Objectives for Pricing of Services,  1. Revenue and Profit Objectives  Cover costs, Seek profit  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, e.g., 限量新版名牌 包， iphone - Build market share / large user base, e.g., 初期價格折扣

6. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 6 2. Pricing Strategy As Represented by the Pricing Tripod

7. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 7 The Pricing Tripod

8. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 8 1.Costs 2.Value to customer 3.Competition Floor and Ceiling of Price

9. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 9 Three Main Approaches to Pricing, 港埠費率、成本研究 1. Cost-Based Pricing Set prices relative to financial costs Activity-Based Costing (ABC) Pricing implications of cost analysis 2. Value-Based Pricing Relate price to value perceived by customer 3. Competition- Based Pricing Monitor competitors’ pricing strategy Dependent on the price leader

10. 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

11. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 11 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 (Cost down! 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. Value up!

12. 企業價值鏈 12

13. 作業基礎經濟地圖 13

14. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 14 Value-Based Pricing: Understanding Net Value  Net Value = Perceived Benefits to Customer (Gross Value) - 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

15. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 15 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

16. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 16 Defining Total User Cost Physical Effort Psychological Burdens Sensory Burdens Incidental Expenses Operating Costs Purchase Time * Includes all five cost categories Purchase and Service Encounter Costs Search Costs* Post Purchase Costs* Necessary Follow-up Problem Solving Money

17. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 17 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: High non-price-related costs of using alternatives Personal relationships matter Switching costs are high Time and location specificity reduces choice

18. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 18 Competitive-Based Pricing: C/P 值 (Capability/Price, Cost/Performance)

19. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 19 3. Revenue Management: (Yield Management) What it is and How it works

20. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 20 Maximizing Revenue from Available Capacity at a Given Time  Most effective in the following conditions:  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

21. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 21 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？

22. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 22 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)

23. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 23 Price Elasticity

24. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 24 Key Categories of Rate Fences: Physical (Product-Related) Fences 1. Product-Related Fences

25. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 25 Key Categories of Rate Fences: Non Physical Fences 2. Transaction Characteristics

26. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 26 Key Categories of Rate Fences: Non Physical Fences 3. Consumption Characteristics

27. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 27 Key Categories of Rate Fences: Non Physical Fences 4. Buyer Characteristics

28. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 28 Relating Price Buckets and Fences to Demand Curve

29. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 29 4. Ethical Concerns in Service Pricing

30. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 30 4. Ethical Concerns in Pricing  Many services have complex pricing schedules (pilling)  hard to understand, difficult to calculate full costs in advance of service. e.g., 逾期還 DVD, 繳信用卡費, 取消飯店預約, 0 元手機, 換電信 公司優惠， new fees, hard to compare  Unfairness and misrepresentation in price promotions  misleading advertising, hidden charges.. e.g., shopping 團, 大車換 小車加錢  Too many rules and regulations  customers feel constrained, exploited, customers unfairly penalized when plans change. e.g., 臨時被通知扣錢, 事先不知情, 郵 件未準時寄達，非我能控制

31. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 31 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

32. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 32 5. Putting Service Pricing into Practice

33. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 33 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?

34. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 34 Putting Service Pricing into Practice  How much to charge?  Pricing tripod provides a useful starting point  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）  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) 1. How much to charge?

35. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 35 Putting Service Pricing into Practice  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  When should payment be made?  In advance  Once service delivery has been completed 3. Who should collect payment? 4. Where should payment be made? 5. When should payment be made?

36. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 36  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  Ensure price is accurate and intelligible 6. How should payment be made? Putting Service Pricing into Practice, Apple Pay, 支付寶

37. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 37 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

38. Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 6– Page 38 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