Exploring Business Models: Pricing and Revenue Management
Exploring Business Models: Pricing and Revenue Management
Exploring Business
Models:
Pricing and Revenue
Management
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 1
Overview of Chapter 5
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 2
What Is a Business Model?
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 3
What Makes Service Pricing Strategy
Different and Difficult?
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 4
Alternative Objectives for Pricing
(Table 5.1)
User-based objectives
Build demand
- Demand maximization
- Full-capacity utilization
Build a user base
- Stimulate trial and adoption of new service
- Build market share/large user base
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 5
The Pricing Tripod
Fig 5.1
Pricing strategy
Competition
Costs Value to customer
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 6
Three Main Approaches to Pricing
Cost-based pricing
Set prices relative to financial costs (problem: defining costs)
Activity-based costing
Pricing implications of cost analysis
Competition-based pricing
Monitor competitors’ pricing strategy (especially if service
lacks differentiation)
Who is the price leader? Does one firm set the pace?
Value-based pricing
Relate price to value perceived by customer
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 7
Cost-based Pricing:
Traditional vs. Activity-based Costing
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 8
Value-based Pricing
Understanding Net Value (Fig 5.2)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 9
Value-based Pricing:
Strategies for Enhancing Net Value
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 10
Value-based Pricing:
Enhancing Perceptions of Gross Value
Reduce uncertainty
Service guarantees
Benefit-driven—pricing aspect(s) of service that create value
Flat rate (quoting a fixed price in advance)
Relationship pricing
Discounts for volume purchases
Discounts for purchasing multiple services
Low-cost leadership
Convince customers not to equate price with quality
Keep economic costs low to ensure profitability at low price
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 11
Paying for Service:
The Customer’s Perspective
Nonmonetary costs
Time costs
Physical costs
Psychological (mental) costs
Sensory costs (unpleasant sights, sounds,
feel, tastes, smells)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 12
Trading Off Monetary and
Nonmonetary Costs (Fig 5.5)
Which clinic would you patronize if you needed a chest x-ray
(assuming all three clinics offer good quality)?
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 13
Maximizing Revenue from
Available Capacity at a Given Time
Price customization
Charge different value segments different prices for same
product
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 14
The Strategic Levels of
Revenue (Yield) Management
Price
Fixed Variable
Quadrant 1 Quadrant 2
Predictable
Movies Hotel rooms
Stadiums/arenas Airline seats
Function space Rental cars
Duration
Quadrant 3 Quadrant 4
Unpredictable Restaurants Hospitals
Golf courses
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 17
Key Categories of Rate Fences (2)
Table 5.2
Nonphysical Fences
Transaction Characteristics
Time of booking or Requirements for advance purchase
reservation Must pay full fare two weeks before departure
Location of booking Passengers booking air tickets for an identical
or reservation route in different countries are charged different
prices
Flexibility of ticket Fees/penalties for canceling or changing a
usage reservation (up to loss of entire ticket price)
Nonrefundable reservation fees
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 18
Key Categories of Rate Fences (3)
Table 5.2
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 19
Key Categories of Rate Fences (4)
Table 5.2
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 20
Relating Price Buckets and Fences to
Demand Curve (Fig 5.7)
Price
per
seat
1st class
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 22
Designing Fairness into
Revenue Management
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 23
Putting Service Pricing
into Practice (1)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 24
Putting Service Pricing
into Practice (2)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 25
Putting Service Pricing
into Practice (3)
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 5 - 26