Setting and Implementing: Prices Revenue Management

Services Marketing
Chapter 6:
Setting Prices and
Implementing
Revenue Management
Slide © 2011 by Lovelock & Wirtz Services Marketing 7/e Chapter 6 – Page 1
Overview Of Chapter 6
Services Marketing
 Effective Pricing is Central to Financial Success
 Pricing Strategy as Represented by the Pricing Tripod
 Revenue Management: What it is and How it Works
 Ethical Concerns in Service Pricing
 Putting Service Pricing into Practice
Services Marketing
Effective Pricing is
Central to Financial Success
What Makes Service Pricing
Strategy Different and Difficult?
Services Marketing
 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” and establish basis for
pricing?
 Importance of time factor – same service may have more

value to customers when delivered faster
 Customers find service pricing difficult to understand, risky,

and sometimes even unethical
Services Marketing
Rate
fees
fare
bill
Objectives for Pricing of Services
Services Marketing
 Revenue and Profit Objectives

 Seek profit
 Cover costs
 Patronage and 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
Services Marketing
1. Who is your customer?

2. What are your per-unit costs?
3. What is your revenue target?
4. What is your value to the customer (in both utility an
d brand)?
5. Who are the competition?
6. Where is the market headed?
Services Marketing
Pricing Strategy
As Represented by the Pricing
Tripod
The Pricing Tripod
Services Marketing
Floor and Ceiling of Price
Services Marketing
Value to customer
Competition
Costs
Three Main Approaches to Pricing
Services Marketing
Cost-Based Value-Based Competition-

Pricing Pricing Based Pricing
●
Set prices relative
to financial costs ●
Monitor competitors’
●
Relate price to pricing strategy
●
Activity-Based
value perceived by
Costing
customer ●
Dependent on the
price leader
●
Pricing implications
of cost analysis
Cost-Based Pricing: Traditional vs.
Activity-Based Costing
Services Marketing
 Traditional costing approach

 Emphasizes expense categories (arbitrary overheads allocation)
 May result in reducing value generated for customers
 ABC management systems

 Link resource expenses to variety and complexity of
goods/services produced
 Yields accurate cost information
BUT, customers care about value to themselves, not what

service production costs the firm
Value-Based Pricing:
Understanding Net Value
Services Marketing
 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 options
 Competing services are then evaluated via comparison of

net value
Value-Based Pricing:
Strategies for Enhancing Net Value
Services Marketing
 Enhance gross value – benefits delivered

 Add benefits to core product
 Enhance supplementary service
 Manage perceptions of benefits delivered
 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
Services Marketing
Defining Total User Cost
Services Marketing
Money Purchase
Search Costs*
Time Operating Costs
Physical Effort Incidental Expenses
Purchase and Service

Psychological Burdens
Encounter Costs
Sensory
Burdens
Necessary
Post Purchase Costs* Follow-up
Problem * Includes all five

Solving cost categories
Competition-Based Pricing
Services Marketing
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
Managers should examine all related financial
and non-monetary costs
Competitive-Based Pricing
Services Marketing
Services Marketing
Services Marketing
Services Marketing
Services Marketing
Revenue Management:
What it is and How it works
Maximizing Revenue from
Available Capacity at a Given Time
Services Marketing
 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
Maximizing Revenue from
Available Capacity at a Given Time
Services Marketing
 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
 Rate fences deter customers willing to pay more from

trading down to lower prices (minimize consumer surplus)
Price Elasticity
Services Marketing
Key Categories of Rate Fences:
Physical (Product-Related) Fences
Services Marketing
Product-Related Fences
Rate Fences Examples
Basic Product  Class of travel (Business/Economy class)
 Size and furnishing of a hotel room
 Seat location in a theater
Amenities  Free breakfast at a hotel, airport pick up, etc.
 Free golf cart at a golf course
Service Level  Priority wait listing
 Increase in baggage allowances
 Dedicated service hotlines
 Dedicated account management team
Non Physical Fences
Services Marketing
Transaction Characteristics
Time of booking or  Requirements for advance purchase
reservation  Must pay full fare two weeks before departure
Location of booking or  Passengers booking air tickets for an identical route in
reservation 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)
 Non-refundable reservation fees
Non Physical Fences
Services Marketing
Consumption Characteristics
Rate Fences Example

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, especially in
international travel
 Prices vary by location (between cities, city centre vs.
edges of city)
Non Physical Fences
Services Marketing
Buyer Characteristics

Frequency or volume of  Member of certain loyalty tier with the firm get
consumption 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
Relating Price Buckets and Fences
to Demand Curve
Services Marketing
Services Marketing
Ethical Concerns in Service

Pricing
Ethical Concerns in Pricing
Services Marketing
 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
Designing Fairness into
Revenue Management
Services Marketing
 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
Services Marketing
Putting Service
Pricing into Practice
Pricing Issues:
Putting Strategy into Practice
Services Marketing
3. Who should
1. How much to 2. What basis
collect
charge? for pricing?
payment?
4. Where 5. When should 6. How should

should payment payment be payment be
be made? made? made?
7. How to
communicate
prices?
Putting Service Pricing into Practice
Services Marketing
 How much to charge?

1. How much
 Pricing tripod provides a useful starting point to charge?
 A specific figure must be set for the price

 Need to consider the pros and cons, and ethical issues
 What basis for pricing? 2. What basis

for pricing?
 Completing a task
 Admission to a service performance
 Time based
 Monetary value of service delivered (e.g., commission)
 Consumption of physical resources (e.g., food and beverages)
Services Marketing
 Who should collect payment?

3. Who should
 Service provider or specialist intermediaries collect
payment?
 Direct or non-direct channels
 Where should payment be made?

4. Where should
 Conveniently located intermediaries payment be
made?
 Mail/bank transfer
 When should payment be made?

5. When should
 In advance payment be
made?
 Once service delivery has been completed
Services Marketing
 How should payment be made?

6. How should
 Cash payment be
made?
 Token
 Stored value card
 Electronic fund transfer
 Charge Card (Debit/Credit)
 Vouchers
 How to communicate prices? 7. How to

communicate
 Relate the price to that of competing products prices?
 Ensure price is accurate and intelligible
Summary
Services Marketing
 Pricing objectives can include

 Generating revenues and profit, building demand, and developing
user base
 Three main foundations to pricing a service

 Cost-based pricing
 Competition-based pricing
 Value-based pricing
 Firm must be aware of competitive pricing but may be

harder to compare for services than for goods
Summary
Services Marketing
 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
 Use of rate fences
 Ethical issues in pricing

 Complex pricing schedules
 Unfairness and misrepresentation in advertising
 Hidden charges
 Too many rules and regulations
Services Marketing
https://www.youtube.com/watch?v=b2zg81CSZ64
https://www.forbes.com/sites/forbestechcouncil/2019/09/10/in-the-future-everything-will-be-dynamically-priced/# 16af2961f8f1
https://www.youtube.com/watch?v=6JZ6yjJprok

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Services Marketing

 Effective Pricing is Central to Financial Success

 Pricing Strategy as Represented by the Pricing Tripod

 Revenue Management: What it is and How it Works

 Ethical Concerns in Service Pricing

 Putting Service Pricing into Practice

 Harder to calculate financial costs of creating a service

 Variability of inputs and outputs:

 Importance of time factor – same service may have more

 Customers find service pricing difficult to understand, risky,

 Revenue and Profit Objectives

 Patronage and User-Based Objectives

1. Who is your customer?

Cost-Based Value-Based Competition-

 Traditional costing approach

 ABC management systems

BUT, customers care about value to themselves, not what

 Net Value = Perceived Benefits to Customer (Gross Value)

 Consumer surplus: difference between price paid and

 Competing services are then evaluated via comparison of

 Enhance gross value – benefits delivered

 Reduce costs incurred by

Physical Effort Incidental Expenses

Purchase and Service

Problem * Includes all five

Price competition increases due

However under these circumstances,

 Most effective in the following conditions:

 Revenue management (RM) is price customization

 RM uses mathematical models to examine historical data

 Rate fences deter customers willing to pay more from

Flexibility of ticket usage  Fees/penalties for canceling or changing a reservation

Rate Fences Example

Rate Fences Examples

Group membership  Child, student, senior citizen discounts

Size of customer group  Group discounts based on size of group

Ethical Concerns in Service

 Many services have complex pricing schedules

 Unfairness and misrepresentation in price promotions

 Too many rules and regulations

 Design clear, logical, and fair price schedules and fences

 Use high published prices and present fences as

 Communicate consumer benefits of revenue management

 Use bundling to “hide” discounts

 Take care of loyal customers

 Use service recovery to compensate for overbooking

4. Where 5. When should 6. How should

 How much to charge?

 A specific figure must be set for the price

 What basis for pricing? 2. What basis

 Who should collect payment?

 Where should payment be made?

 When should payment be made?

 How should payment be made?

 How to communicate prices? 7. How to

 Pricing objectives can include

 Three main foundations to pricing a service

 Firm must be aware of competitive pricing but may be

 Ethical issues in pricing

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