Chapter 6: Setting Prices and Implementing Revenue Management

MKT 346: Marketing of Services Dr. Houston

Pricing Plays a Critical Role in Services Marketing Helps consumers

Form expectations Make purchase decisions Evaluate service quality

Helps service companies

Manage demand

What Makes Service Pricing Strategy Different and Difficult? Harder to calculate cost of creating a service process or performance Variability of inputs and outputs
How can firms define a unit of service?

Time factor may play a role

Same service may have more value to when delivered faster

Customers find service pricing difficult to understand, risky and sometimes even unethical

Objectives for Pricing of Services Revenue and Profit Objectives

Seek profit

(Table 6.1)

Cover costs

Patronage and User-Based Objectives

Build demand

Build a user base

The Pricing Tripod

(Fig. 6.3)

The Pricing Tripod Basis for Any Pricing Strategy Value to customer
(Maximum Price)

Competition

Costs (Minimum Price)

Three Main Approaches to Pricing

Cost-Based Pricing

Value-Based Pricing

Competition-Based Pricing

Value-Based Pricing: Understanding Net Value Exchange (purchase) will not take place unless customer sees positive net value in transaction Net Value = All Perceived Benefits minus All Perceived Costs Perceived Costs = Money and non-monetary costs When looking at competing services, customers are mainly comparing relative net values

(Fig. 6.7)

Dont Ignore the Non-Monetary Costs!

Value-Based Pricing:

Time Costs Physical Costs Psychological Costs

Time spent on service delivery

Fatigue and discomfort from waiting

Mental effort to buy and use a service

Sensory Costs

Unpleasant service environment Examples: smell, temperature, noise, etc.

Defining Perceived Total User Costs

(Fig. 6.11)

Value-Based Pricing: Managing Perception of Value Need effective communication and personal explanations to explain value Reduce related monetary costs
Cut time spent searching for, purchasing, and using service

Reduce non-monetary costs

Time Costs Physical Costs Psychological (Mental) Costs Sensory Costs (unpleasant sights, sounds, feel, tastes, smells)

Trading Off Monetary and Non-Monetary Costs (Fig. 6.12)

Competition-Based Pricing: When Price Competition is Reduced Non-price related costs of using competing alternatives are high
Personal relationships Switching costs Time and location

Managers should not only look at competitors actual prices, but should examine all related monetary and non-monetary costs

Maximizing Revenue from Available Capacity at a Given Time

Charge different prices for the same product Most effective when: Relatively high fixed capacity High fixed cost structure Perishable inventory

Variable and uncertain demand

Varying customer price sensitivity

Maximizing Revenue from Available Capacity at a Given Time

Use real time information plus complex mathematical models that examine historical data 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)

Types of Rate Fences

Physical Rate Fences
Service product differences

Non-Physical Rate Fences

Differences in consumption, transaction, or buyer characteristics

Key Categories of Rate Fences: Physical

(Table 6.2)

Key Categories of Rate Fences: Non-Physical

(Table 6.2)

Key Categories of Rate Fences: Non-Physical

(Table 6.2)

Key Categories of Rate Fences: Non-Physical

(Table 6.2)

Ethical Concerns in Pricing Services are difficult to evaluate Price/quality association Complex pricing schedules

Hidden charges and fees

Too many rules and regulations

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

Pricing Issues: Putting Strategy into Practice How much to charge?

(Table 5.3)

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?

MKT 346 Key Concepts: Chapter 6

Three types of pricing objectives The pricing tripod

Revenue management
Types of rate fences Ethical issues in pricing Considerations for putting service pricing into practice