SERVICE PRICING & REVENUE MANAGEMENT

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1 SERVICE MARKETING SERVICE PRICING & REVENUE MANAGEMENT TRACY - MARY - NANCY

2 LEARNING OBJECTIVES: LO1 - Recognize that effective pricing is central to the financial success of service firms. LO2 - Outline the foundations of a pricing strategy as represented by the pricing tripod. LO3 - Define different types of financial cost and explain the limitations of cost-based pricing. LO4 - Understand the concept of net value and how cross value can be enhanced through value - based pricing and reduction of related monetary and non-monetary costs. LO5 - Describe competition-based pricing and situations where

3 LEARNING OBJECTIVES: LO6 - Define revenue management and describe how it works. LO7 - Discuss the role of rate fences in effective revenue management. L08 - Be familiar with the issues of ethics and consumer concerns related to service pricing. LO9 - Understand how fairness can be design into revenue management policies. L010 - Discuss the six questions marketers need to answer to design an effective service pricing stategy.

4 LO 1 FIRST Effective Pricing Is Central to Financial Success

5 What is Business model

6 Revenue and profit objectives Gain profit Gain a specific target level, but do not seek maximize profit Cover costs Patronage and User Base-Related Objectives Build demand - Demand maximization - Full-capacity utilization Build a user base - Stimulate trial and adoption of new service - Build market share, a large user, network Strategy-Related Objectives Support Positioning Strategy - Support the firm s positioning and differentiation strategy - Promote a We-will-not-be-undersold positioning Support Competitive Strategy - Discourage existing competition to expand capacity - Discourage potential new competition to enter the market Objectives for Pricing of Service

7 LO 2 Pricing Strategy Stands on Three Legs

8 The Pricing Tripod

9 The Pricing Tripod

10 LO 3 Three Main Approaches to Pricing

11 Three Main Approaches to Pricing

12

13 LO 4 Value-Based Pricing Understanding Net Value

14 LO 4: Value-Based Pricing Understanding Net Value

15 LO 4: Value-Based Pricing Reducing Related Monetary and Non-monetary Costs

16 LO 4: Value-Based Pricing Defining total user costs

17 LO 4: Value-Based Pricing Increasing Net Value by Decreasing Nonmonetary Costs of Service

18 LO 5 Competition-based Pricing

19 LO 5: Competition-based Pricig 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 completion can decrease: High non-price-related costs of using alternatives Personal relationships matter Switching cost are high Time and location specificity reduces choice Managers should examine all related financial non-monetary cost

20 LO 6 Revenue Management

21 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

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 Rate fences deter customers willing to pay more from trading down to lower prices (minimize consumer surplus)

23 Price Elasticity

24 Price Elasticity What are the important values for price elasticity of demand? We use the word "coefficient" to describe the values for price elasticity of demand If Ped = 0 demand is perfectly inelastic - demand does not change at all when the price changes the demand curve will be vertical. If Ped is between 0 and 1 (i.e. the % change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. If Ped = 1 (i.e. the % change in demand is exactly the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level. If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic. For example if a 10% increase in the price of a good leads to a 30% drop in demand. The price elasticity of demand for this price change is 3

25 LO 7 The Role Of Rate Fences In Effective RM

26 Product-Related Fences Key Categories of Rate Fences: Physical (Product-Related) Fences Rate fence Basic Product Amenities Service Level Examples Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theater Free breakfast at a hotel, airport pick up, etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

27 Transaction Characteristics Key Categories of Rate Fences: Non Physical Fences Rate fence Time of booking or reservation Location of booking or reservation Flexibility of ticket usage Examples Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for an identical route in different countries are charged different prices Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non-refundable reservation fees

28 Rate fence Examples Time of booking or reservation Requirements for advance purchase Must pay full fare two weeks before departure Location of booking or reservation Passengers booking air tickets for an identical route in 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

29 Consumption Characteristics Key Categories of Rate Fences: Non Physical Fences Rate fence Time or duration of use Location of consumption Examples Early bird special in restaurant before 6pm; Must stay over on Sat for airline, hotel; Must stay at least five days. Price depends on departure location, especially in international travel; Prices vary by location (between cities, city centre vs. edges of city).

30 Buyer Characteristics Key Categories of Rate Fences: Non Physical Fences Rate fence Frequency or volume of consumption Group membership Size of customer group Examples Member of certain loyalty tier with the firm get priority pricing, discounts or loyalty benefits Child, student, senior citizen discounts Affiliation with certain groups (e.g., Alumni) Group discounts based on size of group

31 Relating Price Buckets and Fences to Demand Curve

32 LO 8 Ethics & Consumer Concern Related To SP

33 Ethical Concerns in Pricing 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

34 LO 9 Designing Fairness Into Revenue Management

35 LO 9 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

36 LO 10 Putting Service Pricing Into Practice

37 LO 10 Putting Service Pricing Into Practice 1.How much to charge? 2.What basis for pricing? 3.Who and where should collect payment? 4.When should payment be made? 5.How should payment be made? 6.How to communicate prices?

38 1 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

39 2 What should be the basis of 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)

40 Who should collect payment and where? 3 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

41 4 When should payment be made? In advance Once service delivery has been completed In a lump sum or by installments over time

42 How should payment be made? 5 01 Cash 04 Electronic fund transfer 02 Token 05 Charge Card (Debit/Credit) 03 Stored value card 06 Vouchers

43 6 How to communicate Relate the price to that of competing products Ensure price is accurate and intelligible prices

44 Summary

45 Pricing objectives can include Generating revenues and profit, building demand, and developing user base

46 Three main foundations to pricing a service 01 Cost-based pricing 02 Competition-based pricing 03 Value-based pricing

47 Firm must be aware of competitive pricing but may be harder to compare for services than for goods

48 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

49 Ethical issues in pricing Complex pricing schedules Unfairness and misrepresentation in advertising Hidden charges Too many rules and regulations

50 THANKS TRACY - MARY - NANCY

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