Module 7

Module 7Module 7

Managing Service Promises

1

The Communication GapThe Communication Gap

2

PerceivedService

Expected Service

CUSTOMER

COMPANY

CustomerGap

GAP 1

GAP 2

GAP 3

External Communications

to CustomersGAP 4Service Delivery

Customer-Driven Service Designs and

Standards

Company Perceptions of Consumer Expectations

Module 7(a)Module 7(a)

Integrated Service Marketing Communication

3

Key Factors Related To CommunicationKey Factors Related To Communication

4

Service Delivery

External Communications to

Customers

Gap4

Inadequate management of service promisesOverpromising in advertising and personal sellingInsufficient customer educationInadequate horizontal communicationDifference in policies and procedures across branches

or units

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Learning ObjectivesLearning Objectives

Discuss the key reasons for provider GAP 4 that relates to

marketing communication.

Present strategies for managing customer expectations.

Present five categories of strategies for matching service

delivery with promises.

The Need for Coordination in Marketing Communication

The Need for Coordination in Marketing Communication

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Communication and The Services Marketing Triangle

Internal Marketing

Interactive Marketing

External Marketing

Company (Management)

CustomersEmployees

“enabling the promise”Vertical Communication

Horizontal Communication

“delivering the promise”Personal Selling

Customer Service CenterService Encounters

Servicescapes

“setting the promise”Advertising

Sales PromotionPublic RelationsDirect Marketing

Key Service Communication ChallengesKey Service Communication Challenges

Discrepancies between what is communicated about a service and what a customer receives- or perceives that they receives- can powerfully affect consumer evaluation of service quality.

The factors that contribute to the communication challenges include

a) Inadequate Management of Service Promises

b) Inadequate Management of Customer Expectations

c) Inadequate Customer Education

d) Inadequate Internal Marketing Communication

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Approaches for Integrating Services Marketing Communication

Approaches for Integrating Services Marketing Communication

Improvecustomereducation

Manageservice

promises

Managecustomer

expectations

Manageinternal

marketingcommunication

Goal:Delivery is

greater than or equal to promises

Goal:Delivery is


Offerserviceguarantees

Create effectiveservices communications

MANAGING SERVICE PROMISES

Makerealisticpromises

Coordinate externalcommunication

Approaches for ManagingService Promises




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1. Create Effective Service Advertising Guidelines for service advertising effectiveness

Use narratives to demonstrate the service experience like vasan eye care

Present vivid information, evoke strong emotions like airtel Use interactive imagery like LIC, ICICI Prudential, Mcdonalds Focus on the tangibles like ICICI Bank or ITC Hotels Feature service employee in communication Chevrolet CEO Promise what is possible Encourage WOM communication Feature Service Customers eg LIC customer testimonials



2. Coordinate External Communication Manage brand image through all the external communication

vehicles like advertising, websites, sales promotion, public relations, direct marketing and personal selling

3. Make Realistic Promises

4. Offer Service Guarantees

Communicate criteria for service effectiveness

Create tiered-valueofferings

Negotiateunrealistic

expectations

Goal:Delivery is


Offer choices

Approaches for ManagingCustomer Expectations

Approaches for ManagingCustomer Expectations

Goal:Delivery is


Prepare customers for the service process

Clarify expectationsafter the sale

Teach customers to avoid peak demand periods and seek slow periods

Confirm performanceto standards

Approaches for Improving Customer Education

Approaches for Improving Customer Education

Goal:Delivery is


Createeffective verticalcommunications

Align back-office personnel with

external customers

Createeffective horizontal

communications

Createcross-functional

teams

Approaches for Managing Internal Marketing Communications

Approaches for Managing Internal Marketing Communications

Module 7 (b)Module 7 (b)

Pricing of Services

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Key Factors Related To PricingKey Factors Related To Pricing

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Service Delivery

External Communications to

Customers

Gap4

Assuming that customers hold reference prices for services

Narrowing defining price as monetary costSignaling the wrong quality level with an inappropriate

priceNot understanding customers’ value definitionsNot matching price strategy to customers’ value

definitions

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Learning ObjectivesLearning Objectives

Three major ways that service prices are perceived

differently from goods prices by customers.

Key ways that pricing of services differs from pricing of

goods from a company’s perspective.

What value means to customer and the role that price

plays in value.

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Most service organizations use artless and unsophisticated

approach to pricing without regard to :

Underlying shifts in demand

The rate that supply can be expanded

Prices of available substitutes

Consideration of the price-volume relationship

Availability of future substitutes

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3 key ways that Service Prices are Different for Consumers

3 key ways that Service Prices are Different for Consumers

KEY WAYS:

1. Customer knowledge of service prices

2. The role of non-monetary Costs

3. Price as an Indicator of Service Quality

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1. Customer Knowledge of Service Prices

1. Customer Knowledge of Service Prices

To what extent do customer use price as a criterion in selecting services?

How much do customer know about the cost of services?

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Customer Knowledge…Customer Knowledge…

Service variability limits knowledge Variety of combinations (eg. Life insurance) Different features

Providers are unable to estimate prices in advance (e.g. Legal services)

Individual customer needs vary (e.g. Beauty salon)

Collection of price information is difficult in services

Prices are not visible (e.g. Financial Services)

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Reference PricesReference Prices

It is a price point in memory for a good or a service and

consists of :

The price last paid

The price most frequently paid

The average of all prices customer have paid for similar

offerings.

Generally consumers are quite uncertain about their

knowledge of the prices of services than of goods.

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2. The Role of Non-monetary Costs2. The Role of Non-monetary Costs

Demand for a service is not just a function of monetary price but is

influenced by other cost as well. Such as :

Time costs (participation is required)

Search costs

Convenience costs

Psychological costs

Fear of not understanding(insurance), rejection(bank loans, credit

cards), outcomes (medical diagnoses)

Reducing Nonmonetary Costs

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Customer uses price as an indicator of both service costs and service

quality

Some cues used by customers other than price:

When service cues to quality are readily accessible

When brand names provide evidence of a company’s reputation

When the level of advertising communicates the belief in the brand

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Reason Reason

Reason for this is risk associated with the service purchase.

High risk situation(e.g medical), customer takes price as a

surrogate for quality.

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Approaches to Pricing ServicesApproaches to Pricing Services

There are three approaches -:

Cost-Based Pricing

Competition Based Pricing

Demand Based Pricing

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Three basic marketing Price structures &

Challenges

Competition- Based

Cost- Based

Demand- Based

Challenges:1.Costs are difficult to

trace.2.Labor is more difficult to

price than materials.3.Costs may not equal the

value that customers perceive the services are worth.

Challenges:1.Monetary price must be

adjusted to reflect the value of nonmonetary costs.

2.Information on service costs is less available to customers; hence price may not be a central factor.

Challenges:1. Small firms may charge too little to be viable2. Heterogeneity of services limits comparability.3. Prices may not reflect customer value.

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Cost-Based PricingCost-Based Pricing

In Cost - Based Pricing, the company determines expenses

from raw materials and labor, adds amount or percentages for

overhead and profit, thereby arrives at the price.

Price = Direct costs + Overhead costs + Profit margin

Cost-Based Pricing…Cost-Based Pricing…

Direct costs involve materials and labor that are associated

with delivering the service

Overhead costs are a share of fixed costs

Profit margin is a %age of full costs( direct + overhead)

Industries using cost-based pricing are construction,

engineering, advertising etc.

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Problems with Cost - Based Pricing

Problems with Cost - Based Pricing

Costs are difficult to trace.

Labor is more difficult to price than materials.

Costs may not equal the value the customers perceive the services

are worth

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Examples of Cost - Based PricingExamples of Cost - Based Pricing

Cost-plus pricing - Cost-plus pricing is the simplest pricing

method. The firm calculates the cost of producing the product

and adds on a percentage (profit) to that price to give the selling

price. This method although simple has two flaws; it takes no

account of demand and there is no way of determining if potential

customers will purchase the product at the calculated price.

Fee for Service - Hourly fee usually charged for consultancy or

by lawyers.

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Competition- Based PricingCompetition- Based Pricing

Focuses on the prices charged by other firms in the same

industry and market.

This approach usually works where -:

Services are standard (e.g. dry- cleaning)

Where there are oligopolies (a few large service providers,

as in airlines)

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Problems with Competition-Based Pricing

Problems with Competition-Based Pricing

Small firms may charge too little and not make margins high enough to

remain in business. Thus, many small establishments cannot deliver

services at the low prices charged by chain operators.

Heterogeneity of services across and within providers also makes it

difficult for a firm to follow this approach. (e.g. different banks have

different charges for making DD’s)

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Examples of Competition-Based Pricing

Examples of Competition-Based Pricing

Price signaling – It occurs in a market with a high concentration of

sellers. Any price offered by one company will be matched by

competitors to avoid giving a low- cost seller an advantage e.g. airlines.

Going - rate pricing – It involves charging the most prevalent rate in the

market. ( e.g. mobile service providers).

The Two Approaches The Two Approaches

Cost-based pricingCompetition-based pricing

Are based on the company and its competitors rather than on customers.

Neither approach takes into consideration that customers may lack reference prices

May be sensitive to nonmonetary prices May judge quality on the basis of price

All the above factors can and should be accounted for in a company’s pricing decisions.

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Demand Based PricingDemand Based Pricing

Setting prices consistent with customer perceptions of value

Prices are based on what customers will pay for the services

provided

Nonmonetary costs and beliefs must be factored into the

calculation of perceived value to the customer.

When services require time, inconvenience, psychological and

search costs the monetary prices must be adjusted to

compensate.

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Demand Based…..Demand Based…..

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Services save time, inconvenience, psychic and search costs,

the customer is likely willing to pay a higher monetary price.

Information on service based costs may be less available to

customers, making monetary price not as large or salient a

factor in initial service selection as it is in goods purchasing.

VALUEVALUE

One of the most appropriate ways that companies process their services is basing the price on the perceived value of the service to the customer. A service marketer needs to ask the following questionsWhat do customers mean by value?How can it be quantified in rupees so that appropriate price is

fixed?Is the meaning of value similar across consumers and services?How can value perceptions be influenced?

To Understand demand-based pricing approaches, it is must to fully understand what value means to customers.

Not a simple task Consumers discuss value, they use the term in many different

ways and talk about a myriad of attributes or components 38

Four meanings of perceived VALUEFour meanings of perceived VALUE

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Value is all that I get for all that

I give

Value is the quality I get for the price I pay

Value is low price

Value is everythingI want in a service

Pricing Strategies When the Customer Means- “Value Is Low Price”

Pricing Strategies When the Customer Means- “Value Is Low Price”

Discounting - price cuts and offers to price- sensitive customers.

10%,50% offered by companies on services.

Odd pricing - placing the price just below the exact dollar amount.

999,399,599

Syncro-pricing - is done to manage demandPlace, Time, Quantity and incentives.

Penetration pricinglow price strategy.

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Value is Low PriceValue is Low Price

Equate value with low price

Money is most salient in their perceptions of value

Fast food restaurant : “service is a value, when coupons

are used”

Airline travel : “value is when airline tickets are discounted”

Dry Cleaning: “Value means the lowest price”

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Pricing Strategies When the Customer Means- “Value Is Everything I Want in a Service”

Pricing Strategies When the Customer Means- “Value Is Everything I Want in a Service”

Prestige pricing

Demand based pricing who offer high quality services.

Skimming pricing

Services introduced at high prices.

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Value is Whatever I Want in a Product or Service

Value is Whatever I Want in a Product or Service

Emphasize the benefits they receive from a service or product

Price is far less important than the quality or features

Ex. : Insurance industry

MBA degree : “value is very best education”

Medical service : “value is high quality”

Rock concert : “value is the best performance”

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Pricing Strategies When the Customer Means- “Value Is the Quality I Get for the Price I Pay”Pricing Strategies When the Customer Means

- “Value Is the Quality I Get for the Price I Pay”

Value Pricing

Giving more for less.

Services combined and provided at a cost lower than they would cost individually.

Market Segmentation Pricing

Charging different prices to groups of customers for what they perceive as different qualities of service.

Occurs when segments show different price elasticity's of demand and desire different quality of service. Client Category Service Version

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Value is the Quality I Get for the Price I Pay

Value is the Quality I Get for the Price I Pay

Trade off between the money they give and the quality they receive.

Hotel for vacation : “ value is price first and quality second ”

Hotel for business travel : “ value is the lowest price for a quality

brand ”

Computer services contract : “value is the same as quality. No –value

is affordable quality”

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Pricing Strategies When the Customer Means- “Value Is All That I Get for All That I give”

Pricing Strategies When the Customer Means- “Value Is All That I Get for All That I give”

Includes not just the money spent on the service, but also the time and effort.

Price Framing : 1994 Olympics broadcast

Price Bundling :

Mixed Bundling : a bunch of services offered at lower

price than its individual costs. Mixed Leader Bundling : Discount on additional related

products. Eg: TV cable connections Mixed Joint Bundling: single service is formed for the

combined set of services to increase demand for both the services by packaging them together. 46

Complementary Pricing

Captive Pricing : the cost is divided into initial fixed cost and future recurrent variable costs.

Loss Leadership : one product is priced lowest in the market to attract customer attention and drive them to the store . The remaining products are normal or high priced.

Result Based Pricing

Contingency Pricing : the pricing is based on the end result of the service, as a percentage of the outcome. Eg : Lawyer’s fee.

Partial Contingency Pricing : the pricing is done in two parts , one initial fee (nominal amount) and the secondly a contingency price for the service.

Eg : PayPerClick strategy adopted by Google and Yahoo for advertisements47

Value is what I get for what I giveValue is what I get for what I give

All the benefits they receive as well as all sacrifice

components (money, effort, time) when describing value

Housekeeping service : “value is how many rooms I can get

cleaned for what the price is”

Hair stylist : “value is what I pay in cost and time for the look I

get”

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End Of Module 7End Of Module 7

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Module 7

Business

key factors

based pricing

monetary price

search costs

service costs

customer knowledge

service prices

pricing strategies