Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 1 Chapter 6 Pricing and Revenue Management
Mar 29, 2015
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 1
Chapter 6
Pricing and Revenue Management
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 2
What Makes Service Pricing Strategy Different (and Difficult)?
No ownership of services--hard for firms to calculate financial costs of creating an intangible performance
Variability of inputs and outputs--how can firms define a “unit of service” and establish basis for pricing?
Many services hard for customers to evaluate--what are they getting in return for their money?
Importance of time factor--same service may have more value to customers when delivered faster
Delivery through physical or electronic channels--may create differences in perceived value
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 3
Objectives of Pricing Strategies
Revenue and profit objectives Seek profit Cover costs
Patronage and user base-related objectives Build demand Build a user base
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 4
The Pricing Tripod (Fig. 6.1)
Pricing Strategy
CostsCompetition
Value to customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 5
Three Main Approaches to Pricing
Cost-Based PricingSet prices relative to financial costs
(problem: defining costs)
Competition-Based PricingMonitor competitors’ pricing strategy
(especially if service lacks differentiation)Who is the price leader? (one firm sets the pace)
Value-BasedRelate price to value perceived by customer
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 6
Activity-Based Costing: Relating Activities to the Resources They Consume
Managers need to see costs as an integral part of a firm’s effort to create value for customers
When looking at prices, customers care about value to themselves, not what production costs the firm
Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to create and deliver service (do they add value?)
Must link resource expenses to:variety of products producedcomplexity of productsdemands made by individual customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 7
Perceived Benefits
Timee
Effort
Net Value = (Benefits – Outlays) (Fig. 6.3)
Perceived Outlays
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 8
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty service guarantees benefit-driven (pricing that aspect of service that creates value) flat rate (quoting a fixed price in advance)
Relationship Pricing non-price incentives discounts for volume purchases discounts for purchasing multiple services
Low-cost Leadership Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 9
Paying for Service:The Customer’s Perspective
Customer “expenditures” on service comprise both financial and non-financial outlays
Financial costs: price of purchasing service expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any of the five senses)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 10
Determining the Total Costs of a Service to the Consumer (Fig. 6.4)
Price
Related Monetary Costs
Time Costs
Physical Costs
Psychological Costs
Sensory Costs
Necessary follow-up
Problemsolving
Operating Costs
Incidental Expenses
Purchase andUse Costs
Search Costs
After Costs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 11
Trading off Monetary and Non- Monetary Costs (Fig. 6.5)
Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ?
Price $85 Located 15 min
away by car or transit
Next available appointment is in 1 week
Hours: Monday – Friday, 8am – 10pm
Estimated wait at clinic is about 30 - 45 minutes
Price $85 Located 15 min
away by car or transit
Next available appointment is in 1 week
Hours: Monday – Friday, 8am – 10pm
Estimated wait at clinic is about 30 - 45 minutes
Clinic BClinic B
Price $125 Located next to
your office or college
Next appointment is in 1 day
Hours: Mo –Sat, 8am – 10pm
By appointment - estimated wait at clinic is about 0 to 15 minutes
Price $125 Located next to
your office or college
Next appointment is in 1 day
Hours: Mo –Sat, 8am – 10pm
By appointment - estimated wait at clinic is about 0 to 15 minutes
Clinic CClinic CClinic AClinic A
Price $45 Located 1 hour away
by car or transit Next available
appointment is in 3 weeks
Hours: Monday – Friday, 9am – 5pm
Estimated wait at clinic is about 2 hours
Price $45 Located 1 hour away
by car or transit Next available
appointment is in 3 weeks
Hours: Monday – Friday, 9am – 5pm
Estimated wait at clinic is about 2 hours
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 12
Increasing Net Value by Reducing Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 13
Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
Based on price customization - charging different customers (value segments) different prices for same product
Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
RM uses mathematical models to examine historical data and real time information to determinewhat prices to charge within each price buckethow many service units) to allocate to each bucket
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 14
The Strategic Levers of Revenue (Yield) Management
Quadrant 4:
Continuing Care
Hospitals
Quadrant 3:
Restaurants
Golf Courses
Unpredictable
Quadrant 2:
Hotel Rooms
Airline Seats
Rental Cars
Cruise Lines
Quadrant 1:
Movies
Stadiums/Arenas
Function Space
Predictable
Du
rati
on
VariableFixed
Price
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 15
Dealing with Common Customer Conflicts Arising from Revenue Management
Perceived Unfairness & Perceived Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability
Customer conflict can arise from: Marketing tools to reduce customer conflicts:
Unfulfilled Inventory Commitment
Unfulfilled Demand of Regular Customers
Unfulfilled Price Expectation of Group Customers
Change in the Nature of the Service
Fenced Pricing Bundling Categorising High Published Price
Well designed Customer Recovery Programme for Oversale
Preferred Availability Policies
Offer Lower Displacement Cost Alternatives
Physical Segregation & Perceptible Extra Service
Set Optimal Capacity Utilisation Level
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 16
Price Elasticity (Fig. 6.6)
De
De
Di
Di
Price perunit ofservice
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 17
Key Categories of Rate Fences (Table 6.2)
Rate Fences Examples
Physical (Product-related) Fences
Basic Product Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre
Amenities Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course
Service Level Priority wait listingIncrease in baggage allowances Dedicated service hotlines Dedicated account management team
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 18
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences
Transaction Characteristics
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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 19
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Consumption Characteristics
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, esp in international travel
Prices vary by location (between cities, city centre versus edges of city)
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 20
Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Buyer Characteristics
Frequency or volume of consumption
Member of certain loyalty-tier with the firm get 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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 21
Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)
First Class
Full Fare Economy (No Restrictions)
One-Week Advance Purchase
One-Week Advance Purchase, Saturday Night Stayover
3-Week Advance Purchase, Saturday Night Stayover
3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
Late Sales through Consolidators/ Internet, no refunds
Capacity
of Aircraft No. of Seats Demanded
Capacityof 1st-classCabin
Price per Seat
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 22
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate or they don’t observe work
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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 23
Pricing Issues: Putting Strategy into Practice (Table 6.3)
How much to charge?
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?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 24
Consumption follows the Timing of Payments (Research Insight 6.1)
Fre
quen
cy o
f H
ealth
Clu
b V
isits
Annual Payment Plan
Semiannual Payment Plan
Fre
quen
cy o
f H
ealth
Clu
b V
isits
Time Line
Quarterly Payment Plan
Time Line
Monthly Payment Plan
Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,” Harvard Business Review, September 2002, 90-96.