MKT 346: Marketing of ServicesDr. Houston

Chapter 6:Setting Pricesand Implementing Revenue Management

Pricing Plays a Critical Role in Services MarketingHelps consumersForm expectationsMake purchase decisionsEvaluate service quality

Helps service companiesManage demand

What Makes Service Pricing Strategy Different and Difficult?Harder to calculate cost of creating a service process or performance

Variability of inputs and outputsHow can firms define a unit of service?

Time factor may play a roleSame service may have more value to when delivered faster

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

Revenue and Profit ObjectivesSeek profitCover costs

Patronage and User-Based ObjectivesBuild demandBuild a user base

Objectives for Pricing of Services (Table 6.1)

The Pricing Tripod (Fig. 6.3)

The Pricing Tripod Basis for Any Pricing Strategy

Three Main Approaches to PricingCost-Based Pricing

Value-Based Pricing

Competition-Based Pricing

Value-Based Pricing: Understanding Net Value (Fig. 6.7)Exchange (purchase) will not take place unless customer sees positive net value in transactionNet Value = All Perceived Benefits minus All Perceived CostsPerceived Costs = Money and non-monetary costsWhen looking at competing services, customers are mainly comparing relative net values

Value-Based Pricing: Dont Ignore the Non-Monetary Costs!

Defining Perceived Total User Costs (Fig. 6.11)

Value-Based Pricing:Managing Perception of ValueNeed effective communication and personal explanations to explain valueReduce related monetary costs Cut time spent searching for, purchasing, and using serviceReduce non-monetary costsTime CostsPhysical CostsPsychological (Mental) CostsSensory Costs (unpleasant sights, sounds, feel, tastes, smells)

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

Competition-Based Pricing: When Price Competition is ReducedNon-price related costs of using competing alternatives are highPersonal relationshipsSwitching 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 TimeCharge different prices for the same product Most effective when:Relatively high fixed capacityHigh fixed cost structurePerishable inventoryVariable and uncertain demandVarying customer price sensitivity

Maximizing Revenue from Available Capacity at a Given TimeUse real time information plus complex mathematical models that examine historical data to determineWhat prices to charge within each price bucketHow 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 FencesPhysical Rate FencesService product differences

Non-Physical Rate FencesDifferences 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 PricingServices are difficult to evaluatePrice/quality associationComplex pricing schedulesHidden charges and feesToo many rules and regulations

Designing Fairness into Revenue ManagementDesign clear, logical and fair price schedules and fences Use high published prices and present fences as opportunities for discountsCommunicate consumer benefits of revenue managementUse bundling to hide discountsTake care of loyal customersUse service recovery to compensate for overbooking

Pricing Issues: Putting Strategy into Practice (Table 5.3)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?

MKT 346 Key Concepts: Chapter 6Three types of pricing objectivesThe pricing tripodRevenue management Types of rate fencesEthical issues in pricingConsiderations for putting service pricing into practice