Wk 6 Notes
Wk 6 Notes MKTG - 45082 - 001
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MKTG - 45082 - 001
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This 10 page Class Notes was uploaded by Megan Angelo on Tuesday October 4, 2016. The Class Notes belongs to MKTG - 45082 - 001 at Kent State University taught by Eileen Bridges in Fall 2016. Since its upload, it has received 3 views. For similar materials see Services Marketing in Marketing at Kent State University.
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Date Created: 10/04/16
Ch. 6 Setting Prices and Implementing Revenue Management 6.1 Effective Pricing is Central to Financial Success • Difficult to calculate financial costs of creating a service process or performance • Variability of inputs and outputs: How can firms define a “unit of service” and establish a basis for pricing? • Importance of time factor – same service may have more value to customers when delivered faster • Customers find service pricing difficult to understand, risky and sometimes even unethical! • Revenue and Profit Objectives • Seek profit • Cover costs • Patronage and User-Based Objectives • Build demand • Demand maximization • Full capacity utilization • Build a user base • Stimulate trial and adoption of new service Build market share 6.2 Three Main Approaches to Pricing • Cost-Based Pricing – Set prices relative to financial costs (difficult to trace) – Activity-Based Costing may define costs – Pricing implications of cost analysis • Value-Based Pricing – Relate price to value perceived by customer • Competition-Based Pricing – Monitor competitors’ pricing (especially if service lacks differentiation) – Who is the price leader - does one firm set the pace? • Traditional cost-based pricing approach – Emphasizes expense categories (overhead allocated arbitrarily) – May inaccurately assess value generated for customers • Activity Based Cost management systems – Link marketing expenditures to customer value produced – Yield accurate cost data (even with high fixed costs) • When looking at prices, customers care about value to themselves, not what service production costs the firm • Exchange will not take place unless customer sees positive net value • Monetary price is not the only perceived outlay in purchasing and using a service • Net Value = Perceived Benefits to Customer minus All Perceived Outlays (Money, Time, Mental/Physical Effort) When looking at competing services, customers compare relative net values Customer “expenditures” on service include 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 impact on any of the five senses) • Reduce time costs of service at each stage • Minimize psychological costs of service – For instance, eliminate/redesign unpleasant or inconvenient procedures • Eliminate physical costs of service – For instance, use painkillers during surgical procedures and headsets with music during unpleasant noise • Decrease unpleasant sensory costs of service – Unpleasant sights, sounds, smells, feel, tastes • Suggest ways for customers to reduce other monetary costs, such as using free parking When is Price Competition High? • There are more competitors • There are more available offers to substitute a different provider • There is a wider distribution of competitors • Demand decreases • There is surplus capacity in the industry When is Price Competition Reduced? • Non-price-related costs of using competing alternatives are high • Personal relationships matter • Switching costs are high • Time and location specificity reduces choice • Examine all financial and non-monetary costs of your competitors! 6.3 Revenue Management: What it is and How it Works • Most effective when: – Relatively high fixed capacity and high fixed costs – Perishable inventory – Variable and uncertain demand – A wide range of customer price sensitivities • Revenue management is a form of price customization – Charges different value segments different prices for the same product based on their price sensitivities • It uses mathematical models to examine historical data and real time information to decide: – What prices to charge within each price bucket – How many service units to allocate to each bucket • Rate fences deter customers who are willing to pay more from trading down to lower prices 6.4 Ethical Concerns in Service Pricing • Customers are vulnerable when service is hard to evaluate; they assume that higher price indicates better quality • Many services have complex pricing schedules – Hard to understand – Difficult to calculate full price in advance of service • Quoted prices are not the only expenditures – Hidden charges – Many kinds of fees • Too many rules and regulations – Customers feel constrained or exploited – Customers face unfair fines and penalties • Design clear, logical, and fair price schedules and rate fences • Use high published prices and present rate fences as opportunities for discounts (rather than quoting lower prices and using fences to impose surcharges) • Communicate consumer benefits of revenue management • Use bundling to “hide” discounts, to reduce perceptions of unfairness for those not receiving the discount • Take care of loyal customers • Use service recovery to compensate for overbooking 6.5 Putting Service Pricing into Practice Putting Service Pricing into Practice (Table 5.3) • How much should we charge? • What should be the basis for pricing? • Who should collect payments? • Where should payments be made? • When should payments be made? • How should payments be made? • How should we communicate prices? • How much should we charge? • The pricing tripod model helps with costs, customer price sensitivity, and competitors • Consider whether discounts are offered • Are any psychological pricing points used? • What should be the basis for pricing? • Completing a task • Admission to a service performance • Time based (e.g. hourly rate) • Monetary value of service delivered (e.g. commission) • Consumption of physical resources (e.g. food and beverages) • Distance-based (e.g. transportation) • Who should collect payments? • Service provider or specialist intermediaries • Direct or indirect channels • Where should payments be made? • Conveniently located intermediaries • By mail • Bank transfer • Internet, phone, fax; charge to credit card • When should payments be made? • In advance • After service delivery is completed • How should payments be made? • Cash • Check • Debit or Credit Card • Tokens or Vouchers • Stored Value Card (e.g. Starbucks) • How should we communicate prices? • Relate the price to that of competing products • Use salespeople and customer service representatives • Good signage at retail points • Ensure price is accurate and intelligible
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