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Wk 6 Notes

by: Megan Angelo

Wk 6 Notes MKTG - 45082 - 001

Megan Angelo

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About this Document

Setting Prices and Implementing Revenue Management
Services Marketing
Eileen Bridges
Class Notes
services, Marketing
25 ?




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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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