Love Lock 06

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Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 1 Chapter 6 Pricing and Revenue Management

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Chapter 6

Transcript of Love Lock 06

Page 1: Love Lock 06

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 6 - 1

Chapter 6

Pricing and Revenue Management

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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)

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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

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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

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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

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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?

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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.