LoveLock Chapter 5
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Transcript of LoveLock Chapter 5
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #
Chapter 5:Exploring BusinessModels:Pricing and RevenueManagement
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2
Overview of Chapter 5
Effective Pricing Is Central to Financial Success
Pricing Strategy Stands on Three Legs
Revenue anage!ent" #hat It Is and $ow It #or%s
Ethical Concerns in Service Pricing
Putting Service Pricing into Practice
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " $
#hat Is a &usiness odel'
(se of effective pricing !echanis! to"
Transform sales into revenues
Recover costs
Create value for owners of business
ust clarify )usiness logic that e*plains how fir! candeliver value to custo!ers at an appropriate cost
+ot all )usiness !odels re,uire end user of specific
service to pay full costconsider third-party payers" Advertisers
Health insurers
Donors to nonprofit organizations
Tax subsidies for public services
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " %
#hat a%es Service Pricing Strategy.ifferent and .ifficult'
$arder to calculate financial costs of creating a serviceprocess or perfor!ance than a !anufactured good
/aria)ility of inputs and outputshow can fir!s define a0unit of service1 and esta)lish )asis for pricing'
Custo!ers find !any services hard to evaluatewhatare they getting in return for their !oney'
I!portance of ti!e factor
sa!e service !ay have !orevalue to custo!ers when delivered faster
.elivery through physical or electronic channels!aycreate differences in perceived value
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2lternative O)3ectives for Pricing(Table !"#
Revenue and profit o)3ectives
$ee% profit
Cover costs
Patronage and user-)ased o)3ectives
&uild demand
- .e!and !a*i!i4ation
- Full-capacity utili4ation
&uild a user base- Sti!ulate trial and adoption of new service
- &uild !ar%et sharelarge user )ase
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 6
The Pricing Tripod'ig !"
Pricing strategy
CostsCompetition
Value to customer
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Three ain 2pproaches to Pricing
Cost-)ased pricing $et prices relative to financial costs (problem defining costs#
Activit)*based costing
+ricing implications of cost anal)sis
Co!petition-)ased pricing
,onitor competitors- pricing strateg) (especiall) if servicelac%s differentiation#
.ho is the price leader/ Does one firm set the pace/
/alue-)ased pricing
Relate price to value perceived b) customer
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Cost-)ased Pricing"Traditional vs6 2ctivity-)ased Costing
Traditional costing approach 0mphasizes expense categories (arbitrar) overhead allocation#
,a) result in reducing value generated for customers
2&C !anage!ent syste!s 1in% resource expenses to variet) and complexit) of goods2services
produced
3ields accurate cost information
#hen loo%ing at prices7 custo!ers care a)out value tothe!selves7 not what service production costs the fir!
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/alue-)ased Pricing(nderstanding +et /alue 8'ig !4#
/alue e*change will not ta%e placeunless custo!er sees positive netvalue in transaction
+et value 9 Perceived )enefits tocusto!er 8gross value: !inus allPerceived outlays 8oney7 Ti!e7entalPhysical effort:
onetary price is not only perceivedoutlay in purchasing7 using a service
Consu!er surplus" difference)etween price paid and a!ountcusto!er would have )een willing topay in a)sence of other options
Perceived
benefits
Tim
e e
Efort
Perceivedoutlays
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/alue-)ased Pricing"Strategies for Enhancing +et /alue
Enhance gross value)enefits delivered
Add benefits to core product
0nhance supplementar) service
,anage perceptions of benefits delivered
Reduce outlayscosts incurred )y custo!ers
Reduce price and2or other monetar) costs of ac5uisition and usage
Cut amount of time re5uired to evaluate6 bu)6 use service
1ower ph)sical and mental effort associated with purchase and use Reduce perceptions of amount of cost6 time6 effort re5uired
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/alue-)ased Pricing"Enhancing Perceptions of ;ross /alue
Reduce uncertainty $ervice guarantees
&enefit*driven7pricing aspect(s# of service that create value
'lat rate (5uoting a fixed price in advance#
Relationship pricing 8onprice incentives
Discounts for volume purchases
Discounts for purchasing multiple services
Low-cost leadership
Convince customers not to e5uate price with 5ualit)
9eep economic costs low to ensure profitabilit) at low price
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Paying for Service"The Custo!er
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Trading Off onetary and+on!onetary Costs 8'ig !#
#hich clinic would you patroni4e if you needed a chest *-ray 8assu!ing all threeclinics offer good ,uality:'
Price =>5
Located ?5 !ins away)y car or transit
+e*t availa)leappoint!ent is in ?wee%
$ours" on-Fri7 >2-?@P
Esti!ated wait atclinic is a)out A@ toB5 !ins
Price =B5
Located ? hour away)y car or transit
+e*t availa)leappoint!ent is in Awee%s
$ours" on-Fri7 2-5P
Esti!ated wait atclinic is a)out D hours
Clinic A Clinic B
Price =?D5
Located ne*t to youroffice or college
+e*t appoint!ent isin ? day
$ours" on-Fri7 >2-?@P
&y appoint!entesti!ated wait atclinic is @ to ?5 !ins
Clinic C
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Increasing +et /alue )y Reducing+on!onetary Costs of Service
Reduce ti!e costs of service at each stage
ini!i4e unwanted psychological costs of service
0liminate2redesign unpleasant2inconvenient procedures
Eli!inate unwanted physical costs of service
.ecrease unpleasant sensory costs of service
:npleasant sights6 sounds6 smells6 feel6 tastes
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a*i!i4ing Revenue fro!2vaila)le Capacity at a ;iven Ti!e
Price custo!i4ation Charge different value segments different prices for same product
(seful in dyna!ic !ar%ets Different price buc%ets based on price sensitivit) to different usage
times6 flexibilit)6 other factors
R uses !athe!atical !odels to e*a!ine historical data andreal-ti!e infor!ation to deter!ine .hat prices to charge within each price buc%et
How man) service units to allocate to each buc%et
Rate fences deter custo!ers willing to pay !ore fro! tradingdown to lower prices 8!ini!i4e consu!er surplus:
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The Strategic Levels ofRevenue 8ield: anage!ent
Quadrant 1
Movies
Stadiums/arenas
Function space
Quadrant 2
Hotel rooms
Airline seats
Rental cars
Cruise lines
Quadrant
Restaurants
!ol" courses
Quadrant #
Continuin$ care
Hospitals
Fi%ed &aria'le
(redicta'le
)npredicta'le
(rice
*uration
Source+ Fi$ 1 "rom ,imes and C-ase readin$ .p 2120
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.ealing with Custo!er Conflicts2rising fro! Revenue anage!ent
Customer con"lict can arise"rom+ Maretin$ tools to reducecustomer con"licts+ (erceived un"airness and
perceived "inancial risassociated it- multitier pricin$and selective inventor3
availa'ilit3
)n"ul"illed inventor3 commitment
)n"ul"illed demand o" re$ularcustomers
)n"ul"illed price e%pectation o"$roup customers
C-an$e in nature o" service
Fenced pricin$Bundlin$Cate$ori4in$Hi$- pu'lis-ed price
5ell6desi$ned customer recover3pro$ram "or over'ooin$
(re"erred availa'ilit3 policies
(-3sical se$re$ation and percepti'lee%tra service
Set optimal capacit3 utili4ation level
7""er loer displacement costalternatives
So(rce) J* Wirtz+ S** ,i-es+ J*.** .o and * atterson+ 1even(e Manage-ent) 1esolving otential C(sto-er Conlicts+3 Jo(rnal o 1even(e and ricingManage-ent+ 200$+ 4ol* 2 5$) 2#6"22&*
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ey Categories of Rate Fences 8?:Table !4
Rate Fences E*a!ples
+h)sical (product*related# 'ences
&asic product Class of travel (business2econom) class#
$ize and furnishing of a hotel room$eat location in a theater
2!enities 'ree brea%fast at a hotel6 airport pic%up6 etc!
'ree golf cart at a golf course
Service level
+riorit) wait*listing;ncrease in baggage allowances
Dedicated service hotlines
Dedicated account management team
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ey Categories of Rate Fences 8D:Table !4
+onphysical Fences
Transaction Characteristics
Ti!e of )oo%ing or
reservation
Re5uirements for advance purchase
,ust pa) full fare two wee%s before departure
Location of )oo%ingor reservation
+assengers boo%ing air tic%ets for an identical
route in different countries are charged different
prices
Fle*i)ility of tic%etusage
'ees2penalties for canceling or changing a
reservation (up to loss of entire tic%et price#
8onrefundable reservation fees
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ey Categories of Rate Fences 8A:Table !4
+onphysical Fences 8cont
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ey Categories of Rate Fences 8B:Table !4
+onphysical Fences 8cont
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 22
Relating Price &uc%ets and Fences to.e!and Curve8'ig !>#
(rice
perseat
Capacit3 o" 1stclass ca'in
Capacit3 o" aircra"t8o o" seats demanded
1stclass
Full "are econom3 .no restrictions0
1 6 ee advance purc-ase
1 6 ee advance purc-ase9 Saturda3 ni$-t sta3
6 ee advance purc-ase9 Saturda3 ni$-t sta3
Speci"ied "li$-ts9 'oo on :nternet9 no
c-an$es/re"unds
;ate sales t-rou$-consolidators/:nternet9no re"unds
6ee advance purc-ase9 Saturda3 ni$-t sta39
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2$
Ethical Concerns in Pricing
Custo!ers are vulnera)le when service is hard to evaluateor they don
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2%
.esigning Fairness intoRevenue anage!ent
.esign clear7 logical7 and fair price schedules and fences
(se high pu)lished prices and present fences asopportunities for discounts rather than ,uoting lowerprices and using fence as )asis to i!pose surcharges
Co!!unicate consu!er )enefits of revenue!anage!ent
(se )undling to 0hide1 discounts
Ta%e care of loyal custo!ers
(se service recovery to co!pensate for over)oo%ing
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2!
Putting Service Pricinginto Practice 8?:
$ow !uch to charge' The pricing tripod model provides a useful departure point
A specific figure must be set for the price
8eed to consider the pros and cons6 the ethical issues
#hat )asis for pricing' 8$ow define unit of service':
Completing a tas%
Admission to a service performance
Time based ,onetar) value of service delivered
(e!g!6 commission#
Consumption of ph)sical resources(e!g!6 food and beverages#
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Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 26
Putting Service Pricinginto Practice 8D:
#ho should collect pay!ent' $ervice provider or specialist intermediaries
Direct or nondirect channels
#here should pay!ent )e !ade' Convenientl) located intermediaries
,ail2ban% transfer
#hen should pay!ent )e !ade'
;n advance
?nce service deliver) has been completed
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Putting Service Pricinginto Practice 8A:
$ow should pay!ent )e !ade' Cash
To%en
$tored value card
0lectronic fund transfer
Charge card (debit2credit#
@ouchers
Third*part) pa)ment
$ow to co!!unicate prices'
Relate the price to that of competing products
0nsure price is accurate and intelligible