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Chapter 6

Transcript of Love Lock 06

Chapter 6

Pricing and Revenue Management

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 1

What Makes Service Pricing Strategy Different (and Difficult)?

No ownership of services--hard for firms to calculatefinancial costs of creating an intangible performance unit of service and establish basis for pricing? are they getting in return for their money? value to customers when delivered faster create differences in perceived value

Variability of inputs and outputs--how can firms define a Many services hard for customers to evaluate--what Importance of time factor--same service may have more Delivery through physical or electronic channels--may

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 2

Objectives of Pricing Strategies

Revenue and profit objectives Seek profit Cover costs

Patronage and user base-related objectives Build demand Build a user base

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 3

The Pricing Tripod (Fig. 6.1)

Pricing Strategy

CostsSlide 2004 by Christopher Lovelock and Jochen Wirtz

Competition Value to customerServices Marketing 5/E

6- 4

Three Main Approaches to Pricing

Cost-Based Pricing Set prices relative to financial costs

(problem: defining costs)

Competition-Based Pricing Monitor competitors pricing strategy

(especially if service lacks differentiation) Who is the price leader? (one firm sets the pace)

Value-Based Relate price to value perceived by customer

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 5

Activity-Based Costing: Relating Activities to the Resources They Consume

Managers need to see costs as an integral part of a firmseffort to create value for customers

When looking at prices, customers care about value tothemselves, not what production costs the firm

Traditional cost accounting emphasizes expensecategories, with arbitrary allocation of overheads create and deliver service (do they add value?) variety of products produced complexity of products demands made by individual customersServices Marketing 5/E

ABC management systems examine activities needed to Must link resource expenses to:

Slide 2004 by Christopher Lovelock and Jochen Wirtz

6- 6

Net Value = (Benefits Outlays)(Fig. 6.3)

Effort Time

Perceived Benefits

e

Perceived Outlays

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 7

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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6- 8

Paying for Service: The Customers PerspectiveCustomer 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 anyof the five senses)6- 9

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Determining the Total Costs of a Service to the Consumer (Fig. 6.4)Search Costs Price Related Monetary Costs Time Costs Purchase and Use Costs Physical Costs Psychological Costs Sensory Costs Necessary follow-up Problem solvingSlide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E

Operating Costs Incidental Expenses

After Costs

6 - 10

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) ? Clinic 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

Clinic B 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 minutesServices Marketing 5/E

Clinic C 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 minutes6 - 11

Slide 2004 by Christopher Lovelock and Jochen Wirtz

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

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 12

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 dividedinto different price buckets according to price sensitivity

Requires rate fences to prevent customers in one valueand real time information to determine

segment from purchasing more cheaply than willing to pay

RM uses mathematical models to examine historical data what prices to charge within each price bucket how many service units) to allocate to each bucket

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 13

The Strategic Levers of Revenue (Yield) ManagementPrice Fixed DurationQuadrant 1: PredictableMovies Stadiums/Arenas Function Space

VariableQuadrant 2:Hotel Rooms Airline Seats Rental Cars Cruise Lines

Quadrant 3: UnpredictableRestaurants Golf Courses

Quadrant 4:Continuing Care Hospitals

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 14

Dealing with Common Customer Conflicts Arising from Revenue ManagementCustomer conflict can arise from: Perceived Unfairness & Perceived

Marketing tools to reduce customer conflicts: Fenced Pricing Bundling Categorising High Published Price Programme for Oversale Preferred Availability Policies Offer Lower Displacement Cost

Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability Unfulfilled Inventory Commitment Unfulfilled Demand of Regular

Well designed Customer Recovery

Customers Unfulfilled Price Expectation of Group Customers Change in the Nature of the Service

Alternatives Physical Segregation & Perceptible Extra Service Set Optimal Capacity Utilisation Level

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 15

Price Elasticity (Fig. 6.6)

Price per unit of service

Di De

Di

De

Quantity of Units DemandedDe : 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.

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 16

Key Categories of Rate Fences (Table 6.2)Rate Fences Basic Product Examples

Physical (Product-related) Fences

Amenities Service Level

Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 17

Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences Transaction Characteristics Time of booking or reservation Location of booking or reservation Flexibility of ticket usage

Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for anidentical route in different countries are charged different prices

Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 18

Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences (contd) 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 Price depends on departure location, esp in international travel Prices vary by location (between cities, citycentre versus edges of city)

Location of consumption

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

6 - 19

Key Categories of Rate Fences (Table 6.2 contd)

Non Physical Fences (contd) Buyer Characteristics Frequency or volume of consumption Group membership Size of customer group

Member of certain loyalty-tier