Pricing & Revenue Management

Services Marketing - SZABIST

Role of Pricing
Various terms for Pricing Difficulties in Services Pricing
Understanding of costs Value Created for Customers Competitors Pricing

Pricing and Financial Success

Role of Marketing in Revenue Generation Traditional Approach to Pricing

Services Marketing - SZABIST

Objectives for Setting Prices

Revenue and profit objectives
Seek profit Cover costs

Patronage and user-base related objectives

Build demand Build a user base

Services Marketing - SZABIST

Three Basic Price Structures and Difficulties Associated with Usage for Services

PROBLEMS:
1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value

PROBLEMS:
1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value

PROBLEMS:
1. Monetary price must be adjusted to reflect the value of non-monetary costs 2. Information on service costs less available to customers, hence price may not be a central factor

Pricing of Services

Difference between Services & Goods`

Limited or inaccurate reference point of service Monetary price is only one of the prices (Time cost, Search cost, Convenience cost) Price is a good indicator of quality of Service

Pricing Strategy : It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the competitive edge to capture the market.

STEPS in designing the PRICING STRATEGY

Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning. Make marketing mix decisions - define the service, distribution, and promotional tactics. Estimate the demand curve - understand how quantity demanded varies with price.

STEPS in designing the PRICING STRATEGY

Calculate cost - fixed and variable costs associated with the service Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc

Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo)
Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts

Price ~ Quality
In the absence of other forms of communication from the company, price becomes the sole decisive factor in selection of a service High risk services customers associate price with service assurance eg. ?

Cost Based Pricing

Cost Based Pricing

Price = Direct Cost + Overhead Cost + Margin

Direct Cost = Material + labour used to produce the

service Overhead costs are apart from the fixed cost
Used in Services like Advertising , Contracting , etc.

Cost-Based Pricing
Establishing the Cost of Service
Fixed Cost Semi Variable Cost Variable Cost Contribution Margin Determining and Allocating Cost in Multiservice Facility Break-even Point
Price sensitivity Market size Maximum capacity

Services Marketing - SZABIST

Cost-Based Pricing
Traditional Approach
FC + SVC + VC

Activity Based Costing (ABC)

Mandatory Activities Discretionary Activities Unit Level Activity costs Batch Level Activity costs Overall Operation costs
Services Marketing - SZABIST

Fee for Service

Cost of the time involved in providing the service.
Eg. Professional services where charges are per hour like consultants, lawyers psychologists etc.

Competition Based pricing

Competition Based pricing

This approach is based on using the competitors price as the point of reference
When services are standard across providers. Eg: Fitness clubs, Driving classes, Computer classes etc. In oligopolies where there are few large service providers : Airlines

Going-rate Pricing

Price Signaling
Found in markets where there are a number of competitors. If any one company offers a lower cost advantage others immediately match the price. Eg. Airlines. In this type of pricing strategy the charges offered are the ones that are prevalent in the market for the same type of service. Eg. Tourist bus services, Car hires etc.

Competition-Based Pricing
Factors Increasing Price Competition
Number of Competitors Number of Substitutes Competitions Distribution & Substitution Increasing Surplus Capacity

Factors Decreasing Price Competition

Non-price-related costs Personalization, Customization and Switching Costs Time & Location Specificity

Services Marketing - SZABIST

Demand/Value based pricing

Demand/Value Based pricing

Unlike in cost based and competition based pricing, demand based pricing is customer focused and not company or market focused. This type of pricing is fixed keeping in mind what the customers are likely to pay for the perceived value offered by the service. For the determination of demand based pricing non monetary costs also have to be considered, as these contribute to the perception of value.

Value-Based Pricing
Enhancing Gross Value
Reduce Uncertainty
Benefit-Driven Pricing Flat Rate Pricing

Relationship Pricing
Discounts Price & Non-price Incentives Bundled Services

Low-Cost Leadership
Differentiate Low Cost & Low Quality Ensure Profits

Managing the Perception of Value

Services Marketing - SZABIST

Value-Based Pricing
Reducing Related Monetary & Nonmonetary Costs
Monetary Costs Nonmonetary Costs
Time Costs Physical Costs Psychological Costs Sensory Costs

Search Costs Purchase & Use Costs Post-consumption Costs

Services Marketing - SZABIST

Pricing Strategies When the Customer Defines Value as Low Price

Value is Low Price

Discounting Odd Pricing Synchro-pricing Penetration Pricing

Pricing Strategies When the Customer Defines Value as Everything Wanted in a Service

Value is Everything

I Want in a Service
Prestige Pricing Skimming Pricing

Pricing Strategies When the Customer Defines Value as Quality for the Price Paid

Value is the Quality

I Get for the Price I Pay

Value Pricing Market Segmentation

Pricing

Pricing Strategies When the Customer Defines Value as All that is Received for All that is Given

Value is All that

I Get for All that I Give

Price Framing Price Bundling Complementary Pricing Results-based Pricing

Price Wars
Price wars are frequent in industries where Cost differentiation opportunities exists Capital is intensive and products are homogeneous

Revenue Management
How revenue management works
Reserving Capacity for High Yield Customers Effect of Competitors Pricing on Revenue Management Price Elasticity

Services Marketing - SZABIST

Designing rate fences

Physical fences
Basic product Amenities Service level

Nonphysical fences
Transaction characteristics Consumption characteristics Buyer characteristics
Services Marketing - SZABIST

Ethical Concerns
Government Regulations Perceived Fairness & Trust Designing Fairness into Pricing Strategy
Clarity Highly published Communicate benefits Use bundling Retain loyal customers Service recovery
Services Marketing - SZABIST

Implementing Services Pricing

Pricing Issues
How much should be charge for this service? What should be the basis of pricing? Who should collect payment? Where should payment be made? How should payment be made? How should prices be communicated?

Services Marketing - SZABIST