PRICING & REVENUE

MANAGEMENT IN
SERVICES
Whats Pricing???

Marketing is the only revenue generating function in

an organization

Rest incur costs

Pricing is the mechanism by which sales are

transformed into revenues
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? (educational, legal
services)

Importance of time factor--same service may have more

value to customers when delivered faster (complicated
surgery)
Objectives of Pricing Strategies

Revenue and profit obectives

!eek profit (Ma"imize revenue from fi"ed

capacity)

#over costs

Patronage and user base$related obectives

%uild demand (hotels discount during non$peak

season)

%uild a user base (encourage trial&mobile phone

services)
he Pricing ri!od
Pricing Strategy
Costs
Competition
Value to customer
hree Main "!!roaches to
Pricing

Cost-Based Pricing

!et prices relative to financial costs

Competition-Based Pricing

Monitor competitors' pricing strategy (especially if

service lacks differentiation)

Value-Based

Relate price to value perceived by customer

Cost-Based Pricing

!trategy is to cover the costs (fi"ed ( variable ) then

price accordingly

)eed to evaluate (break even point)

Eg: For a 200 room hotel to cover fixed &

variale costs of ! cr"#r$ if the avg room rent
is %s& 2000$ it 'ill need to sell 20000 room
nights to customers out of the total capacit#
of ()000&

*f the price charged is %s& +,00$ the rea-

even volume 'ill rise to 2.000 room nights

*f the price no' is increased to %s& 2.00$ the

rea- even volume 'ill come do'n to +,000
room nights
#o$!etition %ased Pricing

*irms with undifferentiated service offerings go for it

#ustomers may go for the cheapest in absence of any

perceived difference

Price #ompetition increases with

+, -ncreasing no, of competitors
., -ncrease of substitute offers
/, -ncreasing surplus capacity in the industry
#o$!etition %ased Pricing&

Following Reduces price competition

+, )on$price related costs (eg0 complementary lounges
for credit card service)
., Personalization ( customization (eg0 %.% sales)
/, 1ime ( location specificity reduce choice (eg0
2rgent surgery ( hospitalization)
Perceived
Benefits
Time
e
Effort
'et (alue ) (%enefits * Outlays)

3alue is whatever - want in a product

4uality - get for the

price - pay
Perceived
Outlays
(alue %ased Pricing

Pricing !trategies to Reduce 2ncertainty

service guarantees

benefit$driven (pricing that aspect of service that directly

benefits the customers)

Relationship Pricing

non$price incentives (eg0 complimentary spas in 5otels)

discounts for volume purchases

discounts for purchasing multiple services 6g0 71our ( 1ravel

service8 prices charged according to customization (ac car, /
star hotel, customized sight seeing)9
(alue %ased Pricing&

:ow$cost :eadership

;ppeal to customers on tight financial budget

6g0 -ndian Railways ( P!2 banks

Managing the Perception of 3alue

o
1rue for credence services
o
#ustomers have the feeling of being e"ploited
aking the e+a$!le of ata Sky
v services&,,
Pricing to reduce uncertainty&

Benefit driven pricing/&&1ata sky has priced its

services on the basis of the benefits it gives to a
customer0 clarity of viewing, better <uality, more
channels, active services etc,

Flat rate pricing/&&in 1ata sky 13 services=flat

rate of pricing limits ust with a base package to
which a consumer subscribes or the installation fee
and the set top bo" fee,
Pricing to reduce uncertainty&
%elationship pricing/&& 5ow does 1ata sky's
pricing strategies relate to developing and
maintaining long$term customer relationships?

>ffering free +. movies on a yearly package,

;dditional facilities like ;ctive cooking, ;ctive

cricket, ;ctive darshan, ;ctive 6nglish speaking
channels,

0o' cost leadership/&1ata sky offers it's 13

services at a cut cost of that a cable operator would
charge=plus giving added advantage of better
facilities attract customers ( promises <uantity with
<uality,

1anaging the perception of value/1ata sky

manages to communicate effectively with its
customers via their own channel (#h, )o, +??) to
help them recognize and appreciate the value they
receive,
rading off Monetary and 'on-
Monetary #osts
Which clinic would you patronize if you needed a chest x-
ray (assuming all three clinics offer good quality !

Price "#$

%ocated &$ min away

'y car or transit

(ext a)aila'le
appointment is in &
wee*

+ours, -onday .
/riday0 #am . &1pm

2stimated wait at
clinic is a'out 31 - 4$
minutes

Price "#$

%ocated &$ min away

'y car or transit

(ext a)aila'le
appointment is in &
wee*

+ours, -onday .
/riday0 #am . &1pm

2stimated wait at
clinic is a'out 31 - 4$
minutes
Clinic 5
Clinic 5

Price "&6$

%ocated next to your

office or college

(ext appointment is
in & day

+ours, -o .Sat0 #am

. &1pm

5y appointment -
estimated wait at
clinic is a'out 1 to &$
minutes

Price "&6$

%ocated next to your

office or college

(ext appointment is
in & day

+ours, -o .Sat0 #am

. &1pm

5y appointment -
estimated wait at
clinic is a'out 1 to &$
minutes
Clinic C
Clinic C
Clinic 7
Clinic 7

Price "4$

%ocated & hour away

'y car or transit

(ext a)aila'le
appointment is in 3
wee*s

+ours, -onday .
/riday0 8am . $pm

2stimated wait at
clinic is a'out 6 hours

Price "4$

%ocated & hour away

'y car or transit

(ext a)aila'le
appointment is in 3
wee*s

+ours, -onday .
/riday0 8am . $pm

2stimated wait at
clinic is a'out 6 hours
.evenue Manage$ent

#oncept of ma"imizing revenue from available capacity @ a

given time

%ased on price customi2ation $ charging different

customers 3value segments4 different prices for same
product

;lso called as Ayield management' is basically supply (

demand management

1he least price sensitive segment is allotted capacity at

highest price, followed by the ne"t segment @ lower price (
so on
.evenue Manage$ent

2seful in dynamic markets where demand can be divided

into different price uc-ets according to price sensitivity

6g0 2seful in pricing tickets of ;irlines, hotels offering

discounts during non peak periods

Revenue Management uses mathematical models to

e"amine historical data and real time information
.evenue Manage$ent /ith
"irline Services e+a$!le

%usiness travelers often reserve airline tickets @ a

short notice, but vacationers may book it about few
months in advance

; good revenue management system is able to predict

accurately how many customers will use a service for a
given slotBtime period
.evenue Manage$ent /ith
"irline Services e+a$!le

-f a firm prices too low, it will e"perience a higher

booking pace ( its cheaper seats will fill up <uickly

-f the initial pricing is too high, the firm will get a very
low share of early booking segments ( may later have
to sell e"cess capacity last minute at very low prices to
still recover some contribution towards its fi"ed cost
he Strategic 0evers of
.evenue (1ield) Manage$ent
Quadrant 4:
+ospitals
Quadrant 3:
9estaurants
:olf Courses
;npredicta'le
Quadrant 2:
+otel 9ooms
7irline Seats
Quadrant 1:
-o)ies
Stadiums<7renas
Predicta'le
D
u
r
a
t
i
o
n
Varia'le /ixed
Price
2thical #oncerns in Pricing

Many services have comple" pricing schedules (6g0 related

to hospital8 legal services)

hard to understand

difficult to calculate full costs in advance of service

2nfairness and misrepresentation in price promotions

misleading advertising

hidden charges
3"'4 1O5