Setting Prices and Implementing Revenue Management

Chapter 6
Setting Prices and

Implementing
Revenue
Management
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 1
Effective Pricing Is Central to
Financial Success
What Makes Service Pricing Strategy
Different and Difficult?
 Harder to calculate financial costs than a manufactured

good
 Difficulty in defining a “unit of service”
 Services hard to evaluate
 Customers may be prepared to pay more for faster delivery
 Delivery through physical or electronic channels—may

create differences in perceived value
Alternative Objectives for Pricing
(Table 5.1)
 Revenue and profit objectives

 Seek profit
 Cover costs
 Patronage and user-based objectives

 Build demand
 Build a user base
Pricing Strategy Stands on
Three Foundations
The Pricing Tripod
(Fig 5.2)
Pricing strategy
Competition
Costs Value to customer
Cost-Based Pricing:
Traditional vs. Activity-Based Costing
 Traditional costing approach

 Labour and infrastructure costs are considered fixed costs
 Service firms have higher ratio of fixed to variable costs found in
manufacturing
 Cost reduction decisions often cut these costs which leads to
reduced service levels and unhappy customers
 Activity-based costing (ABC)

 Sets of delivery activities and related costs
 Firms can pinpoint profitability of different services, channels etc
 When looking at prices, customers care about value to

themselves, not what service production costs the firm
Competition-Based Pricing
 When customers don’t see a difference between

competitive offerings, they choose the cheapest
 Price competition is reduced when

 Non- price related costs of using competing alternatives are high
 Personal relationships matter
 Switching costs are high
 Time and location specificity reduce choice
 When competing on price take into account the entire cost

to customers including:
 All related financial and non-monetary costs PLUS switching costs
 Compare this cost to the competition
Value-Based Pricing
Understanding Net Value (Fig 5.4)
 Customers evaluate competition

by comparing their perceived
benefits to their perceived
outlays
 Service pricing strategies should

enhance perceived value by:
 Reducing uncertainty
 Relationship enhancement Effort Time
e
 Low cost leadership Perceived
benefits Perceived
 Manage value perception outlays
Reduce Related Monetary and Non-
Monetary Costs
 Incremental financial outlays

 Includes the price of purchasing service and other expenses
 Expenses associated with search, purchase activity, usage
― E.g. Two theatre tickets also requires the cost of parking, babysitters etc.
 Non-monetary costs
 Time costs
 Physical costs
 Psychological (mental) costs
 Sensory costs (unpleasant sights, sounds,
feel, tastes, smells)
Defining Total User Costs (Fig 5.6)
Money Purchase
Search costs*
Time Operating costs
Physical effort Incidental

expenses
Purchase and Psychological
service encounter burdens
costs
Sensory
burdens
Necessary
After costs* follow-up
Problem * Includes all five

solving cost categories
Trading Off Monetary and
Non-monetary Costs (Fig 5.7)
Revenue Management:
What It Is and How It Works
Revenue Management (RM)
 RM charges more for customers booking service closer to time of

consumption instead of on a first come first served basis
 Charge different value segments different prices for same product
 Predicts how many customers will use a given service at a specific time at
each of several different price levels and then allocates capacity at each
level or price bucket
 If booking pace for a higher-paying segment is stronger than expected,
additional capacity is allocated to this segment and taken away from the
lowest- paying segment
 Rate fences allow customers to self segment on the basis of service
characteristics and willingness to pay.
 This helps companies restrict lower prices to customers willing to accept

certain restrictions
Key Categories of Rate Fences (1)
Table 5.2
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 pickup, etc.
 Free golf cart at a golf course
Service level  Priority wait-listing
 Increase in baggage allowances
 Dedicated service hotlines
 Dedicated account management team
Table 5.2
Nonphysical Fences
Transaction Characteristics
Time of booking or  Requirements for advance purchase

reservation  Must pay full fare two weeks before departure
Location of booking or  Passengers booking air tickets for an identical
reservation route in different countries are charged
different prices
Flexibility of ticket  Fees/penalties for canceling or changing a
usage reservation (up to loss of entire ticket price)
 Nonrefundable reservation fees
Table 5.2
Nonphysical Fences (cont’d)

Consumption Characteristics
Time or duration of  Early-bird special in restaurant before 6PM

use  Must stay over on Saturday for airline, hotel
 Must stay at least 5 days
Location of  Price depends on departure location, especially
consumption in international travel
 Prices vary by location (between cities, city
centre versus edges of city)
Table 5.2
Nonphysical Fences (cont’d)

Buyer Characteristics
Frequency or volume of  Member of certain loyalty tier with the firm
consumption 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
Ethical Concerns in Service Pricing
Designing Fairness into
Revenue Management
 Design clear, logical, and fair price schedules and fences
 Use high published prices and present fences as

opportunities for discounts rather than quoting lower prices
and using fence as basis to impose surcharges
 Communicate consumer benefits of revenue management
 Use bundling to “hide” discounts
 Take care of loyal customers
 Use service recovery to compensate for overbooking
Putting Service Pricing
into Practice
Pricing Issues:
Putting Strategy into Practice (Table 5.3)
 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?

Setting Prices and Implementing Revenue Management

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Chapter 6

Setting Prices and

 Harder to calculate financial costs than a manufactured

 Difficulty in defining a “unit of service”

 Services hard to evaluate

 Customers may be prepared to pay more for faster delivery

 Delivery through physical or electronic channels—may

 Revenue and profit objectives

 Patronage and user-based objectives

 Traditional costing approach

 Activity-based costing (ABC)

 When looking at prices, customers care about value to

 When customers don’t see a difference between

 Price competition is reduced when

 When competing on price take into account the entire cost

 Customers evaluate competition

 Service pricing strategies should

 Incremental financial outlays

Physical effort Incidental

After costs* follow-up

Problem * Includes all five

 RM charges more for customers booking service closer to time of

 This helps companies restrict lower prices to customers willing to accept

Rate Fences Examples

Time of booking or  Requirements for advance purchase

Nonphysical Fences (cont’d)

Time or duration of  Early-bird special in restaurant before 6PM

Nonphysical Fences (cont’d)

Size of customer group  Group discounts based on size of group

 Design clear, logical, and fair price schedules and fences

 Use high published prices and present fences as

 Communicate consumer benefits of revenue management

 Use bundling to “hide” discounts

 Take care of loyal customers

 Use service recovery to compensate for overbooking

 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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