5questions about Strategic Services Marketing

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StrategicServicesPricing_Lecture_8.pptx

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Autumn 2020

Associate Professor Francois Carrillat

Marketing Discipline Group

UTS Business School

24706 Strategic Services Marketing

A Customer Experience Perspective

Lecture 8: Pricing of Services (Ch. 15)

(see ‘Program’ in the 24706 Subject Outline)

Sessions 1-2

Chapter 1: Introduction to services

Chapter 2: The Gaps model of service quality

Chapter 8: Service innovation and design (blueprinting)

Chapter 9: Customer-defined service standards

Chapter 3: Customer expectations of services

Chapter 4: Customer perceptions of service

Chapter 10: Physical evidence and the servicescape

Chapter 6: Building customer relationships

Chapter 7: Service recovery

Chapter 11: Employees’ roles in service delivery

Chapter 12: Customers’ roles in service delivery

Chapter 13: Managing demand and capacity

Chapter 15: Pricing of services Chapter 14: Integrated marketing communications

NOTE: Chapters 5 and 16 are not explicitly discussed in lectures

Subject Overview: Textbook Readings & Exams

Sessions 3,4,5

Title: Services Marketing, Integrating Customer Focus Across the Firm

Authors: Valerie Zeithaml, Mary Jo Bitner, Dwayne Gremler

Publication Details: 2012, 6th Edition, McGraw Hill

Textbook: show and tell US view but will complement with examples international and australian.

An Alternative View: Rental / Non-Ownership View (1)

What is specific about the pricing of services? Lack of transparency

Variability impedes transparency of price

Providers unwilling to estimate prices

Collection of pricing information can be overwhelming

Price might not be visible

Even with internet; how much is a minute of cell phone conversation really costing you?

Unwilling to estimate: laywers will goive you a ball parrk estimate; sometimes very broad; in addition depends on outcome that is only partially under the control or not at all (legal) under the control of customer (medical).

Not visible: Bundling, unbundling : ex: airlines.

pay for coffee, water

Reference prices more difficult to establih for customers

An Alternative View: Rental / Non-Ownership View (1)

Why is pricing of services different? The Role of Nonmonetary Costs

An Alternative View: Rental / Non-Ownership View (1)

Pricing Strategy: Three Approaches

Cost-Based Pricing

Set prices relative to financial costs (problem: defining costs)

Competition-Based Pricing

Competitors’ pricing strategy as an anchor

Value-Based Pricing

Relate price to value perceived by customer

Necessarry to determine proice based on these 3 inptsL coist, competition, and value.

Cannot price below cost if that is the level where customer value your offering

Cannot ignore compeition price even is abve value treshold and cost treshold. 3 pronged stool; needs 3 to be balance and strike the right startegy.

An Alternative View: Rental / Non-Ownership View (1)

Pricing Strategy: Cost-Based

Price = Direct costs + Overhead Costs + Profit margin

Cost-based pricing strategies

Cost-plus service (high proportion of tangibles)

Fee for service (low proportion of tangibles)

Industries: utilities, contracting, advertising, wholesaling.

Challenge: price per unit BUT what is a unit of service?

Service inputs rather than ouputs

Input: lawyer bill per hour except for injury laweyers for charge based on outcome; commission but tis later form is value based pricing (see later startegy).

An Alternative View: Rental / Non-Ownership View (1)

Pricing Strategy: Competitor-Based Pricing

Competitor-based strategies

Price signaling (any price is matched)

Going- rate pricing (follow pricing of one market’s actor)

Pricing strategy used for differentiation from competitors

https://www.youtube.com/watch?v=gTrDadzS0FA&index=42&list=PLqpBJ9DtSj_4hLeSB8ws0SOD16v8GldUO

Price signaling: in highly concentrated

Going on rate dominated by small number of large companies)

Cash arte for banks is like price of corn syrup for Coca Cola or petrol iof building polymere plastic parts

CBA mobes forst in the pass it on department: passed on .2% then NAB who announced maybe pass on everythign passed only .2% just like CBA….

If banks follow going-rate how do they make profits on lending? By chargiunbg different fees on other apsects of the service: refinancing rules, switching banks for mortgage, sergvices fees, admin fees, transation fees, money transfer fees, etc. rules aout offset accounts.

Competitive Considerations

Price wars may help increase customer demand, but has detrimental effect on the financial bottom line of the firm.

Accent Group CEO Daniel Agostinelli banned discounting at its 430 shoe stores late last year.Ja Read more: http://www.afr.com/business/retail/accent-group-ceo-denounces-lazy-retailing-as-discounting-soars-20180329-h0y4lo#ixzz5CFJu7SMc Follow us: @ FinancialReview on Twitter | financialreview on Fac

ootwear retailer, RCG Corporation, has signed a deal to purchase Accent Group, owner of the Platypus Shoes, Skechers, Vans, and Timberland stores.

RCG, owner of Athlete’s Foot and Merrell, will pay between $180 million and $200 million for the company, which also holds the Australian

Competition-Based Pricing

Price competition is greatest when there is:

an increasing number of competitors

an increasing number of substitute offers

a wider distribution of competitor and/or substitution offers

reduced demand

an increasing surplus capacity in the industry

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 reduces choice

Managers should not only look at competitor’s prices dollar for dollar, but should examine all related financial and non-monetary costs

What is pricne competition? Hat sre its consequences for service providers for the industry

Do not want to get into a price war: grocery retail industry on the verge of being so.

An Alternative View: Rental / Non-Ownership View (1)

Pricing Strategy: Demand-Based Pricing

Perceived value: ‘consumer’s overall assessment of the utility of a service based on perceptions of what is received and what is given’

Factor in non-monetary costs

Time (opportunity cost; social status of segments)

Psychological

Physical

Convenience

Reduce time costs of service at each stage

Minimize unwanted psychological costs of service e.g., eliminate/redesign unpleasant/ inconvenient procedures

Eliminate unwanted physical costs of service

Decrease unpleasant sensory costs of service (unpleasant sights, sounds, smells, feel, tastes)

Suggest ways for customers to reduce other monetary costs

Demand Considerations

Demand for services tend to be more price inelastic compared to goods.

Cross-price elasticity considerations need to be examined because of price bundling or debundling.

Products are complementary if negative relationship exists.

Products are substitutes if positive relationship exists.

Yield management can be used to manage demand and maximize profits.

The concept of value in pricing

2 defining features of prices in services compared to goods;

1) knowledge of price is difficult to obtain (lack of transparency)

2) non monetary cost share can very large

Demand-Based Pricing Strategy: Customer-Defined Value

Value is low pri

Low price

Customers perceive that what they have to give up in monetary terms is the most important factor e.g., a ‘buy-one-get-one-free’ voucher at a restaurant chain

Whatever I want in a product or service

Customers believe value is represented in the benefits of a

product or service, rather than the cost e.g., my ISP offers 24 hour technical support, 7 days a week

ce very true for low value added services and intenagibility is low and sxtanardization achieveavkle easily. (retial, fast food, )

The quality I get for the price I pay

Customers see value as a trade-off between the money they give up and the quality they receive e.g., you pay more to stay in a 5* hotel, but know you will be more comfortable here than if you booked into a 3* hotel

What I get for what I give

Customers consider all the benefits they receive as well as all sacrifice components e.g., I pay a delivery charge if I use Coles Online, but I do not have to leave the house to go shopping

Need effective communication and personal explanations to explain value

Reduce related-monetary costs

Cut time spent searching for, purchasing and using service

Reduce non-monetary costs

Time Costs

Physical Costs

Psychological (Mental) Costs

Sensory Costs (unpleasant sights, sounds, feel, tastes, smells

Demand-Based Pricing Strategy: ‘Low Price’

Discounting

Odd pricing

Synchro-Pricing

Place differential (complex servicescape)

Time differentials

Quantity differentials

Differentials as incentives (increasing loyalty)

Penetration Pricing

Odd proicing not thqat prevalent in OZ…

Differentials as incenitves goodif confident that increase service use or more consuemrs using service will strenghten loyaltyt. Careful if service capacity already close to optimum and maximum decrease service qality for consuemrs (restaurant).

Sport example: give a taste to everybody important for future generation of customers.

Penetration: high demand elasticity; likely that cometition can match with – eg., for example delivery service from grocery store.

Demand-Based Pricing Strategy: ‘Everything I want in a service’

Skimming Pricing (major innovation)

Prestige pricing

Skimming compared to prestige; strong service innovation; strong improvement in service while prestigqe is luxury

Demand-Based Pricing Strategy: ‘The Quality I get for the Price I Pay’

Value pricing (bundling)

Market segmentation Pricing

Client category (eg., senior discount)

Service version (core service + supplementary)

Market segmentation pricing: prices acording to price sensitivity

Demand-Based Pricing Strategy: ‘All that I Get for All that I Give’

- Price framing

- Price bundling

- Complementary pricing (unbundling)

Captive pricing

Loss leadership

Results-based pricing

Framing: providing a referecence value ex groupon

Captive pricing: cable installation same strategy as printer and then nuying ink very expensive.

Airlines have been unbundling a lot: on Jetstar but not on Virgin; however ticket slightly cheaper.

TV channel bundles

Ethical dilemma with unbundling; cannot confuse customers on purpose.

Results based pricing: participation in movies

Minimizing consumer surplus through pricing

Quantity*price = $9 Quantity*price = $9

Full price strategy

Discounted price strategy

Pricing strategy that minimizes consumer surplus

Quantity*price = $25

In both the volume and margin pricing startegy cases revenue is the same

Yield management (a.k.a: “price discrimination”)

https://www.youtube.com/watch?v=-oJlJ5oo5AM

Price buckets:

Bucket: 1’54’ -

Yield management (a.k.a: “price discrimination”)

Yield Management: “The process of allocating the right type of capacity to the right kind of customer at the right price so as to maximize revenue or yield.”

Yield: “the extent to which an organization’s resources (or capacities) are achieving their full revenue-generating potential.”

Yield =

Actual revenue

Potential revenue

Where:

Actual revenue = actual capacity x average actual price

Potential revenue = total capacity x maximum price

200-room Hotel

Max room rate = $100/night

Potential Revenue = 200 x $100 = $20,000

All rooms sold at discounted rate ($50/night)

Yield = 200 x $50 /$20,000 = $10,000 = 50%

Full rate charged, but only 80 rooms sold

Yield = 80 x $100/$20,000 = $8,000 = 40%

Full rate charged for 80 rooms, discount for remaining 120 rooms

Yield = [(80 x $100) + (120 x $50)]/$20,000 = $14,000= 70%

Surbooking ispart of yled management: optimising capacity utiliation

Yield management (a.k.a: “price discrimination”)

Most effective when:

Relatively high fixed capacity

High fixed cost structure

Perishable inventory

Variable and uncertain demand

Varying customer price sensitivity

Revenue management is price customisation:

Charge different value segments different prices for same product based on price sensitivity

Revenue management uses mathematical models to examine historical data and real time information to determine

What prices to charge within each price bucket

How many service units to allocate to each bucket

Rate fences deter customers willing to pay more from trading down to lower prices (minimise consumer surplus)

Very important to keep capacity for highest paying customers since they tend to book at the end (business travelers for example).

An Alternative View: Rental / Non-Ownership View (1)

Let’s Revisit: What Pricing Strategy Are These?

Data rescue: Competitor a lot and cost a little (presumably already paid for it).

Form tickets to Olal card: make priceof service ore visible; you see how muche is cost when you tap off; less complicated (no need to carry mutple mybus 1 o2 o3 if need trips of different distances., automatic relaoding, no need to buy new tickets…..BUT…more costly and you are being tracked,

An Alternative View: Rental / Non-Ownership View (1)

And These?

Data rescue: Competitor a lot and cost a little (presumably already paid for it).

Ethical Concerns in Pricing

Customers are vulnerable when service is hard to evaluate

Many services have complex pricing schedules

Hard to understand

Difficult to calculate full costs in advance of service

Quoted prices not the only prices

Hidden charges

Many kinds of fees

Payment timing affects service usage in some cases (affect demand for services)

Too many rules and regulations

Customers feel constrained, exploited

Customers face unfair fines and penalties

https://www.youtube.com/watch?v=40YBTM1C70w&list=PLqpBJ9DtSj_4hLeSB8ws0SOD16v8GldUO&index=43

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

Dorada Tennis Club case study

How can we shift demand and increase capacity by exploiting one important characteristic of the game of tennis?