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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 2
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 3
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 4
Pricing Strategy Stands on
Three Foundations
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 5
The Pricing Tripod
(Fig 5.2)
Pricing strategy
Competition
Costs Value to customer
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 6
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 7
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 8
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 9
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)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 10
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 11
Trading Off Monetary and
Non-monetary Costs (Fig 5.7)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 12
Revenue Management:
What It Is and How It Works
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 13
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 14
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 15
Key Categories of Rate Fences (2)
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 16
Key Categories of Rate Fences (3)
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)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 17
Key Categories of Rate Fences (4)
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 18
Ethical Concerns in Service Pricing
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 19
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 20
Putting Service Pricing
into Practice
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 21
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?
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 5- 22
