Chapter 7: Setting Prices and Implementing Revenue Management
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?
Importance of time factor--same service may have more value to customers when delivered faster
Delivery through physical or electronic channels--may create differences in perceived value
Objectives of Pricing Strategies
Revenue and profit objectives
Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base
Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs
(problem: defining costs)
Competition-Based Pricing
Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
Activity-Based Costing: Relating Activities to the Resources They Consume
Managers need to see costs as an integral part of a firm’s effort to create value for customers
When looking at prices, customers care about value to themselves, not what production costs the firm
Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to create and deliver service (do they add value?)
Must link resource expenses to:
variety of products produced
complexity of products
demands made by individual customers
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty
service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
Relationship Pricing
non-price incentives
discounts for volume purchases
discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price
Paying for Service:The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any of the five senses)
Increasing Net Value by Reducing Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
Based on price customization - charging different customers (value segments) different prices for same product
Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
RM 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
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change
Chapter 7: Setting Prices and Implementing Revenue Management
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?
Importance of time factor--same service may have more value to customers when delivered faster
Delivery through physical or electronic channels--may create differences in perceived value
Objectives of Pricing Strategies
Revenue and profit objectives
Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base
Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs
(problem: defining costs)
Competition-Based Pricing
Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
Activity-Based Costing: Relating Activities to the Resources They Consume
Managers need to see costs as an integral part of a firm’s effort to create value for customers
When looking at prices, customers care about value to themselves, not what production costs the firm
Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to create and deliver service (do they add value?)
Must link resource expenses to:
variety of products produced
complexity of products
demands made by individual customers
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty
service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
Relationship Pricing
non-price incentives
discounts for volume purchases
discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price
Paying for Service:The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any of the five senses)
Increasing Net Value by Reducing Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
Based on price customization - charging different customers (value segments) different prices for same product
Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
RM 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
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change
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Chapter 7: Setting Prices and Implementing Revenue Management
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?
Importance of time factor--same service may have more value to customers when delivered faster
Delivery through physical or electronic channels--may create differences in perceived value
Objectives of Pricing Strategies
Revenue and profit objectives
Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base
Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs
(problem: defining costs)
Competition-Based Pricing
Monitor competitors’ pricing strategy
(especially if service lacks differentiation)
Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
Activity-Based Costing: Relating Activities to the Resources They Consume
Managers need to see costs as an integral part of a firm’s effort to create value for customers
When looking at prices, customers care about value to themselves, not what production costs the firm
Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to create and deliver service (do they add value?)
Must link resource expenses to:
variety of products produced
complexity of products
demands made by individual customers
Enhancing Gross Value
Pricing Strategies to Reduce Uncertainty
service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
Relationship Pricing
non-price incentives
discounts for volume purchases
discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality
Must keep economic costs low to ensure profitability at low price
Paying for Service:The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
Financial costs:
price of purchasing service
expenses associated with search, purchase activity, usage
Time expenditures
Physical effort (e.g., fatigue, discomfort)
Psychological burdens (mental effort, negative feelings)
Negative sensory burdens (unpleasant sensations affecting any of the five senses)
Increasing Net Value by Reducing Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service
Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
Based on price customization - charging different customers (value segments) different prices for same product
Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
RM 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
Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change
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