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Demand and Capacity Management
Issues for capacity-constrained service: lack of inventory capabilities.
Variation in demand pattern.
Strategies to adjust supply and demand.
Inventory Demand Through Waiting Lines and Reservations
• Shifting demand to match capacity
• Adjusting capacity to meet demand.
Demand and Capacity Management
One of service industry is hospitality industry : Prominent problem is seen in the hotels.
Case of Ritz-Carlton Hotel in Phoenix, Arizona Challenge for the hotel is to fill 281 rooms 365 days of the year.
The variation in demand is tremendous.
Form November –mid April the demand is high but as the temp rises the demand fallsconsiderably.
Hotels have a decent traffic of business travelers, so demand on weekends decreases.
The focus is to manage the peaks and valleys of these demands
Demand and Capacity Management
The fundamental issues is “The lack of inventory capabilities”.
Unlike manufacturing firms, service firms cannot built up inventories during the period of slowdemand to use later during high demands.
And this happen because of basic nature of the service.
So, Ritz-Carlton’s cannot move around to alternative location in the summer months.
The lack of inventory capability combined with fluctuating demand leads to a variety ofpotential outcomes:
Excess demand
Demand exceeds optimum capacity
Demand and supply are balanced at the level of optimum capacity
Excess capacity
Demand and Capacity Management
Source: C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy: chap9, p261
Demand and Capacity ManagementT
ime Legal
Consulting
Accounting
Medical
Lab
or Law firm
Accounting firm
Consulting firm
Health clinic
Eq
uip
men
t Delivery service
Telecommunication
Network services
Utilities
Health club
Fac
iliti
es
Hotels
Resturants
Hospitals
Airlines
Schools
Theatres
Chruches
Capacity Constraints
Demand and Capacity Management
Analyzing Demand patterns :
• Record Demand
• Demand may seem random, but analysis mayreveal a demand cycle for different segments
• Keep good records of transactions to analyzedemand patterns. For this we can use varioussoftware . E.g. : “Feastic” does it for restaurants.
Demand and Capacity Management
Analyzing demand patterns:
• Random demand fluctuations
• Underlying causes of randomly changing demandlevels
• Weather
• Health problems
• Accidents, Fires, Crime
• Natural disasters
Demand and Capacity Management
Strategies for matching capacity with demand
Shifting demand to match capacity
Shifting capacity to match demand.
Demand and Capacity Management
Shifting demand to match capacity
• The strategy is to shift customers away from periods inwhich demands exceeds capacity, by convincing them touse the service during periods of slow demand.
• E.g.: happy hours in fast food chains, 50% discounts indominos in office hrs, all ladies night in cafes,
• This all is done to attract more customers to increasedemand and thus better utilize its productive capacity.
Demand and Capacity Management
Demand too high Communicate busy days and times to
customers.
Modify timing and locations of servicedelivery
Offer incentives for nonpeak usage
Set priorities by taking care of loyal orhigh-need customers first.
Charge full price for the service –nodiscounts.
Demand too low Stimulate business from current
market segments.
Advertise peak usage times andbenefits of non-peak use
Vary how the facility is used.
Differentiate on price.
Vary service offering.
Shifting demand to match capacity
Demand and Capacity Management
Adjusting capacity to meet demand
• This strategy focuses on matching supply and demand focuses on adjusting capacity.
• The main aim is to adjust, stretch and then align capacity to match customer demand.
• During period of high demand organization seek to expand capacity and in case of low demand it shrink the capacity to not waste the resources.
Demand and Capacity Management
Demand too high Stretch time, labor, facilities and
equipment temporarily.
Use part-time employees
Cross-train employees
Hire part-train employees
Request overtime work fromemployees
Subcontract or outsource activities.
Rent or share facilities and equipment
Demand too low Schedule downtime during periods of
low demand.
Perform maintenance, renovations.
Schedule vacations
Schedule employee training
Lay off employees
Modify or move facilities andequipment.
Adjusting capacity to meet demand
Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• When demand exceed supply
• Steps to take to inventory demand (keep for use later)
• Asking customers to wait in line (queue), usually on a first-come first-served basis
• Offering customers the opportunity to reserve or book capacity in advance
Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Waiting lines
• Almost nobody likes to wait
• An average person may spend up to 30 minutes/day waiting in line—equivalent to 20 months in an 80 year lifetime
• Not all queues take physical waiting in a single location
• Queues may be physical but geographically dispersed
• Some are virtual
Demand and Capacity Management
Source:C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy
Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• Benefits of reservations
• Controls and smooth the demand
• Data captured helps organizations
• Prepare financial projections
• Plan operations and staffing levels
• Benefits businesses. Allows management to make sure some time is kept free foremergency jobs
• Pre-sells service
• Informs and educates customers in advance of arrival
• Saves customers from having to wait in line for service (if reservation times are honored)
Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• characteristics of well designed reservations
• Fast and user-friendly for customers and staff
• Answers customer questions
• Offers options for self service (e.g. Web)
• Accommodates preferences (e.g., room with view)
• Deflects demand from unavailable first choices to alternative times and locations
Demand and Capacity Management
Inventory Demand Through Waiting Lines and Reservations
• Reservations
• Reservations strategies
• Reservations Strategies Should Focus on Yield
• Yield= actual revenue/potential revenue
• Yield analysis helps managers recognize opportunity cost of allocating capacity to one customer/segment when another segment might yield a higher rate later
• Decisions need to be based on good information
• Detailed record of past usage
• Supported by current market intelligence and good marketing sense
• Realistic estimate of changes of obtaining higher rated business
• When firms overbook to increase yield,
• Victims of over-booking should be compensated to preserve the relationship
PRICING OF SERVICES
• An effective pricing is central to financial success.
• Services organizations even use different terms todescribe the prices they set;
• Consumers often find service pricing
universities talk about tuition
Professional firms collect fees
Banks impose interest & services charges- the list goes on.
Different to understand- insurance products or hospital bills
Risky- when you make a hotel reservation on 3 different days, you may be
offered 3 different prices.
Sometimes even unethical- many bank customers complain about an array of
fees & charges they perceive as unfair.
OBJEVCTIVES OF PRICING OF SERVICES
Make the largest possible maximize demand, provided a
contribution or profit. Certain minimum level of revenue is
achieved.
Achieve a specific target
level, but do not seek to achieve full capacity utilization.
Maximize profits.
build market share and/or a
Cover fully allocated costs, large user base, especially if there are a
including corporate overhead. Lot of economies of scale that lead to
competitive cost advantage.
Cover costs of providing one FOR EXAMPLE:
particular service, excluding If development or fixed costs are high.
Overhead.
REVENUE & PROFIT OBJECTIVES
PATRONAGE & USER
BASED OBJECTIVES
THREE FOUNDATIONS OF PRICING STRATEGY
Once the pricing objectives are understood, we can focus on thepricing strategy.
The foundations of pricing strategy can be described as:
PRICING
STRATEGIES
COSTS
(to the
provider)
COMPETITORS
(PRICING)
VALUE TO
THE
CUSTOMERS
In many service industries, pricing used as to be viewed from financial andaccounting standpoint; therefore, cost-plus pricing often was used.
In these three pricing strategy, the costs a firm needs to recover usuallysets a minimum price, or floor, for specific service offering.
THREE FOUNDATIONS OF PRICING STRATEGY
APPROACHES TO PRICING SERVICES
COST BASED PRICING
(PRICE= DIRECT COST+ OVERHEAD COST+
PROFIT MARGIN)
COMPETITION BASED PRICING
1. When services are standard across providers, such as in dry cleaning
industry:
2. In oligopolies with a few large service providers, such as in airline or
rental car industry.
DEMAND BASED PRICING• Involves setting prices consistent with customer perception of
value: prices are based on what customers will pay for the
service provided.
Three Basic Price Structures and Difficulties Associated with Usage for Services
PROBLEMS:1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
PROBLEMS:1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
PROBLEMS:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor
COST-BASED PRICINGIn this approach, a company determines expenses from raw materials
and labor, adds amounts or percentages for overhead and profits.
direct costs=> materials & labor that are associated withdelivering the service.
overhead costs=> share of fixed costs.
profit margin=> percentage of full costs
(DIRECT+OVERHEAD COSTS).
PRICE= DIRECT COSTS+ OVERHEAD
COSTS+ PROFITS MARGIN
F
COMPETITION BASED PRICING
r market.
SITUATIONS WHEN THIS APPROACH IS USEDPREDOMINANTLY:
i. when services are standard across providers, such as in the drycleaning industry.
ii. in oligopolies with a few large service providers, such as in theairline or rental car industry.
=> difficulties involved in provision of services sometimes makecompetition based pricing less simple than it is in goods industries.
DEMAND BASED PRICING
involves setting prices consistent with customer perceptions of the value: prices are based on what customer will pay for the services provided.
=> services and goods differ with respect to this form of pricing is that information on service costs may be less available to the customers, making monetary price not as salient a factor in initial service selection as it is in goods purchasing.
SUMMARY OF SERVICE PRICING STRATEGIES FOR FOUR CUSTOMER DEFINITIONS OF VALUE
Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing
In detail….
A. Pricing strategies when the customers means “Value Is Low Price”
DISCOUNTING:
Service providers offer discounts or price cuts to communicate to price-sensitive
buyers that they are receiving value.
ODD PRICING:
It is the practice of pricing services just below the exact dollar amount to make
buyers perceive that they are getting a lower price.
SYNCHRO-PRICING:
It is the use of price to manage demand for a service by capitalizing on customers
sensitivity to prices.
PENETRATION PRICING:
In which new services are introduced at low prices to stimulate trial and
widespread use.
This strategy is appropriate when;
i. Sales volume of the service is very sensitive to price, even in the early stage of
introduction.
ii. It is possible to achieve economies in unit costs by operating at large volumes.
B.
Pricing strategies when the customer means “Value Is Everything IWant In a Service”
PRESTIGE PRICING:
It is a special form of demand-based pricing by service marketers who
offer high-quality or status services.
For certain services- restaurants, health clubs, airlines and hotels- a
higher price is charged for the luxury end of the business.
SKIMMING PRICING:
Skimming, a strategy in which new services are introduced at high
prices.
In this situation, customers are more concerned about obtaining the
service than about the cost of the service, allowing service provider
to skim the customers most willing to pay the highest prices.
C. Pricing strategies when the customers means “Value Is The Quality I Get For The Price I Pay”
VALUE PRICING:
It involves assembling a bundle of services that are desirable to a
wide group of customers and then pricing them lower than they
would cost alone.
MARKET SEGMENTATION PRICING:
with this strategy, a service marketer charges different prices to
groups of customers for what are perceived to be different quality
level of service, even though there may not be corresponding
differences in the costs of providing the service to each of these
groups.
D. Pricing strategies when the customer means “Value Is All That I Get For All That I Give”
PRICE BUILDING:
When customers find value in a package of services that are interrelated, price
bundling is an appropriate strategy . Bundling allows customers to pay less than
when purchasing each of the services individually.
COMPLEMENTARY PRICING:
this strategy includes 3 related strategies;
i. CAPTIVE PRICING=> the firm offers abase service or product and then
provides the supplies or peripheral services needed to continue using the
service.
ii. TWO PART STRATEGY=> the service price are broken into a fixed fee
plus variable usage fees.
iii. LOSS LEADERSHIP=> is the term typically used in retail stores
provides place a familiar service on special largely to draw the customer
to the store and reveal other levels of services available at high prices.
APPLYING THE FLOW MODEL OF DISTRIBUTION TO SERVICES
Distribution embraces three interrelated elements:
Information and promotion flow To get customer interested in buying the service
Negotiation flow To sell the right to use a service
Product flow To develop a network of local sites
DISTINGUISHING BETWEEN DISTRIBUTION OF SUPPLEMENTARY AND CORE SERVICES
Distribution relates to both core services andsupplementary services
Core services for people processing and possession processing services requirephysical locations
Core services for mental stimulus processing and information processing can bedistributed electronically
Supplementary services can be tangible or intangible in nature; latter can bedistributed widely and cost-effectively via nonphysical channels
Telephone
Internet
INFORMATION AND PHYSICAL PROCESSES OF AUGMENTED SERVICE PRODUCT
Exceptions
Billing
Payment
Informationprocesses
InformationConsultation
Safekeeping
Physical processes
Order-taking
Core
Hospitality
DISTRIBUTION OPTIONS FOR SERVING CUSTOMERS
Customers visit service site Convenience of service factory locations and operational schedules important when
customer has to be physically present
Service providers go to customers Unavoidable when object of service is immovable
More expensive and time-consuming for service provider
Service transaction is conducted remotely Achieved with help of logistics and telecommunications
SIX OPTIONS FOR SERVICE DELIVERY
Customer goes to service organization
Service organization comes to customer
Customer and service organization transact remotely (mail or electronic communications)
Theater
Barbershop
Bus service
Fast-food chain
House painting
Mobile car wash
Credit card company
Local TV station
Mail delivery
Broadcast network
Telephone company
Type of Interaction between Customer and Service Organization
Single Site Multiple Sites
Availability of Service Outlets
CHANNEL PREFERENCES VARY AMONG CUSTOMERS
For complex and high-perceived risk services, people tend to rely on personalchannels
Individuals with greater confidence and knowledge about a service/channel tendto use impersonal and self-service channels
Customers with social motives tend to use personal channels
Convenience is a key driver of channel choice
PLACES OF SERVICE DELIVERY
Cost, productivity, and access to labor are key determinants to locating a servicefacility
Locational constraints Operational requirements
- Airports
Geographic factors
- Ski resorts
Need for economies of scale
- Hospitals
THE CHALLENGE OF DISTRIBUTION IN LARGE DOMESTIC MARKETS
Marketing services (i.e., physical logistics) face challenges due to: Distances involved (geographic areas)
Existence of multiple time zones
Multiculturalism (especially, immigrants and indigenous people)
Differences in laws and tax rates
Large U.S. companies counter this by: Targeting specific market segments
Seeking out narrow market niches
Serving multiple segments across a huge geographic area is biggest marketingchallenge
PLACES OF SERVICE DELIVERY
Mini-stores Creating many small service factories to maximize geographic coverage
- Automated kiosks
Separating front and back stages of operation
- Taco Bell
Locating in multipurpose facilities Proximity to where customers live or work
- Service stations
- Service Perspectives
TIME OF SERVICE DELIVERY
Traditionally, schedules were restricted
Service availability limited to daytime, 40 to 50 hours a week
Sunday historically considered as a rest day in Christian tradition,Saturday in Jewish tradition, and Friday in Muslim tradition
Today
For flexible, responsive service operations:
- 24/7 service—24 hours a day, 7 days a week, around the world
Some organizations still avoid 7-day operations, for example:
- Atlanta-based Chick-fil-A
“Being closed on Sunday is part of our value proposition”
SERVICE DELIVERY INNOVATIONS FACILITATED BY TECHNOLOGY
Technological Innovations
Development of “smart” mobile telephones and PDAs as well as Wi-Fi high-speed Internettechnology that links users to Internet from almost anywhere
Voice-recognition technology
Websites
Smart cards
- Store detailed information about customer
- Act as electronic purse containing digital money
Increase accessibility of services
Deliver right information or interaction at right time
Create and maintain up-to-date real-time information
E-COMMERCE: MOVE TO CYBERSPACE
Internet facilitates 5 categories of “flow” Information
Negotiation
Service
Transactions
Promotion
Electronic channels offer complement/alternative to traditional physical channels
Convenience (24-hour availability, save time, effort)
Ease of obtaining information online and searching for desired items
Better prices than in many bricks-and-mortar stores
Broad selection
E-COMMERCE: MOVE TO CYBERSPACE
Recent Developments link Websites, customer management (CRM) systems, andmobile telephony
Integrating mobile devices into the service delivery infrastructure can be used asmeans to: Access services
Alert customers to opportunities/problems
Update information in real time
SPLITTING RESPONSIBILITIES FOR SUPPLEMENTARY SERVICE ELEMENTS
Challenges for original supplier
Act as guardian of overall process
Ensure that each element offered by intermediaries fits overall service concept
As created by originating firm
As enhanced by distributor
As experienced by customer
+Core = Core
Core product Supplementary services
Total experience and benefits
FRANCHISING
Popular way to expand delivery of effective service concept
Franchising is a fast growth strategy, when Resources are limited
Long-term commitment of store managers is crucial
Local knowledge is important
Fast growth is necessary to preempt competition
Study shows significant attrition rate among franchisors in the early years of anew franchise system One-third of all systems fail within first 4 years
Three-fourths of all franchisors cease to exist after 12 years
Disadvantages of franchising Some loss of control over delivery system and, thereby, over how
customers experience actual service
Effective quality control is important yet difficult
Conflict between franchisees may arise especially as they gainexperience
Alternative: license another supplier to act on the original supplier’sbehalf to deliver core product, for example: Trucking companies
Banks selling insurance products
References:
Zeithaml, Valarie A; Mary Jo Bitner, Dwayne D. Gremler and Ajay Pandit (2011). Service Marketing: Integrating Customer Focus across Firm 6e; McGraw Hill Education (India) Pvt. Ltd, New Delhi. Chapter 15,12 and 17.
Lovelock,Christopher; Jochen Wirtz and Jayanta (2011) Service Marketing-People, Technology, Strategy, 7e.: Pearson, New Delhi.
harbert.auburn.edu/~lettwil/servch4
http://www.entrepreneur.com/encyclopedia/pricing-a-service
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