LoveLock Chapter 5

7/24/2019 LoveLock Chapter 5

1/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #

Chapter 5:Exploring BusinessModels:Pricing and RevenueManagement


2/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2

Overview of Chapter 5

Effective Pricing Is Central to Financial Success

Pricing Strategy Stands on Three Legs

Revenue anage!ent" #hat It Is and $ow It #or%s

Ethical Concerns in Service Pricing

Putting Service Pricing into Practice


3/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " $

#hat Is a &usiness odel'

(se of effective pricing !echanis! to"

Transform sales into revenues

Recover costs

Create value for owners of business

ust clarify )usiness logic that e*plains how fir! candeliver value to custo!ers at an appropriate cost

+ot all )usiness !odels re,uire end user of specific

service to pay full costconsider third-party payers" Advertisers

Health insurers

Donors to nonprofit organizations

Tax subsidies for public services


4/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " %

#hat a%es Service Pricing Strategy.ifferent and .ifficult'

$arder to calculate financial costs of creating a serviceprocess or perfor!ance than a !anufactured good

/aria)ility of inputs and outputshow can fir!s define a0unit of service1 and esta)lish )asis for pricing'

Custo!ers find !any services hard to evaluatewhatare they getting in return for their !oney'

I!portance of ti!e factor

sa!e service !ay have !orevalue to custo!ers when delivered faster

.elivery through physical or electronic channels!aycreate differences in perceived value


5/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " !

2lternative O)3ectives for Pricing(Table !"#

Revenue and profit o)3ectives

$ee% profit

Cover costs

Patronage and user-)ased o)3ectives

&uild demand

- .e!and !a*i!i4ation

- Full-capacity utili4ation

&uild a user base- Sti!ulate trial and adoption of new service

- &uild !ar%et sharelarge user )ase


6/27


The Pricing Tripod'ig !"

Pricing strategy

CostsCompetition

Value to customer


7/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 7

Three ain 2pproaches to Pricing

Cost-)ased pricing $et prices relative to financial costs (problem defining costs#

Activit)*based costing

+ricing implications of cost anal)sis

Co!petition-)ased pricing

,onitor competitors- pricing strateg) (especiall) if servicelac%s differentiation#

.ho is the price leader/ Does one firm set the pace/

/alue-)ased pricing

Relate price to value perceived b) customer


8/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " &

Cost-)ased Pricing"Traditional vs6 2ctivity-)ased Costing

Traditional costing approach 0mphasizes expense categories (arbitrar) overhead allocation#

,a) result in reducing value generated for customers

2&C !anage!ent syste!s 1in% resource expenses to variet) and complexit) of goods2services

produced

3ields accurate cost information

#hen loo%ing at prices7 custo!ers care a)out value tothe!selves7 not what service production costs the fir!


9/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " '

/alue-)ased Pricing(nderstanding +et /alue 8'ig !4#

/alue e*change will not ta%e placeunless custo!er sees positive netvalue in transaction

+et value 9 Perceived )enefits tocusto!er 8gross value: !inus allPerceived outlays 8oney7 Ti!e7entalPhysical effort:

onetary price is not only perceivedoutlay in purchasing7 using a service

Consu!er surplus" difference)etween price paid and a!ountcusto!er would have )een willing topay in a)sence of other options

Perceived

benefits

Tim

e e

Efort

Perceivedoutlays


10/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #0

/alue-)ased Pricing"Strategies for Enhancing +et /alue

Enhance gross value)enefits delivered

Add benefits to core product

0nhance supplementar) service

,anage perceptions of benefits delivered

Reduce outlayscosts incurred )y custo!ers

Reduce price and2or other monetar) costs of ac5uisition and usage

Cut amount of time re5uired to evaluate6 bu)6 use service

1ower ph)sical and mental effort associated with purchase and use Reduce perceptions of amount of cost6 time6 effort re5uired


11/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " ##

/alue-)ased Pricing"Enhancing Perceptions of ;ross /alue

Reduce uncertainty $ervice guarantees

&enefit*driven7pricing aspect(s# of service that create value

'lat rate (5uoting a fixed price in advance#

Relationship pricing 8onprice incentives

Discounts for volume purchases

Discounts for purchasing multiple services

Low-cost leadership

Convince customers not to e5uate price with 5ualit)

9eep economic costs low to ensure profitabilit) at low price



Paying for Service"The Custo!er


13/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #$

Trading Off onetary and+on!onetary Costs 8'ig !#

#hich clinic would you patroni4e if you needed a chest *-ray 8assu!ing all threeclinics offer good ,uality:'

Price =>5

Located ?5 !ins away)y car or transit

+e*t availa)leappoint!ent is in ?wee%

$ours" on-Fri7 >2-?@P

Esti!ated wait atclinic is a)out A@ toB5 !ins

Price =B5

Located ? hour away)y car or transit

+e*t availa)leappoint!ent is in Awee%s

$ours" on-Fri7 2-5P

Esti!ated wait atclinic is a)out D hours

Clinic A Clinic B

Price =?D5

Located ne*t to youroffice or college

+e*t appoint!ent isin ? day

$ours" on-Fri7 >2-?@P

&y appoint!entesti!ated wait atclinic is @ to ?5 !ins

Clinic C


14/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #%

Increasing +et /alue )y Reducing+on!onetary Costs of Service

Reduce ti!e costs of service at each stage

ini!i4e unwanted psychological costs of service

0liminate2redesign unpleasant2inconvenient procedures

Eli!inate unwanted physical costs of service

.ecrease unpleasant sensory costs of service

:npleasant sights6 sounds6 smells6 feel6 tastes


15/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #!

a*i!i4ing Revenue fro!2vaila)le Capacity at a ;iven Ti!e

Price custo!i4ation Charge different value segments different prices for same product

(seful in dyna!ic !ar%ets Different price buc%ets based on price sensitivit) to different usage

times6 flexibilit)6 other factors

R uses !athe!atical !odels to e*a!ine historical data andreal-ti!e infor!ation to deter!ine .hat prices to charge within each price buc%et

How man) service units to allocate to each buc%et

Rate fences deter custo!ers willing to pay !ore fro! tradingdown to lower prices 8!ini!i4e consu!er surplus:



The Strategic Levels ofRevenue 8ield: anage!ent

Quadrant 1

Movies

Stadiums/arenas

Function space

Quadrant 2

Hotel rooms

Airline seats

Rental cars

Cruise lines

Quadrant

Restaurants

!ol" courses

Quadrant #

Continuin$ care

Hospitals

Fi%ed &aria'le

(redicta'le

)npredicta'le

(rice

*uration

Source+ Fi$ 1 "rom ,imes and C-ase readin$ .p 2120



.ealing with Custo!er Conflicts2rising fro! Revenue anage!ent

Customer con"lict can arise"rom+ Maretin$ tools to reducecustomer con"licts+ (erceived un"airness and

perceived "inancial risassociated it- multitier pricin$and selective inventor3

availa'ilit3

)n"ul"illed inventor3 commitment

)n"ul"illed demand o" re$ularcustomers

)n"ul"illed price e%pectation o"$roup customers

C-an$e in nature o" service

Fenced pricin$Bundlin$Cate$ori4in$Hi$- pu'lis-ed price

5ell6desi$ned customer recover3pro$ram "or over'ooin$

(re"erred availa'ilit3 policies

(-3sical se$re$ation and percepti'lee%tra service

Set optimal capacit3 utili4ation level

7""er loer displacement costalternatives

So(rce) J* Wirtz+ S** ,i-es+ J*.** .o and * atterson+ 1even(e Manage-ent) 1esolving otential C(sto-er Conlicts+3 Jo(rnal o 1even(e and ricingManage-ent+ 200$+ 4ol* 2 5$) 2#6"22&*


18/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #&

ey Categories of Rate Fences 8?:Table !4

Rate Fences E*a!ples

+h)sical (product*related# 'ences

&asic product Class of travel (business2econom) class#

$ize and furnishing of a hotel room$eat location in a theater

2!enities 'ree brea%fast at a hotel6 airport pic%up6 etc!

'ree golf cart at a golf course

Service level

+riorit) wait*listing;ncrease in baggage allowances

Dedicated service hotlines

Dedicated account management team


19/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " #'

ey Categories of Rate Fences 8D:Table !4

+onphysical Fences

Transaction Characteristics

Ti!e of )oo%ing or

reservation

Re5uirements for advance purchase

,ust pa) full fare two wee%s before departure

Location of )oo%ingor reservation

+assengers boo%ing air tic%ets for an identical

route in different countries are charged different

prices

Fle*i)ility of tic%etusage

'ees2penalties for canceling or changing a

reservation (up to loss of entire tic%et price#

8onrefundable reservation fees


20/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 20

ey Categories of Rate Fences 8A:Table !4

+onphysical Fences 8cont


21/27Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2#

ey Categories of Rate Fences 8B:Table !4

+onphysical Fences 8cont


22/27


Relating Price &uc%ets and Fences to.e!and Curve8'ig !>#

(rice

perseat

Capacit3 o" 1stclass ca'in

Capacit3 o" aircra"t8o o" seats demanded

1stclass

Full "are econom3 .no restrictions0

1 6 ee advance purc-ase

1 6 ee advance purc-ase9 Saturda3 ni$-t sta3

6 ee advance purc-ase9 Saturda3 ni$-t sta3

Speci"ied "li$-ts9 'oo on :nternet9 no

c-an$es/re"unds

;ate sales t-rou$-consolidators/:nternet9no re"unds

6ee advance purc-ase9 Saturda3 ni$-t sta39


23/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2$

Ethical Concerns in Pricing

Custo!ers are vulnera)le when service is hard to evaluateor they don


24/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2%

.esigning Fairness intoRevenue anage!ent

.esign clear7 logical7 and fair price schedules and fences

(se high pu)lished prices and present fences asopportunities for discounts rather than ,uoting lowerprices and using fence as )asis to i!pose surcharges

Co!!unicate consu!er )enefits of revenue!anage!ent

(se )undling to 0hide1 discounts

Ta%e care of loyal custo!ers

(se service recovery to co!pensate for over)oo%ing


25/27

Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/ Chapter ! " 2!

Putting Service Pricinginto Practice 8?:

$ow !uch to charge' The pricing tripod model provides a useful departure point

A specific figure must be set for the price

8eed to consider the pros and cons6 the ethical issues

#hat )asis for pricing' 8$ow define unit of service':

Completing a tas%

Admission to a service performance

Time based ,onetar) value of service delivered

(e!g!6 commission#

Consumption of ph)sical resources(e!g!6 food and beverages#


26/27


Putting Service Pricinginto Practice 8D:

#ho should collect pay!ent' $ervice provider or specialist intermediaries

Direct or nondirect channels

#here should pay!ent )e !ade' Convenientl) located intermediaries

,ail2ban% transfer

#hen should pay!ent )e !ade'

;n advance

?nce service deliver) has been completed


27/27

Putting Service Pricinginto Practice 8A:

$ow should pay!ent )e !ade' Cash

To%en

$tored value card

0lectronic fund transfer

Charge card (debit2credit#

@ouchers

Third*part) pa)ment

$ow to co!!unicate prices'

Relate the price to that of competing products

0nsure price is accurate and intelligible

Documents

LoveLock Chapter 5