and Pricing communication for services
Modules 11 & 12; Chapters 9 & 11
Lecture overview
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Consumer's view of the pricing of services Three basic foundations of price
monetary and non-monetary costs perspectives of value
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Elasticity of demand Pricing objectives Pricing methods Pricing strategies and tactics Asset use and yield management
How does consumers' evaluation of pricing for services differ from their evaluation for pricing for goods?
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Activity
Think of 3 different services that you use? What is the price of each? Ask a friend if they know the price?
First, customers often have inaccurate or limited reference prices for services
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Reference price is a price in memory based on:
last price paid price usually paid price paid for similar service
Why are consumers' perceptions of the price of services often inaccurate?
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intangibility
difficult to visualise quality or value comparisons are difficult
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variability & inseparability
service offering can be tailored to suit needs
re-configured or remixed in real time exact price is not known until after provision
So then, what are the managerial implications
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service providers are often reluctant to quote a price in advance price tends not to be featured in promotional messages
may create unrealistic expectations however, advertising the price may overcome misperceptions
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price may not influence initial purchase but will impact on repeat purchase
Price is often a cue for quality
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used as a surrogate for quality when...
inadequate information
ie lack of brand image
price varies a great deal due to service customisation quality is difficult to evaluate
ie high in experience or credence qualities
high risk is associated with the service
ie high in credence qualities
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price sets expectations
Three basic foundations for developing a pricing strategy
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Costs
sets the floor for the price
fixed and variable costs break even point (total revenue = total cost)
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Competition Perceived value
sets the ceiling
what the customer is prepared to pay what is value to the customer?
Costs: monetary and nonmonetary costs
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A service is a bundle of benefits and these are exchanged for a bundle of costs. Perceived benefits are balanced with perceived costs in the mind of the consumer.
Fig 9.2 Net value = total benefits - total costs
Perceived costs Perceived benefits
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Perceived benefits how, when, where
service accessed; speed of delivery; degree of customisation
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Perceived costs price charged plus
personal costs time and effort to access service; mental & emotional stress; sensory considerations
Non-monetary costs include...
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Physical effort
Search, involvement & inconvenience
finding the `right' provider time in the service factory degree of involvement may influence outcome partial employee - play role, learn a script
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Time
search, waiting and participation
must be present for high contact services
Non-monetary costs cont...
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Sensory costs
may mean physical discomfort
pain, unpleasant sights, noises, smells, tastes
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Psychic costs
mental effort negative feelings
fear (lack of knowledge, rejection, unknown, change, embarrassment)
So then, what are the managerial implications?
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customers may be prepared to pay more to reduce the non-monetary costs
ie home delivery, faster service (ie business or first class check in), use a broker for search
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firms should seek to minimise nonmonetary costs and promote how nonmonetary costs are being reduced
ie convenience, confidentiality, helpful staff
Consumer definitions of value
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Value is low price
Focus is on money
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Value is everything I want in a service
Focus is on benefits
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Value is the quality I get for the price I pay
Focus is on quality and monetary costs
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Value is all that I get for all that I give
Focus is on all the perceived benefits less all the perceived costs (inc. non-monetary costs)
If value is low price, then
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Focus is on money Pricing tactics include
discounting odd pricing
psychological pricing i.e. $5.99
synchro pricing
ie time (peak and off peak pricing) location (ie gold, silver and bronze seating)
If value is everything I want in a service, then
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Focus is on benefits Pricing tactics include
prestige pricing skimming pricing (perceived value based pricing)
high price, product quality leadership
If value is the quality I get for the price I pay, then
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Focus is on quality and monetary price Pricing tactics include
value for money pricing
ie McValue meals, Qantas flight & acc. package
market segmentation pricing
ie first, business and economy class
If value is all that I get for all that I give, then
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net value = perceived benefits less perceived costs Price bundling Complementary pricing Contingency pricing
Other factors that influence price include...
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Corporate and marketing objectives
high market share maximise profitability product quality leadership cost leadership focus differentiated survival
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Legislation
regulated pricing
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Price elasticity
inelastic pricing
few if any substitutes price changes do not affect quantity demanded
elastic pricing
price changes affect quantity demanded
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Lifecycle stage
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Nature of the service
how much does demand fluctuate?
can price be used to absorb excess capacity? can price be used to reduce peak demand?
how difficult is it for consumers to place a value on the service?
what role does price play as a cue for quality? is the service high in search, experience or credence qualities?
to what extent is the service offering remixed in real time?
can price be pre-set or negotiated before service delivery? can pricing be unbundled?
Fig 9.1 The foundations of a pricing strategy
Perceived value sets the ceiling Competition
Price flexibility
Other factors
Costs set the floor
Highest price the market will bear Discretionary price region
Costs
Price elasticity of demand
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How quantity demanded varies at different price levels. If small change in price causes a large change in demand, then the service is highly price elastic
non-essentials and services that have substitutes for example, holiday packages
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If a change in price does not influence the quantity demanded, then the service is price inelastic
essentials and services with no substitutes for example, electricity, medical care
Pricing strategy will reflect the firm's objectives
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Refer to table 9.1, p. 252 Revenue-oriented objectives
make a profit cover some level of costs
total costs, semi-variable, variable, fixed
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Operations-oriented objectives
use price to match demand and supply even out fluctuations in demand
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Patronage oriented objectives
maximise patronage vary prices based on ability to pay offer payment methods
Seven strategic pricing decisions
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Refer to table 9.2, pp. 255-6 1. What price should we charge?
meet pricing objectives cover costs remain competitive consider perceived value consider price elasticity (sensitivity) ethics/legal use issues
of tactics, price discrimination
reflect added value
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2. What should be the basis of the price?
task-based, admission, time-based, usage, distance bundled or unbundled?
core and supplementary standardised elements and customised elements
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3. Who should collect payment?
the firm or intermediary (commission or flat fee)
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4. Where should payment be made?
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5. How should payment be made?
mode of payment
cash, credit, token, electronic transfer
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6. When should payment be made?
time of payment
before or after delivery time of day, week, month
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7. How should price be communicated?
Channel
personal v non-personal channel media
Message
Most service firms seek to effectively utilise their assets and maximise their revenue
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Capacity constrained service firms use percentage of capacity sold as a measure of operational efficiency
ie occupancy rate, load factors reveals usage rate but not profitability
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need to use ARGE to maximise yield
yield %= actual revenue/potential revenue
ARGE is
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asset revenue generating efficiency index Aim of yield management
match demand and supply allocate the right type of capacity to the right kind of customer at the right price so as to maximise revenue or yield
ARGE formula
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two parts to formula
capacity utilisation (% of capacity sold) yield percentage
the actual price obtained per unit of service as a percentage of the maximum price at which the unit could have been sold
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ARGE =
capacity utilisation x yield percentage
Example of ARGE
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400 room hotel capacity utilisation (occupancy rate) = 60% (.6) 400 x .6 = 240 rooms maximum room price = $100 240 rooms x $100 = $24 000 (potential revenue)
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actual revenue = 120 rooms @ $60 (discounted price ) plus 120 rooms @ $100 (full price) = $19 200 Yield percentage = actual revenue / potential revenue = 19 200/24 000 x 100 = 80% (.8) ARGE = yield percentage x capacity
What is role of marketing in maximising ARGE?
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Developing a profitable business mix
identify key segments forecast sales volumes at different price levels by segment recommend an ideal customer portfolio provide sales targets by segment for various time periods
refer to fig 9.3, p. 262
Figure 9.3 Setting capacity allocation sales targets over time
Week 7
Capacity (% of rooms)
(Low Season)
Out of commission for renovation Executive service guests* Transient guests 50 % Weekend package
Week 36 (High Season)
Executive service guests* Transient guests
Transient guests
Groups and conventions Airline contracts
Weekend package
Groups (No conventions) Airline contracts S n
Nights: M
*
T W T F S S Tim M T W T F S h n u Employees ofu corporations called upon by saleseforce (pay full price andh book rooms through special reservations line) Individual customers paying full price but reserving rooms via publicised telephone number or by just `walking in'
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evaluate performance on ARGE
compare actual and potential revenues determine opportunity cost of serving less profitable segments focus efforts on most profitable customer mix over the year
refer to fig 9.4, p. 263
Why might management not choose to maximise ARGE?
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maintain long-term relationships
consider the lifetime value of the customer
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legal restrictions
price discrimination
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loss of goodwill
negative w.o.m., churn
Summary
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Consumers' evaluation of pricing for services differs from goods Pricing strategy
Three basic foundations for pricing
cost, competition and value
Four consumer definitions of value Pricing objectives
revenue, operations, patronage
Pricing methods Seven strategic pricing decisions
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Maximising ARGE
Communications & Promoting Services
Module 12
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Internal communications
role in internal marketing corporate culture
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External communication customers, intermediaries and other stakeholders
Role of Marketing Communications Inform Persuade Remind
Significance of Communication in Services
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Creates powerful, tangible images Gives sense of credibility, confidence (risk reduction) Uses brand names to give visibility to intangible performances Promotes people as the service
Provider Gap 4 - between service delivery and external communi...