Chapter 6

Services Marketing:
People, Technology,
Strategy
CHAPTER 6
Setting Prices And

Implementing Revenue
Management
1
Learning Objectives
Recognize that effective pricing is central to
the financial success of service firms.
Outline the foundations of a pricing strategy
as represented by the pricing tripod.
Define different types of financial costs and
explain the limitations of cost-based pricing.
Understand the concept of net value and how
gross value can be enhanced through valuebased pricing and reduction of related
monetary and non-monetary costs.
Describe competition-based pricing and
situations where service markets are less
price-competitive.
2
Learning Objectives
Define revenue management and describe
how it works.
Discuss the role of rate fences in effective
revenue management.
Be familiar with the issues of ethics and
consumer concerns related to service pricing.
Understand how fairness can be designed into
revenue management policies.
Discuss the six questions marketers need to
answer to design an effective service pricing
strategy.
3
Effective Pricing Is Central To

Financial Success
Characteristics of Service Pricing
Pricing of services is complicated
Service organizations use different terms to describe
the prices they set Fee, Interest, Charges,
Commission, Tolls, Tariffs etc.
Consumers find service pricing difficult to understand,
risky, and sometimes even unethical
Firms have to consider:
(1) search costs,
(2) purchase and service encounter costs, and
(3) post-purchase or after costs, while pricing services.
4
Pricing Objectives
Revenue and Profit Objectives
Gain profit / Cover Costs
Patronage And User Baserelated Objectives

Build Demand / Develop A User Base
Strategy-related Objectives
Positioning / Competitive Strategy
Objectives for Pricing of

Services
Pricing Strategy Stands On Three

Foundations
Outline the
foundations of
a pricing
strategy as
represented by
the pricing
tripod.
Cost-based Pricing
Establishing the Costs of Providing Service
Fixed, semi-variable, and variable costs, contribution and break-even
analysis
Activity-based Costing
Indirect costs are linked to the variety and complexity of
services produced and not just on physical volume
Pricing Implications of Cost

Analysis
A firm must set its price high enough to recover the full
costs of producing and marketing the service and add a
sufficient margin to yield the desired profit.
Some firms promote loss leaders, which are services
8
sold at less than full cost to attract customers
Value-based Pricing
Understanding Net Value
Net value equals perceived benefits minus perceived costs.
Valarie Zeithaml proposes four broad

expressions of value:
Value
Value
Value
Value
is
is
is
is
a low price.
whatever I want in a product.
the quality I get for the price I pay.
what I get for what I give.
Managing the Perception of Value

Effective communications and personal
explanations are needed to help customers
understand the value they receive.
9
Related Monetary and

Non-Monetary Costs
Related Monetary Costs
Customers incur significant financial costs in
searching for, purchasing, and using the service,
over and above the purchase price paid to the
supplier.
Non-monetary Costs
Reflect the time, effort, and discomfort associated
with the search, purchase, and use of a service
Time Costs
Physical Costs
Psychological costs
Sensory costs
10
Reducing the Related

Monetary
and Non-Monetary Costs
Working with operations experts to reduce the
time required to complete service purchase.

Minimizing unwanted psychological costs of
service.
Eliminating or minimizing unwanted physical
effort.
Decreasing unpleasant sensory costs of
service.
Suggesting ways in which customers can
reduce associated monetary costs.
11
Defining Total User Costs
Service users can incur costs during any of

the three stages of the Service
Consumption
Model.
12
Competition-based
Pricing
Price Competition Intensifiers
Increasing number of competitors.

Increasing number of substituting offers.
Wider distribution of competitor and/or
substitution offers.
An increasing surplus capacity in the industry.
Price Competition Inhibitors

Non-price related costs of using competing
alternatives are high
Personal relationships
Switching costs are high
Services are often time and location specific
13
Revenue Management:
What It Is And How It Works
Revenue management is important in
value creation.
Ensures better capacity utilization and
reserves capacity for higher-paying
segments.
A sophisticated approach to managing
supply and demand under varying
degrees of constraint.
Also known as yield management.
14
Setting Capacity Allocation

Targets By Segment For A Hotel
The figure above is an illustration of the capacity

allocation in a hotel setting, where demand from
15
different types of customers varies not
only by day
Measuring The Effectiveness

Of A Firms Revenue
Management Strategy
Maximizing the revenue per available
capacity for a given space and time
unit (RevPAST)
Success in revenue management
means increasing RevPAST
Competitors Pricing Affect Revenue
Management
Price Elasticity
16
Illustration Of Price
Elasticity
This figure shows the price
elasticity for two segments,
one with a highly elastic
demand and the other with a
highly inelastic demand.
To allocate and price capacity
effectively, the revenue
manager needs to find out
how sensitive demand is to
price and what net revenues
will be generated at different
price points for each target
segment.
17
Designing Rate Fences

Price customization charging different
customers different prices for the same
product
Rate Fences can be either physical or nonphysical.
physical fences refer to tangible product
differences related to the different prices
non-physical fences refer to differences in
consumption, transaction, or buyer
characteristics, but the service is basically
the same
18
Key Categories of Rate

Fences
19
Key Categories of Rate

Fences
20
Fairness And Ethical

Concerns In Service
Pricing
Factors contributing
to unethical pricing
behavior
Service Pricing is Complex
Quoted prices used by consumers for price
comparisons may be only the first of several charges
that can be billed
Pricing is mostly based on usage-related factors
Consumers find it difficult to forecast their own usage
Piling on the Fees

Hidden extras
Adding (or increasing) fines and penalties
22
Designing Fairness Into

Revenue Management
Designing price schedules and fences that are
clear, logical, and fair
Using high published prices and frame fences as
discounts
Communicating consumer benefits of revenue
management
Hiding discounts through bundling, product
design and targeting
Taking care of loyal customers
Using service recovery to compensate for
overbooking
23
Putting Service Pricing Into

Practice
How much to charge
What should be the specified basis for
pricing
Price bundling
Discounting
Freemium
Who should collect payment and where

should payment be made
When should payment be made
How should payment be made
How should prices be communicated to the
target markets
24

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Services Marketing:

Setting Prices And

Effective Pricing Is Central To

Patronage And User Baserelated Objectives

Objectives for Pricing of

Pricing Strategy Stands On Three

Pricing Implications of Cost

Valarie Zeithaml proposes four broad

Managing the Perception of Value

Related Monetary and

Reducing the Related

time required to complete service purchase.

Defining Total User Costs

Service users can incur costs during any of

Price Competition Intensifiers

Increasing number of competitors.

Price Competition Inhibitors

Setting Capacity Allocation

The figure above is an illustration of the capacity

Measuring The Effectiveness

Designing Rate Fences

Key Categories of Rate

Key Categories of Rate

Fairness And Ethical

Piling on the Fees

Designing Fairness Into

Putting Service Pricing Into

Who should collect payment and where

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