SERVICE MARKETING
CHAPTER 6: SETTING PRICE AND IMPLEMENTING
REVENUE MANAGEMENT
OVERVIEW
6.1 Effective Pricing
6.2 Pricing Strategy
6.3 Revenue Management
6.4 Ethical Concerns in Service Pricing
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EFFECTIVE PRICING IS ESSENTIAL
TO FINANCIAL SUCCESS
Source:
(1) [Link]
PRICING CONCEPT
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WHAT MAKES SERVICE PRICING STRATEGY
DIFFERENT AND DIFFICULT?
Variability of inputs and outputs:
• How can firms define a “unit of service” and establish basis for pricing?
= or or
Time Effort Psychical Costs
Importance of time factor – same service Customers find service pricing difficult to
may have more value to customers when
delivered faster
understand, risky, and sometimes even
unethical 4
OBJECTIVES FOR PRICING OF SERVICES
Revenue and Profit Patronage and User-Based
Objectives Objectives
➔ Build demand
➔ Seek profit
- Demand maximization
➔ Cover costs
- Full capacity utilization
➔ Build a user base
- Stimulate trial and adoption of new service
- Build market share/large user base
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PRICING STRATEGY
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THE PRICING TRIPOD
The foundations underlying pricing
strategy can be described as a
tripod, with costs to the provider,
competitors’ pricing, and value
to the customer as the three legs.
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FLOOR AND CEILING PRICE
Value to customer
In the pricing tripod, the costs a firm
needs to recover usually sets a
minimum price, or floor, for a specific
service offering, and the customer’s
perceived value of the offering sets a
Competition
maximum, or ceiling.
The price charged by
competing services typically Costs
determines where, within the
floor-to-ceiling range, the price
can be set.
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THREE MAIN APPROACHES TO PRICING
Cost-Based Value-Based Competition-
Pricing Pricing Based Pricing
• Set prices relative • Relate price to • Monitor
to financial costs value perceived competitors’
by customer pricing strategy
• Activity-Based
Costing • Dependent on the
price leader
• Pricing
implications of
cost analysis
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COST-BASED PRICING: TRADITIONAL VS
ACTIVITY-BASED COSTING
Customers only
care about value
Traditional costing approach ABC management systems to themselves,
not what service
➜Emphasizes expense ➜Link resource expenses to
categories (arbitrary variety and complexity of production costs
overheads allocation) goods/services produced the firm
➜May result in reducing value ➜Yields accurate cost
generated for customers information
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VALUE-BASED PRICING:
UNDERSTANDING NET VALUE
Net Value = Perceived Benefits to Customer (Gross Value) minus
All Perceived Outlays (Money, Time, Mental/Physical Effort)
Consumer surplus: difference between price paid and amount customer
would have been willing to pay in absence of other options
Competing services are then evaluated via comparison of net value
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VALUE-BASED PRICING:
STRATEGIES FOR ENHANCING NET VALUE
Enhance gross value – benefits delivered
• Add benefits to core product
• Enhance supplementary service
• Manage perceptions of benefits delivered
Reduce costs incurred by
• Reducing monetary costs of acquisition and usage
• Cutting amount of time required to evaluate, buy, use service
• Lowering effort associated with purchase and use
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DEFINING TOTAL USER COST
Money Purchase
Search Costs*
Time Operating Costs
Physical Effort Incidental Expenses
Purchase and Service
Encounter Costs Psychological Burdens
Service users can incur costs during any of
Sensory
Burdens the three stages of the service
consumption model. Consequently, firms
have to consider (1) search costs, (2)
Necessary purchase and service encounter
Post Purchase Costs* Follow-up
costs, and (3) postconsumption or
* Includes all five
after costs.
Problem
cost categories Solving
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COMPETITION-BASED PRICING
Price competition increases due to:
• Increasing competition
• Increase in substituting offers
• Wider distribution of competitor
• Increasing surplus capacity in the industry
However under these circumstances,
price competition can decrease:
• High non-price-related costs of using alternatives
• Personal relationships matter
• Switching costs are high
• Time and location specificity reduces choice
• Managers should examine all related financial and
non-monetary costs
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COMPETITIVE-BASED PRICING
This table identifies a
choice of three clinics
available to an individual
who needs to obtain a
routine chest X-ray.
In addition to varying
dollar prices for the
service, different time
and effort costs are
associated with using each
service.
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REVENUE MANAGEMENT
Revenue management (RM) is price customization
• Charge different value segments different prices for same product
based on price sensitivity
è Maximizes revenue from a given capacity at a point in time
è Manage demand and set prices for each segment closer to
perceived value
è Use of rate fences
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PRICING IN AIRLINE INDUSTRIES
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HOW DO AIRLINES SET PRICES?
The price of your ticket consists of a number of things (Schlick, 2003)
Base fare Taxes and airport fees Fuel surcharge
Service fee to issue Food Seat selection Baggage
The last four are sometimes optional (especially for low-cost airlines) where you pay for
them on top of the ticket price if you want them included. With the older, more traditional
airlines, and for long-haul flights, these things are usually included in the ticket price.
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EXAMPLE:
PRICE COMPONENT
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TYPES OF PASSENGER
Business travelers Leisure travelers
flexible on price (the flexible on dates but are not
company is paying) but not on price (the cheaper the
on dates better)
The airline knows that as the departure date gets closer, business travelers
who are still buying tickets really need to get where they’re going on time.
People who buy far in advance are typically leisure travelers who
just pick whatever’s cheapest. 20
PRICING OF AIRLINE TICKETS
Airline ticket pricing is based on demand supply dynamics.
An airline is always trying to get maximum value for its seats, but it has
to try to sell them all before departure or they will become
worthless forever.
Just like a grocery store that puts stuff on sale to get food out the door
before it spoils, an airline will sell tickets but not at one price but at a
range of prices all this to run the airlines efficiently.
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PRICE ELASTICITY
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RELATING PRICE BUCKETS AND FENCES TO
DEMAND CURVE: AIRLINES
This curve provides insights to the thinking and
work of a revenue manager in airline industry
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LOAD FACTOR IN AIRLINE SERVICE
Passenger load factor, or load factor,
measures the capacity utilization of
public transport services like airlines,
passenger railways, and intercity bus
services.
Load Factor is generally used to assess how
efficiently a transport provider fills
seats and generates fare revenue. It is
passenger-kilometres flown as a percentage
of seat-kilometres available.
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CASE STUDY I:
GARUDA INDONESIA
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GARUDA INDONESIA – ECONOMY CLASS
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Source:
(1) [Link]
27
28
GARUDA INDONESIA – BUSINESS CLASS
29
Source:
(1) [Link]
THE NEW DEFINITION OF TRAVELING IN STYLE
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GARUDA INDONESIA SEAT MAP
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Source:
(1) [Link]
GA303 (SUB - CGK)
27 OCT 2017 (05.25-07.00)
Boeing 737-800NG
Aircraft type:
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CASE (1):
GA 303 – SUB-CGK (27 OCT 2017; 05.25-07.00) Boeing 737-800NG
Calculating GA 303 revenue based on
given assumption:
SEAT COMPOSITION
100 % 100%
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CASE (2):
GA 303 – SUB-CGK (27 OCT 2017; 05.25-07.00) Boeing 737-800NG
Calculating GA 303 revenue based on
given assumption:
SEAT COMPOSITION
20% 40% 25% 15% 60% 40%
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CASE STUDY II:
LION AIR – ALL ECONOMY CLASS
37
Source:
(1) [Link]
38
CASE (3):
JT 571 – SUB-CGK (27 OCT 2017; 06.45-08.15) BOEING 737-800NG
Seat capacity: 189 passengers in
Calculating JT 751 revenue based on an all-economy layout
given assumption:
SEAT COMPOSITION
60% 35% 5%
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REVENUE COMPARISON
REVENUE SIMULATION (LION AIR VS. GARUDA)
MORNING FLIGHT, 27 OCT 2017
AIRLINES CLASS NUMBER OF SEAT TICKET PRICE REVENUE
PROMO (60%) 113 IDR 579,900 IDR 65,528,700
LION AIR ECONOMY (40%) 76 IDR 623,000 IDR 47,348,000
IDR 112,876,700
ECONOMY (100%) 150 IDR 823,200 IDR 123,480,000
GARUDA (CASE 1) BUSINESS (100%) 12 IDR 3,233,300 IDR 38,799,600
IDR 162,279,600
ECO SPECIAL PROMO (20%) 30 IDR 823,200 IDR 24,696,000
ECO PROMO (40%) 60 IDR 1,057,500 IDR 63,450,000
ECO AFFORDABLE (25%) 37 IDR 1,299,500 IDR 48,081,500
GARUDA (CASE 2)
ECO FLEXIBLE (15%) 23 IDR 1,604,200 IDR 36,896,600
BUSINESS FLEXIBLE (100%) 12 IDR 3,233,300 IDR 36,799,600
IDR 209,923,700 40
ETHICAL ISSUES IN PRICING
Complex pricing schedules
Unfairness and misrepresentation in advertising
Hidden charges
Too many rules and regulations
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