Pricing and communication for services

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Pricing and communication for services

• Modules 11 12
• Chapters 9 11

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Lecture overview

• Consumers view of the pricing of services
• Three basic foundations of price
• monetary and non-monetary costs
• perspectives of value
• Elasticity of demand
• Pricing objectives
• Pricing methods
• Pricing strategies and tactics
• Asset use and yield management

3
How does consumers evaluation of pricing for
services differ from their evaluation for pricing
for goods?

• Activity
• Think of 3 different services that you use?
• What is the price of each?
• Ask a friend if they know the price?

4
First, customers often have inaccurate or limited
reference prices for services

• Reference price is a price in memory based on
• last price paid
• price usually paid
• price paid for similar service

5
Why are consumers perceptions of the price of
services often inaccurate?

• intangibility
• difficult to visualise quality or value
• comparisons are difficult
• 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

6
So then, what are the managerial implications

• 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
• price may not influence initial purchase but will
  impact on repeat purchase

7
Price is often a cue for quality

• 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
• price sets expectations

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Three basic foundations for developing a pricing
strategy

• Costs
• sets the floor for the price
• fixed and variable costs
• break even point (total revenue total cost)
• Competition
• Perceived value
• sets the ceiling
• what the customer is prepared to pay
• what is value to the customer?

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Costs monetary and non-monetary costs

• 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.

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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
• Perceived costs price charged plus personal
  costs time and effort to access service mental
  emotional stress sensory considerations

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Non-monetary costs include...

• 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
• Time
• search, waiting and participation
• must be present for high contact services

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Non-monetary costs cont...

• Sensory costs
• may mean physical discomfort
• pain, unpleasant sights, noises, smells, tastes
• Psychic costs
• mental effort
• negative feelings
• fear (lack of knowledge, rejection, unknown,
  change, embarrassment)

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So then, what are the managerial implications?

• 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
• firms should seek to minimise non-monetary costs
  and promote how non-monetary costs are being
  reduced
• ie convenience, confidentiality, helpful staff

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Consumer definitions of value

• Value is low price
• Focus is on money
• Value is everything I want in a service
• Focus is on benefits
• Value is the quality I get for the price I pay
• Focus is on quality and monetary costs
• 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)

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If value is low price, then

• 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)

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If value is everything I want in a service, then

• Focus is on benefits
• Pricing tactics include
• prestige pricing
• skimming pricing (perceived value based pricing)
• high price, product quality leadership

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If value is the quality I get for the price I
pay, then

• 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

19
If value is all that I get for all that I give,
then

• net value
• perceived benefits less perceived costs
• Price bundling
• Complementary pricing
• Contingency pricing

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Other factors that influence price include...

• Corporate and marketing objectives
• high market share
• maximise profitability
• product quality leadership
• cost leadership
• focus
• differentiated
• survival

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• Legislation
• regulated pricing
• Price elasticity
• inelastic pricing
• few if any substitutes
• price changes do not affect quantity demanded
• elastic pricing
• price changes affect quantity demanded
• 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?

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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
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Price elasticity of demand

• 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
• 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

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Pricing strategy will reflect the firms
objectives

• Refer to table 9.1, p. 252
• Revenue-oriented objectives
• make a profit
• cover some level of costs
• total costs, semi-variable, variable, fixed
• 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

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Seven strategic pricing decisions

• 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 issues
• use 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
• 3. Who should collect payment?
• the firm or
• intermediary (commission or flat fee)
• 4. Where should payment be made?

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• 5. How should payment be made?
• mode of payment
• cash, credit, token, electronic transfer
• 6. When should payment be made?
• time of payment
• before or after delivery
• time of day, week, month
• 7. How should price be communicated?
• Channel
• personal v non-personal channel
• media
• Message

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Most service firms seek to effectively utilise
their assets and maximise their revenue

• 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
• need to use ARGE to maximise yield
• yield actual revenue/potential revenue

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ARGE is

• 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

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ARGE formula

• 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
• ARGE
• capacity utilisation x yield percentage

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Example of ARGE

• 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 _at_ 60 (discounted price ) plus
• 120 rooms _at_ 100 (full price) 19 200
• Yield percentage
• actual revenue / potential revenue
• 19 200/24 000 x 100 80 (.8)
• ARGE yield percentage x capacity utilisation
• .8 x .6 48

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What is role of marketing in maximising ARGE?

• 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

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Figure 9.3 Setting capacity allocation sales
targets over time
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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

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Why might management not choose to maximise ARGE?

• maintain long-term relationships
• consider the lifetime value of the customer
• legal restrictions
• price discrimination
• loss of goodwill
• negative w.o.m., churn

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Summary

• 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
• Maximising ARGE

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Communications Promoting ServicesModule 12

• Internal communications
• role in internal marketing
• corporate culture
• External communication customers,
  intermediaries and other stakeholders

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Role of Marketing Communications

• Inform

• Persuade

• Remind

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Significance of Communication in Services

• 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

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Provider Gap 4 - between service delivery and
external communications

• Reading 12.1
• provider gap 4
• between what is promised and what is delivered
• performance-expectations gap
• leads to customer dissatisfaction

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Five reasons for gap 4

• 1. Inadequate management of service promises
• 2. Over-promising
• 3. Insufficient customer education
• 4. Inadequate horizontal communication
• 5. Different policies and procedures across
  distribution units

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What are the four major strategies for overcoming
the gap?

• 1. Manage service promises
• 2. Reset customer expectations
• 3. Improve customer education
• 4. Manage horizontal communication

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How can the firm manage service promises?

• Coordinate marketing and operations
• Accurate and realistic promises
• Service guarantees
• Keep customers informed re
• availability
• changes to schedules or offerings
• Negotiate realistic expectations
• Set prices to match service quality

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How can the firm reset customer expectations?

• communicate changes to service offering
• offer choice (options)
• use a tiered value system for different levels of
  service
• communicate appropriate criteria for evaluation
  and appropriate levels of service effectiveness
• communicate industry realities

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What can the firm do to improve customer
education?

• Prepare customers for the process
• Confirm performance to standards and expectations
• Clarify expectations after the sale
• Teach customers to avoid peak demand

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How can the firm improve horizontal
communications?

• align front and back stage
• provide avenues for open communication
• create cross-functional teams

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Services v Goods Implications for Communication
Strategy

• Intangible nature of performances
• Supply demand management
• Reduced role for intermediaries
• Importance of contact personnel
• Educating customers about scripts

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Developing a communication strategy

• Who is the target audience?
• Communication objectives
• Message strategy
• content
• appeals
• emotional, rational, moral
• format

Create a message that meets our objectives
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Developing a communication strategy cont.

• Media strategy
• personal non-personal channels
• use of promotional mix elements
• refer to figure 11.1, p. 294
• Budget
• objective-task method
• Control
• measure, evaluate, revise

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The Marketing Commuication Mix

• Advertising
• Publicity - incl. w-o-m
• Personal Selling
• Sales Promotion
• Direct
• Public Relations
• Corporate Communications
• The Servicescape
• Customer Service

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Summary

• Significance of Communication in Services
• Services v Goods Implications for Communication
  Strategy
• Managing the service delivery/external
  communications gap
• Developing a communication strategy
• target market, objectives, message, media,
  budget, control

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Tutorial

• Case 6 Singapore Airlines, p. 423
• Review questions
• Module 11
• 2, 4 7
• Module 12
• 1, 2 , 8