Exam 4 Flashcards
What are the three things prices depend on?
Cost, customer (demand), and competition
What are the reasons customers usually lack reference price for services?
- Service heterogeneity limits knowledge (i.e. cellular phone service, life insurance)
- Individual customer needs vary (i.e. hair-styling, hotel, braces)
- Hard to gather price information on services (i.e. medical procedures)
- Sometimes, in some services, providers are unwilling to provide precise pricing information (i.e. medical, legal costs)
profit maximizing pricing
K = (P*Q) - C
Factors that affect price sensitivity:
- Base price of a product; higher the base price, greater the price sensitivity to a percent change in price (i.e. x% change in price of a toothpaste versus a car)
- Who pays? I.e. self-pay vs. insurance company pays
- Availability of comparable product substitutes (i.e. when many products of nearly equal quality are available - higher price sensitivity)
- Price comparisons - easy? Difficult?
- Switching costs - high? Low?
- Income level
- Purpose of the specific purchase
Cross price elasticity of demand:
other things being equal, how does the quantity demanded of one product respond to price change in another product?
- Positive: price of X goes up; demand for Y goes up (i.e. butter and margarine) – products X and Y are substitutes
- Negative: price of X goes up; demand for Y goes down (i.e. hot dogs and hot dog buns; safety razors and razor blades) – products X and Y are complements
What are the non-monetary costs of services?
- Search costs
- Time costs
- Inconvenience
- Psychological costs
What are weaknesses of a cost-based pricing system?
- Establishing the cost of a service is often not easy
- Non-monetary costs of services
- Pricing implications of cost structure
- Price: an indicator of quality
- Solely cost-based pricing may ignore demand and competition
What are the critical criteria (i.e., necessary conditions) for effective price segmentation?
- Different groups of consumers must have different response to price
- Individuals in lower-priced segment should not be allowed to sell their tickets to those in other segments
- The customers should not be confused by the use of different prices
Zeithmal describes four types of “value” perceptions, what are they and what pricing strategy or strategies are appropriate for each case?
- “Value is low price.”
- Use penetration pricing
- Discounting
- Odd number pricing (creates preception of lower price)
- Synchro-pricing (synchronize demand and supply) - “Value is everything I want in a product or service.”
* price is less important than perceived quality or other features
- Skimming pricing (prestige pricing) - “Value is the quality I get for the price I pay.” *both price and quality are relevant bust customer sees a trade-off between price she pays and quality she receives
- Value pricing or giving more for less - “Value is all that I get for all that I give.”
- Price bundling: selling services as a group rather than individually
- Create price bundles to take into account the total cost: money, time, effort, and psychological cost
What is price bundling? Under what conditions is bundling more likely to be effective?
- Bundle pricing suggests that in services requiring hardware, service provider should be willing to accept a reduced profit margin or even loss on the hardware to increase demand for the service and potential revenue (i.e. satellite TV, cell phones, etc.)
- When bundle (or package) values vary less across buyers than do the individual product values, bundling should increase profits
- — Movie distributors often sell packages of films rather than selling individual film rights because package values vary less across buyers than do the individual firm values
What is yield management?
- Yield management is a pricing structure that drives prices higher as the time of use of the product/service approaches (i.e. the seller tries to maximize the profits by changing the price over time - increase as capacity approaches exhaustion)
- Yield management is a form of dynamic pricing technique
The 4 key requirements for using yield management:
- Capacity is limited and perishable
- Units of capacity can be reserved by customers ahead of time
- The company can sell the units of capacity at varying prices - also known as fare classes - each which has a fixed price
- The firm can change the availability of the predefined fare classes over time
What happens when (a) demand exceeds supply? (b) supply exceeds demand?
- D>S: Overcrowding, unhappy customers, leaving money on the table
- S>D: Lose money from fixed costs, idle capacity
Why demand management is more difficult for services than for physical products?
- More critical because services can’t be inventoried
- Because services are an experience that happen in real time and there isn’t an inventory for them; for products there is an inventory and they don’t have to be as time sensitive because you can just give the product to the customer
Service capacity consists of _____, _____, _____.
- Physical facility (# of hospital beds)
- People
- Equipment
How is capacity utilization measured?
A. % of total time facility/equipment in operation
B. % of total physical space actually utilized during operation
What is the characteristic of a balanced service operation?
- No lines forming
- No excess capacity
Why is the distinction between maximum and optimum capacity important?
- Maximum capacity ≠ optimum capacity; just because you can fit the most people, does not mean that it will be the best experience for the people paying for the service (i.e. airlines).
- Sometimes, maximum capacity = optimum capacity because it makes the experience better for the people paying for the service (i.e. ballpark)
Cyclical Demand
Causes: employment schedule, tax payment time, school schedule, public holidays, payday)
Random Demand
Causes: weather related (rain, affecting outdoor recreation), Acts of nature (Tsunami, Tornados)
