Lecture 5 Flashcards
Objectives for establishing price
= Revenue and profit
- Seek profit (cover costs)
- > Make the largest possible profit
- > Maximise revenue from a fixed capacity by varying prices and target markets over time (eg. ski resorts, airlines - revenue management)
= Patronage and user-base
- Build demand
- > Achieve full capacity utilisation where other customers are important to the experience (eg. AFL match, nightclub)
- Build user base
- > Encourage trial and adoption of a service eg. Tiger $18 one-way flights to build interest immediately
- > Build market, especially if there are a lot of economies of scale that can lead to competitive ost advantage (eg. Cable TV)
= Non-monetary pricing
- Ensure fairness, equity and affordability for the markets served and focus on positive attidunial and behavioural response eg. legal aid, animal protection -> NFP
Explain the cost-based pricing strategy and some problems with using this strategy
- Number of units of input used, multiplied by cost per unit, plus profit margin eg. catering, accounting, legal, utilities
->Simple for many industries
->Trade and professional associations
..Contract stipulates final price based on costs incurred - Becoming less popular strategy, more revenue focused
Fixed costs => unchanging and incurred if no service provided (eg. permanent staff salaries, rent, insurance, security, cost of capital
Semi-variable costs => componenets of fixed and variable eg. telephone charges, staff overtime
Variable costs => fluctuate as direct consequence of what has been produced/sold eg. ingredients in a restaurant meal, casual staff
Marginal costs => incurred in making an additional sale
Contribution margin => difference between variable cost and price charged (covers overhead)
Problems
- Not considering actual demand
- Not considering that fixed and variable costs behave differently
- Only suitable fo profit objective
- Not taking competition into account
- Difficulties in calculating cost/unit
- Tedious record keeping
Explain the 4 types of value
- Functional/instrumental
eg. fast broadband - Hedonic/experiential
….Focus on emotional/sensual experience or social connectedness
Eg. Facebook, skydiving - Symbolic/expressive
…..Taking parnter out for anniversary dinner - Cost/sacrifice
How can companys reduce monetary/non-monetary costs
- Working with operations to reduce time required to complete the purchase, delivery and consumption (eg. AVIS - 100 steps involved in ordering and getting car, identified what was most important to customers)
- Redesign unpleasant and inconvenient procedures, retrain staff to be friendlier (pschological costs) (eg. electronic lockers that required people to remember pin numbers and numbers and hard to tell which were free, changed to electronic wristbands with locker number on it)
- Eliminating /minimising unwanted physical or mental effort, notably during search and delivery process (eg. carpet cleaning brand that offers to move your furniture)
- Decrease unpleasant sensory costs by creating more attractive visual environments, reduce noise, install more comfortable furniture
- Suggest ways in which customers can reduce associated monetary costs
Explain revenue yield management and when it is appropriate
= allocates perishable capacity units to existing demand in a way that maximises revenue not patronage
- Allocate capacity to highest paying customer segment first
- Concerned with obtaining best possible yield from each available unit of capacity (eg. airline seat, hotel bed, educational institution)
- Successful yield management depends on knowing the range of customers at any given time and then developing strategies that avoid selling each unit below what current customers would be willing to pay
= Appropriate when:
- Realtively fixed capacity
- Perishable inventory
- Different market segments or customers, who arrive or make reservations at different times
- Have low marginal sales costs and high marginal capacity change costs
- Product sold in advance
- Fluctuating demand
- Customers who arrive or reserve early are more price sensitive than those who arrive/reserve late
Explain what rates fences are and include 5 examples
- Rate fences deter customers willing to pay more from trading down to lower prices (form of pricing discrimination)
- *Physical Fences (product-related)
- basic product
- > eg. class of travel, size of rental car
- service level
- > eg. priority wait-list, separate check in counters, improved food/beverage selection, dedicated service hotlines
- *Non-physical Fences (transaction characteristics)
- time of booking/reservation
- > eg. discounts for advance purchase
- flexibility of ticket usage
- > eg.fees/ penalties for cancelling or changing reservation, non-refundable reservation fees
(Consumption characteristics)
- time or duration of use
- > eg. early bird special in a restaurant before 6pm, must stay over a Saturday night/at least 2 nights
How can you measure the effectiveness of revenue management
=>Asset revenue generating efficiency (ARGE) Index
- Index/measure of the extent to which an organisation’s assets are achieving their full revenue-earning potential and yield
- Understand the relationship between the average price actually obtained per unit of service and maximum price that might have been charged for that same service unit
=>Role of marketing in ARGE maximisation
- Identify principal market segments
- Forecast volume of business/segment
- Recommend ideal business mix
- Provide specific sales targets per segment
- Guidelines for what prices to charge each segment at specific points of time
- Monitor actual performance and respond appropriately
Outline some ethical considerations in Service pricing
- Complex (eg. health insurance - paying more for fewer benefits)
- Piling on fees (eg. credit card late payments, online air bookings - should reflect cost to firm but don’t)
- Exploiting customer ignorance (eg. Trivago - show the hotels that pay them more per click rather than cheaper prices as stated)
- Designing fairness into revenue management
- > Design price schedules and fences that are clear, logical and fair
- > Use high published prices and frame fences as discounts
- > Communicate consumer benefits of revenue management
- > Use bundling to ‘hide’ discounts so perceptions of reference prices aren’t reduced
- > Take care of loyal customers
- > Use service recovery to compensate for overbooking
