Week 5 Flashcards
objective for establishing prices
- Revenue and profit objectives
- Patronage and user-base related objectives
- Non-monetary pricing objectives
revenue and profit objectives
Seek profit (Cover costs) o Make the largest profit possible o Maximize revenue from a fixed capacity by varying prices and target markets over time e.g. ski resorts, hotels, airlines (revenue management
Patronage and user-base related objectives (e.g. sporting events, restaurants)
o Build demand: achieve full capacity utilization where customers are important to the experience e.g. nightclub
o Build a user base: Encourage trial and adoption of a service e.g. new bar
Build market, especially if there are a lot of economies of scale that can lead to a competitive cost advantage e.g. cable tv (penetration pricing)
Non monetary pricing objectives:
Ensure fairness, equity and affordability for the markets served and focus on positive attitudinal and behavioral response e.g. legal aid, aged care facilities, animal protection.
Not focused on profit motives, but still need to cover costs
3 roles of pricing in marketing stratergies
Functional role: To help generate sales, revenue, cash flow and profits
Strategic role: To symbolize quality and value offered, to help position and differentiate a service, to manage demand, to pre-empt competitors and to maximise financial performance
e.g. expensive car = high quality *rule of thumb
Cost-based pricing = Number of units of inputs used, multiplied by the cost per unit, plus a profit margin, e.g., catering, building, accountancy, vehicle servicing, engineering, legal, utilities
o Costs of materials used x by desired profit margin
o Simply industries – trades
o Contract stipulated the final price will be based on the costs incurred
define fixed costs
(unchanging) incurred if no service is provided, e.g., permanent staff salaries, rent, insurance, cost of capital, security
define semi variable costs
telephone charges; permanent staff do overtime or company hires temporary labour
Define variable costs
– fluctuate as a direct consequence of what has been produced, e.g., ingredients in a restaurant meal, permanent staff if they were hired and fired as output changed
o Preferred rather than fixed costs e.g. quiet times = fewer costs
define marginal costs
costs are those incurred in making an additional sale (cost pf produce an additional unit)
define contribution margin
is the difference between the variable cost and the price charged (covers overheads)
problems of cost based pricing
o Not considering actual demand (will houses actually sell?)
oNot considering that fixed costs (FX will remain even if demand falls and units unsold) and variable costs behave differently
o Only suitable for profit objective
o Not talking competition into account
o Difficulties in calculating cost per unit
o Tedious record keeping
break even point
That quantity of output at which total revenue equals total costs, assuming a certain sale price
break even calculation
total fixed costs / selling price - average variable costs
= require units to sell
limitations:
o Assumes constant fixed and variable costs
o Tells us what must be sold, rather than what can be sold
define net value
benefits minus costs
4 different types of value
- Functional
- Hedonic or experiential value focusing on the emotional or sensual experience or the social connectedness e.g. skydiving, Facebook
- Symbolic or expressive value – Physchlogical value, makes you feel good about yourself going out for dinner, donating money
- Cost or sacrifice value (e.g. Aldi)
reducing related monetary and non monetary costs
oWorking with operations to reduce the time required to complete the purchase, delivery and consumption
oRedesign unpleasant and inconvenient procedures retrain staff to be friendlier (psychological costs)
oEliminating or minimising unwanted physical effort, notably during search and delivery processes
oDecreasing unpleasant sensory costs by creating more attractive visual environments, reducing noise or installing more comfortable furniture
oSuggesting ways in which customers can reduce associated monetary costs
Innovative pricing mechanisms to manage value:
Dynamic pricing: prices differ over time, between customers and from one service situation to another, e.g., Jetstar
Reverse auctions
Name your own price, e.g.
influence of competitors on price
Price competition intensifies with:
- Increased number of competitors
- Increased substituting offers
- Wider distribution of competitor and substitution offers
- Increased surplus capacity in the industry
Greater competition will reduce prices (increase in supply)
Factors that may reduce pricing competition
o Non-price-related costs of using competing alternatives are perceived to be high, e.g., saving time and effort are as important as saving money
o Personal relationship discourages switching
o Time and location specifics reduce choice, e.g., activities at a tourist destination
o Switching costs are high, e.g., smartphone plans, health clubs
Revenue management / yield management define
Allocates perishable capacity units to existing demand in a way that maximizes revenues, not patronage
Allocate capacity to the highest paying customer segment first
o Concerned with obtaining best possible yield from each available unit of capacity (e.g. airplane seat, hotel room, hospital bed)
o 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
yield management most appropriate for service firms when:q
o They have relatively fixed capacity
o They have perishable inventory
o They have different market segments or customers, who arrive or make their reservations at different times
o They have low marginal sales costs and high marginal capacity change costs
o The product is sold in advance
o There is fluctuating demand
o Customers who arrive or reserve early are more price sensitive than those who arrive or reserve late
price elasticy explain
How sensitive demand is to changes in price
o Demand for a service product is elastic if a change in price results in a greater change in demand for the service product
o When changes in price have little effect on sales it is inelastic
o As revenue management systems monitor booking pace, they indirectly pick up the effect of competitors pricing
explain rate fences and buckets
- Revenue management uses mathematical models to examine historical data and real time information to determine
- What prices to charge within each price bucket
- How many service units to allocate to each bucket
- Rate fences deter customers willing to pay more from trading down to lower prices (e.g. making patrons stay a minimum of nights at a hotel)
physical rate fences
basic product - e.g. class of travel (business, economy)
size of rental car
size of hotel room
Amenities e.g.:
free breakfast at hotel
Free gold cart at gold course
valet parking
Service level e.g.
priority wait listing
seperate checkins
personal buttler
non physical fences (transaction characteristics)
time of booking or reservation
e.g. discounts for advance bookings
Location of booking or reservation
e.g. passengers booking air tickets for an identical route in different countries are charged different prices
customers making reservations online are charged a lower price than those making reservations by phone
Flexibility of ticket usage e.g.
fees for cancelling or changing a reservation (up to loss of entire ticket price)
non refundable fees
Consumption rate fences
time or duration of use
e.g.
early bird special in restaurant before 6:00pm
must stay over saturday night for a hotel booking
must stay at least for 5 nights
Location of consumption
e.g.
Price depends on departure location, especially international travel
Price vary by location (between cities, city centre v edges of city)
how is effectiveness of revenue management measured
Asset revenue generating efficiency (ARGE)
o Index/measure of the extent to which an organisation’s assets are achieving their full revenue-earning potential and yield
o Understand the relationship between the average price actually obtained per unit of service and the maximum price that might have been charged for that same service unit
o The ARGE approach identifies the opportunity costs in accepting one market segment over another, e.g., in the case of a hotel selling rooms to different markets
Role of marketing in ARGE maximization
- Identifying the principal market segments
- Forecasting the volume of business per segment (e.g. 600+ business executives)
- Recommending the ideal business mix
- Providing specific sales targets per segment
- Providing guidelines for what prices to charge each segment at specific points in time.
- Monitoring actual performance and responding appropriately
ethical considerations in service pricing
- Service pricing is complex, e.g., health insurance, telcos
- Piling on the fees, e.g., credit card late payments, car rental
- Exploiting customer ignorance; need to educate consumers
- Designing fairness into revenue management
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
What are the types of costs likely to be most significant in services?
o Fixed costs significant cause they must be borne regardless of how much capacity is utilised (vital that fixed costs are kept to a minimum)
o Fixed personnel can account for 65% of all operational costs
o Variable costs play a significant role in determining the contribution margin and in maximizing resource utilization and yield
Explain the concept of ‘yield management’ in a service setting:
o They have relatively fixed capacity
o They have perishable inventory
Concerned with obtaining the best possible yield or return from every available unit of capacity to be sold
Downside of the perishability characteristic of services can be effectively countered so that available capacity can be sold and utilised to it’s fullest potential and with the best possible return to the firm
‘dynamic pricing’
define yield percentage
Relationship between average price that might be charged and the maximum price that might have been charged (how effective is the service at achieving the maximum price for it’s services
define arge
Capacity usage rate (how much of the rooms were actually used) multiplied by the percentage of yield
Enables a firm to improve productivity to operate more cost effectively to ensure that it’s assets are achieving their full revenue earning potential, to improve sales and profitability
Arge maximization depends on customer knowledge; service organisations that pursue ARGE are likely to be better informed than competitors who do not
