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Module 1: Service Distribution and Pricing Strategies

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Setting Prices and Implementing Revenue Management - Part 1

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MODULE OVERVIEW

Recognizing that effective pricing is central to the financial success of service firms.
Outlining the foundations of a pricing strategy as represented by the pricing tripod.
Defining different types of financial costs and explain the limitations of cost-based pricing.

INTRODUCTION

Importantly, marketing is the only function that brings operating revenues into the organization. All other management functions incur costs.
Creating a viable service requires

a business model that allows for the costs of creating and delivering the service,
in addition to a margin for profits,
to be recovered through realistic pricing and revenue management strategies.



EFFECTIVE PRICING IS CENTRAL TO THE FIANCNCIAL SUCCESS OF SERVICE FIRMS

Characteristics of Service Pricing:

The pricing of services is complicated.
Consider the bewildering fee schedules of many consumer banks or cell phone service providers, or the fluctuating fare structure of a full- service airline.


Service organizations even use different terms to me describe the prices they set.
Consumers often find service pricing:

difficult to understand (e.g., insurance products or hospital bills),
risky (when you enquire about an intercontinental flight on three different days, you may be offered three different prices),
sometimes even unethical (e.g., many bank and credit card users complain about a variety of fees and charges they consider to be unfair)


Objectives for Establishing prices:

Revenue and Profit Objectives

Gain profit / Cover Costs


Patronage And User Base-related Objectives

Build Demand / Develop A User Base


Strategy-related Objectives

Positioning / Competitive Strategy





PRICING TRIPOD

The foundations of pricing strategy can be described as a tripod, with costs to the provider, competitors’ pricing, and value to thecustomer as the three legs.

DIFFERENT TYPES OF FINANCIAL COSTS

Fixed costs are economic costs a supplier would continue to incur (at least in the short run) even if no services were sold.
Variable costs refer to the economic costs associated with serving an additional customer, such as making an additional bank transaction or selling an additional seat on a flight.
Semi-variable costs fall in between fixed and variable costs. They represent expenses that rise or fall in a stepwise fashion as the volume of business increases or decreases.

COST-BASED PRICING AND ITS LIMITATIONS

Cost-Based Pricing: Service costs can be estimated, using fixed, semi-variable, and variable costs
Activity-based Costing: A set of activities that comprises the processes needed to create and deliver a particular service is then combined.
Pricing Implications of Cost Analysis

To make a profit, a firm must set its price high enough to or over the full costs of producing and marketing the service and add a sufficient margin to yield the desired profit at the predicted sales volume.
Some firms promote loss leaders, which are services sold at less than full cost to attract customers, who (it is hoped) will then be tempted to buy profitable service offerings from the same organization in the future.



CONCLUSION

We initiated this module by understanding the significance of effective pricing in the financial success of any service firm.
Next, we touched upon the foundations of a pricing strategy as represented by the pricing tripod.
Finally we looked into different types of financial costs and explained the limitations of cost-based pricing.