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Module 1: Service Distribution and Pricing Strategies

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Setting Prices and Implementing Revenue Management - Part 2

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MODULE OVERVIEW

Understanding the concept of net value and how gross value can be enhanced through value-based pricing and reduction of related monetary and non-monetary costs.
Describing competition-based pricing and situations where service markets are less price-competitive.
Defining revenue management and describe how it works. r

INTRODUCTION

Another leg of the pricing tripod is value to the customer.
No customer will pay more for a service than he or she thinks it is worth.
So, marketers need to understand how customers perceive service value in order to set an appropriate price.

VALUE-BASED PRICING
Understanding Net Value

When customers purchase a service, they are weighing the perceived benefits of the service against the perceived costs they will incur.

Managing the Perception of Value

Since value is subjective, not all customers have the skills or knowledge to judge the quality and value they receive.
This is true especially for credence services, for which customers cannot assess the quality of service even after consumption.

REDUCING RELATED MONETARY AND NON-MONETARY COSTS

When we consider customer net value, we need to understand the customers’ perceived costs.
From a customer's point of view, the price charged by a supplier is only part of the costs involved in buying and using a service.
There are other costs of service, which are made up of the related monetary and non-monetary costs.
Related Monetary Costs: Customers often incur significant financial costs in searching for,purchasing, and using the service, above and beyond the purchase price paid to the supplier.
Non-monetary Costs: Non-monetary costs reflect the time, effort, and discomfort associated with the search, purchase, and use of a service.
Time costs are part of the service delivery.
Customers may even use similar terms to define time usage as they do for money; for instance, consumers talk about budgeting, spending, investing, wasting, losing, and saving time.
Physical costs (such as effort, fatigue, discomfort) may be part of the costs of obtaining services, especially

if customers must go to the service factory,
if waiting and long queues are involved,
if body treatments are involved such as for medical treatments, piercing or waxing, and
if delivery is through self-service.


Psychological costs such as

mental effort (e.g., filling in account opening forms requesting for detailed information),
perceived risk and anxiety (“Is this the best treatment?”)
cognitive dissonance (“Was it good to sign up for this life insurance,this annual gym membership?”),
feelings of inadequacy and fear (“Will be smart enough to succeed in this MBA program?”)


Sensory costs relate to unpleasant sensations affecting any of the five senses.
In a service environment, these costs may include putting up with

crowding,
noise,
unpleasant smells,
excessive heat or cold,
uncomfortable seating, and
visually unappealing environments.



COMPETITION-BASED PRICING

The last leg of the pricing tripod is competition.
Firms with relatively undifferentiated services need to monitor what competitors are charging and should to try to price accordingly.
When customers see little or no difference between competing offerings, they may just choose what they perceive to be the cheapest
Here, the firm with the lowest cost per unit of service enjoys an enviable market advantage and often assumes price leadership.
One firm acts as the price leader, with others take cue from it.
Price Competition Intensifiers: Price competition intensifies with:

Increasing number of competitors.
Increasing number of substituting offers.
Wider distribution of competitor and/or substitution offers
An increasing surplus capacity in the industry.


Price Competition Inhibitors: Although some service industries can be fiercely competitive (e.g., airlines and online banking), not all are, especially when one or more of the following circumstances reduce price competition:

Non-price related costs of using competing alternatives are high.
Personal relationships matter. (e.g., hairstyling or family medical care)
Switching costs are high. (e.g., cancellation charges to cancel insurance policy before due date)
Services are often time and location-specific.



REVENUE MANAGEMENT

Revenue management is important in value creation as it ensures better capacity utilization and reserves capacity for higher-paying segments.
it’s a sophisticated approach to managing supply and demand under varying degrees of constraint.
Reserving Capacity for High-yield Customers:

In practice, revenue management (also known as yield management) involves setting prices according to predicted demand
levels among different market segments.
The least price-sensitive segment is the first to be provided capacity, paying the highest price; other segments follow at increasingly


A well-designed revenue management system can predict with reasonable accuracy

how many customers will use a given service
at a specific time
at each of several different price levels and


then block the relevant amount of capacity at each level (known as a price bucket)
Price Elasticity:

When price elasticity is at “unity,” sales of a service rise (or fall) by the same percentage that price falls (or rises).
If a small change in price has a big impact on sales, demand for that product is said to be price elastic.
If a change in price has little effect on sales, demand is described as price inelastic



CONCLUSION

In this module, we covered the concept of net value.
We also understood how gross value can be enhanced through value-based pricing and reduction of related monetary and non- monetary costs.
Competition-based pricing and situations where service markets are less price-competitive were also described.
We also covered the concept of revenue management and how it works.