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Pricing Strategy
Competition
Costs
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
Value to customer
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Cost-Based Pricing
Set prices relative to financial costs
Competition-Based Pricing
Monitor competitors pricing strategy
(especially if service lacks differentiation) Who is the price leader? (one firm sets the pace)
Value-Based
Relate price to value perceived by customer
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Effort Time
Perceived Benefits
Perceived Outlays
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Relationship Pricing
non-price incentives discounts for volume purchases discounts for purchasing multiple services
Low-cost Leadership
Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price
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Financial costs:
price of purchasing service expenses associated with search, purchase activity, usage
Time expenditures Physical effort (e.g., fatigue, discomfort) Psychological burdens (mental effort, negative feelings) Negative sensory burdens (unpleasant sensations affecting any
of the five senses)
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Incidental Expenses
Physical Costs
Psychological Costs Sensory Costs Necessary follow-up Problem solving
After Costs
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Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ? Clinic A
Price $45 Located 1 hour away by car or transit Next available appointment is in 3 weeks Hours: Monday Friday, 9am 5pm Estimated wait at clinic is about 2 hours
Clinic B
Price $85 Located 15 min away by car or transit Next available appointment is in 1 week Hours: Monday Friday, 8am 10pm Estimated wait at clinic is about 30 45 minutes
Clinic C
Price $125 Located next to your office or college Next appointment is in 1 day Hours: Mo Sat, 8am 10pm By appointment estimated wait at clinic is about 0 to 15 minutes
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Variable
Quadrant 2:
Hotel Rooms Airline Seats Rental Cars Cruise Lines
Quadrant 3: Unpredictable
Restaurants Golf Courses
Quadrant 4:
Continuing Care Hospitals
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Marketing tools to reduce customer conflicts: Fenced Pricing Bundling Categorising High Published Price
Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability
Unfulfilled Inventory Commitment Unfulfilled Demand of Regular
Customers Unfulfilled Price Expectation of Group Customers Change in the Nature of the Service
Alternatives Physical Segregation & Perceptible Extra Service Set Optimal Capacity Utilisation Level
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Di De
De Di
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Rate Fences
Examples
Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theatre Free breakfast at a hotel, airport pick up etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team
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Transaction Characteristics
Time of booking or reservation Location of booking or reservation Flexibility of ticket usage
Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for an
identical route in different countries are charged different prices
Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non refundable reservation fees
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Early bird special in restaurant before 6pm Must stay over on Sat for airline, hotel Must stay at least five days
Location of consumption
Price depends on departure location, esp in international travel Prices vary by location (between cities, city
centre versus edges of city)
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Non Physical Fences (contd) Buyer Characteristics Frequency or volume of consumption Group membership
Child, student, senior citizen discounts Affiliation with certain groups (e.g. Alumni) Group discounts based on size of group
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Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)
Price per Seat
First Class Full Fare Economy (No Restrictions) One-Week Advance Purchase One-Week Advance Purchase, Saturday Night Stayover 3-Week Advance Purchase, Saturday Night Stayover 3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes 3-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds Late Sales through Consolidators/ Internet, no refunds
Capacity of Aircraft
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Time Line
Source: John Gourville and Dilip Soman, Pricing and the Psychology of Consumption, Harvard Business Review, September 2002, 90-96.
Time Line
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