1. Pricing and Revenue Management
Chapter 6
Pricing and Revenue Management

2. What Makes Service Pricing Strategy Different (and Difficult)?
No ownership of services--hard for firms to calculate financial costs of creating an intangible performance
Variability of inputs and outputs--how can firms define a “unit of service” and establish basis for pricing?
Many services hard for customers to evaluate--what are they getting in return for their money?
Importance of time factor--same service may have more value to customers when delivered faster
Delivery through physical or electronic channels--may create differences in perceived value

3. Objectives of Pricing Strategies
Revenue and profit objectives
Seek profit
Cover costs
Patronage and user base-related objectives
Build demand
Build a user base

4. The Pricing Tripod (Fig. 6.1)
Strategy
Costs
Competition
Value to customer

5. Three Main Approaches to Pricing
Cost-Based Pricing
Set prices relative to financial costs (problem: defining 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

6. Activity-Based Costing: Relating Activities to the Resources They Consume
Managers need to see costs as an integral part of a firm’s effort to create value for customers
When looking at prices, customers care about value to themselves, not what production costs the firm
Traditional cost accounting emphasizes expense categories, with arbitrary allocation of overheads
ABC management systems examine activities needed to create and deliver service (do they add value?)
Must link resource expenses to:
variety of products produced
complexity of products
demands made by individual customers

7. Net Value = (Benefits – Outlays) (Fig. 6.3)
Effort
Time e
Perceived
Outlays
Perceived
Benefits

8. Enhancing Gross Value Pricing Strategies to Reduce Uncertainty
service guarantees
benefit-driven (pricing that aspect of service that creates value)
flat rate (quoting a fixed price in advance)
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

9. Paying for Service: The Customer’s Perspective
Customer “expenditures” on service comprise both
financial and non-financial outlays
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)

10. Determining the Total Costs of a Service to the Consumer (Fig. 6.4)
Search Costs
Price
Operating Costs
Related Monetary Costs
Incidental Expenses
Time Costs
Purchase and
Use Costs
Physical Costs
Psychological Costs
Sensory Costs
Necessary follow-up
After Costs
Problem
solving

11. Trading off Monetary and Non- Monetary Costs (Fig. 6.5)
Which clinic would you patronize if you needed a chest x-ray (assuming all three clinics offer good quality) ?
Clinic A
Clinic B
Clinic C
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
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 minutes
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

12. Increasing Net Value by Reducing Non-financial Costs of Service
Reduce time costs of service at each stage
Minimize unwanted psychological costs of service
Eliminate unwanted physical costs of service
Decrease unpleasant sensory costs of service

13. Revenue Management: Maximizing Revenue from Available Capacity at a Given Time
Based on price customization - charging different customers (value segments) different prices for same product
Useful in dynamic markets where demand can be divided into different price buckets according to price sensitivity
Requires rate fences to prevent customers in one value segment from purchasing more cheaply than willing to pay
RM 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

14. The Strategic Levers of Revenue (Yield) Management
Quadrant 4:
Continuing Care
Hospitals
Quadrant 3:
Restaurants
Golf Courses
Unpredictable
Quadrant 2:
Hotel Rooms
Airline Seats
Rental Cars
Cruise Lines
Quadrant 1:
Movies
Stadiums/Arenas
Function Space
Predictable
Duration
Variable
Fixed
Price

15. Dealing with Common Customer Conflicts Arising from Revenue Management
Perceived Unfairness & Perceived Financial Risk Associated with Multi-Tier Pricing and Selective Inventory Availability
Customer conflict can arise from: Marketing tools to reduce customer conflicts:
Unfulfilled Inventory Commitment
Unfulfilled Demand of Regular Customers
Unfulfilled Price Expectation of Group Customers
Change in the Nature of the Service
Fenced Pricing
Bundling
Categorising
High Published Price
Well designed Customer Recovery Programme for Oversale
Preferred Availability Policies
Offer Lower Displacement Cost Alternatives
Physical Segregation & Perceptible Extra Service
Set Optimal Capacity Utilisation Level

16. Price Elasticity (Fig. 6.6)De Di
Price per
unit of
service
Quantity of Units Demanded
De : Demand is price elastic. Small changes in price lead to big changes in demand.
Di : Demand for service is price inelastic. Big changes have little impact on demand.

17. Key Categories of Rate Fences (Table 6.2)
Examples
Physical (Product-related) Fences
Basic Product
Class of travel (Business/Economy class)
Size and furnishing of a hotel room
Seat location in a theatre
Amenities
Free breakfast at a hotel, airport pick up etc.
Free golf cart at a golf course
Service Level
Priority wait listing
Increase in baggage allowances
Dedicated service hotlines
Dedicated account management team

18. Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences
Transaction Characteristics
Time of booking or reservation
Requirements for advance purchase
Must pay full fare two weeks before departure
Location of booking or reservation
Passengers booking air tickets for an identical route in different countries are charged different prices
Flexibility of ticket usage
Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price)
Non refundable reservation fees

19. Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Consumption Characteristics
Time or duration of use
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)

20. Key Categories of Rate Fences (Table 6.2 cont’d)
Non Physical Fences (cont’d)
Buyer Characteristics
Frequency or volume of consumption
Member of certain loyalty-tier with the firm get priority pricing, discounts or loyalty benefits
Group membership
Child, student, senior citizen discounts
Affiliation with certain groups (e.g. Alumni)
Size of customer group
Group discounts based on size of group

21. Relating Price Buckets and Fences to the Demand Curve (Fig. 6.7)
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-Wk Adv. Prchs, Sat. Night Stay, No changes/refunds
3-Week Adv. Prchs, Sat. Night Stay., $100 for Changes
Late Sales through Consolidators/ Internet, no refunds
Capacity
of Aircraft
No. of Seats Demanded
of 1st-class
Cabin
Price per
Seat

22. Ethical Concerns in Pricing
Customers are vulnerable when service is hard to evaluate or they don’t observe work
Many services have complex pricing schedules
hard to understand
difficult to calculate full costs in advance of service
Unfairness and misrepresentation in price promotions
misleading advertising
hidden charges
Too many rules and regulations
customers feel constrained, exploited
customers unfairly penalized when plans change

23. Pricing Issues: Putting Strategy into Practice (Table 6.3)
How much to charge?
What basis for pricing?
Who should collect payment?
Where should payment be made?
When should payment be made?
How should payment be made?
How to communicate prices?

24. Consumption follows the Timing of Payments (Research Insight 6.1)
Frequency of Health Club Visits
Annual Payment Plan
Semiannual Payment Plan
Time Line
Quarterly Payment Plan
Monthly Payment Plan
Source: John Gourville and Dilip Soman, “Pricing and the Psychology of Consumption,” Harvard Business Review, September 2002,