PRICING in Service Marketing Module 5

Marketing of Infrastructure Services and Utilities Module 5

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Module ~ 5


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PRICING


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PRICING METHODS

At the end of this module the learning

outcomes are

1. What is the concept of pricing?

2. What steps need to be followed in fixing

prices?

3. What are the various types of pricing

methods?


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Suggested Readings 1. Marketing Management by Philip Kotler,

Millenium edition, Chapter – 15 2. Service Marketing by Pearson: 7th edition

chapter 6

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What is pricing?

Pricing is customer‘s perception of the value of the product.

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PRICE – One of the element of Marketing Mix – Produces revenue – Other elements result in costs– Very flexible

- Changed quickly – Other elements relatively more difficult to

changeNeeds to be handled well?

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Pricing policy – six step procedure1. Selecting the pricing objective2. Determining demand 3. Estimating costs4. Analyzing competitor’s cost, prices and offers5. Selecting a price method6. Selecting final price

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Setting the price objectiveCan be many

- Survival

- Maximum current profit

- Maximum market share

- Maximum market skimming

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Example-Intel Market Skimming strategy:– New chip (Pentium 4) launched– Artificially high priced 1000 $– High margin– Who pays 1000 $– People who can’t wait– Gradually reduce price– Increases volume– Prices drop down to 50% after 2 yrs.– Pentium 5 will be ready– Pentium 4 will be phased out

Intel skims the market.

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Example- Market – Penetration Strategy• Launch at a lower market price• Gain market share AKAI Color TV

- Priced very low- How?- Chinese kits- Cheap.- Old for new.- Offered exchange schemes· Prices lowered further· Customer pays the difference· By 1998, was the no. 3 player in the market success

story.

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2. Determining demand– Price is related to demand– How sensitive is demand to price– Price elasticity of demand critical– Suppose price is increased by Rs.1 lac of two

cars• Maruti 800 • Mercedes.

– Where will be more affect on demand– Maruti – 800

Price is highly elastic to demand in Maruti – 800

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Price is highly inelastic to demand in case of Mercedes – Estimating price elasticity of demand is

critical. – This depends on

1. No of substitutes 2. Habits of consumers 3. Quality difference 4. Do buyers really notice the change

in price?

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3. Estimating costs.– Price = costs + profit– Costs are of two types• Fixed cost • Variable cost

Fixed cost - Do not change with volume sales

Examples– Salaries of sales personnel– Cost of building– Cost of trucks.

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Variable costs • Vary with sales volume. • Cost of raw material Maruti – 800

- Cost of wheel- Cost of engine - Cost of carburetor

Pricing has to be such that it recovers all costs in the long run

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4. Analyzing competitor’s costs prices and offersPricing has to consider – Competitor’s costs and prices– Image of competitors products – In a price war-

• Winner is the one who has the lowest cost –Do not try to fight on prices if your

costs are higher then your competitors

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5. Selecting a pricing method.Earlier we understood:

1. Customer’ s demand.2. Costs3. Competitors prices / cost

Six methods of pricing4. Mark up pricing5. Target – return pricing6. Perceived- value pricing7. Value- pricing8. Going- rate pricing 9. Sealed- bid pricing

PRICING METHODS


1. Mark – up pricing– Estimate costs– Add profit margin– Arrive at prices

Cost + Profit Margin = PRICE – Profit Margin• Depend on many factors• High on seasonal items• Fixed by government– Life saving drugs– Fertilizers– Electricity

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2. TARGET – RETURN PRICING- You investment in a business - You expect a return - Return varies from individual to individual

EXAMPLE - Suppose you invest 10 Lac Rs to make mixers - You want 20% return on investment

= 0.2 x 10 Lacs = 2 Lacs- Your costs are Rs 16/ mixer

No .of mixers to be sold = 50,000Target – return price = Unit Cost + (desired return x invested capital) Unit Sales

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= Rs 16 + 0.20 x 1000000 50,000 = Rs 20 If you sell 50000 mixers at a price of Rs 20,

you well earn a return on investment of 20%

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3. Perceived-value pricing

– Base price on perceived value

– Buyer’s perception of value and not seller’s cost, as the key to pricing

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Example HP – Printers

– HP – Leader in printers

– How to increase sales?

– Reduces prices of low end printers

– Affordable

– Volume has increased

– Increased prices of consumables

• Ribbons, cartridges

• High margins

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4. Value pricing – Low value pricing for a high offering

Compaq – Computers – Strong brand – Lowering prices – Competition from local assemblers – Making customers shift from assemblers

to branded manufacturers

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5. Going rate pricing – Basis of price largely on competitor prices – Prices almost identical – Typically in oligopolistic markets

Example Airtel, Essar, Reliance – Delhi

– Earlier Airtel, Essar – Prices almost identical– When one changes prices– Other follows– Launch of Dolphin – MTNL– Lower monthly charges– Lower airtime changes– Essar, Airtel, Reliance also lower


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6. Sealed – bid prices– Common as “Tenders”– Each company bids a price which is

confidential– Company quoting lower prices likely to get

business– If you bid very low price, your profit is less– High bid, less chances of getting order– You have to assess what your competitor will

bid?

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Sealed bid – ExampleDTC

– Runs buses– Requires tyres– Invites bids– Tyre manufacturer bid– CEAT, MRF, Goodyear, Apollo– Each has to put the “Right Price”– To be the lowest– Not very low– Sometimes MRF Wins– Sometimes Goodyear wins– Understanding each other’s strategy in the past

situation critical

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Setting the PriceThe Three Cs Model for Price Setting


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7. Selecting the Final Price– Discussed various pricing methods– Which one will suit the company– Other factors

a. Psychological Pricing Bata – Example

- Shoe price Rs. 999.95 paise- Three – Figure pricing

b. Influence of other Marketing – Mix elements

- Product quality- Positioning

Can Lifebuoy be priced at Rs. 35/-Can Mercedes be priced at Rs. 10 Lacs.

PRICING METHODS


DISTRIBUTION OF SERVICES


Delivering Service Through Intermediaries and Electronic

Channels Service Distribution

Direct or Company-Owned Channels

Franchising

Agents and Brokers

Electronic Channels

Common Issues Involving Intermediaries

Strategies for Effective Service Delivery Through

Intermediaries


Delivering Service Through Intermediaries

• Identify the primary channels through which services are delivered to end customers.

• Provide examples of each of the key service intermediaries.

• View delivery of service from two perspectives—the service provider and the service deliverer.

• Discuss the benefits and challenges of each method of service delivery.

• Outline the strategies that are used to manage service delivery through intermediaries.


Service Provider Participants

• service principal (originator)– creates the service concept

(like a manufacturer)

• service deliverer (intermediary)– entity that interacts with the customer

in the execution of the service(like a distributor/wholesaler)


Services Intermediaries

• Franchisees– service outlets licensed by a principal to deliver a unique

service concept it has created• e.g., Jiffy Lube, Blockbuster, McDonald’s

• Agents and Brokers– representatives who distribute and sell the services of one

or more service suppliers• e.g., travel agents, independent insurance agents

• Electronic Channels– all forms of service provision through electronic means

• e.g., ATMs, university video courses, TaxCut software


Benefits and Challenges forFranchisers of Service

• Benefits:– Leveraged business

format for greater expansion and revenues

– Consistency in outlets– Knowledge of local

markets– Shared financial risk

and more working capital

• Challenges:– Difficulty in

maintaining and motivating franchisees

– Highly publicized disputes and conflict

– Inconsistent quality– Control of customer

relationship by intermediary


Benefits and Challenges forFranchisees of Service

• Benefits:– An established business

format– National or regional

brand marketing– Minimized risk of

starting a business

• Challenges:– Encroachment– Disappointing profits

and revenues– Lack of perceived

control over operations– High fees


Benefits and Challenges in Distributing Services through Agents and Brokers

• Benefits:– Reduced selling and

distribution costs– Intermediary’s

possession of special skills and knowledge

– Wide representation– Knowledge of local

markets– Customer choice

• Challenges:– Loss of control over

pricing– Representation of

multiple service principals


Benefits and Challenges in Electronic Distribution of Services

• Benefits:– Consistent delivery for

standardized services– Low cost– Customer convenience– Wide distribution– Customer choice and

ability to customize– Quick customer

feedback

• Challenges:– Price competition– Inability to customize

with highly standardized services

– Lack of consistency due to customer involvement

– Changes in consumer behavior

– Security concerns– Competition from

widening geographies


Common Issues Involving Intermediaries

• conflict over objectives and performance

• difficulty controlling quality and consistency across outlets

• tension between empowerment and control

• channel ambiguity


Strategies for Effective Service Delivery Through Intermediaries

• Control Strategies:– Measurement– Review

• Partnering Strategies:– Alignment of goals– Consultation and

cooperation

• Empowerment Strategies:– Help the intermediary

develop customer-oriented service processes

– Provide needed support systems

– Develop intermediaries to deliver service quality

– Change to a cooperative management structure


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PHYSICAL EVIDENCE IN SERVICES


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At the end of this module the learning outcomes are

• What is the purpose of physical evidence?

• Various types of physical evidence • Role of physical evidence • Various types of physical evidence

strategies.


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Suggested readings

• Services Marketing by Zeithmal and Bitner, Chapter 10, 2nd edition


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What is physical evidence • Services are intangible • Customers rely on tangible cues or

physical evidence for evaluation of services

• Before purchase


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Elements of Physical Evidence Facility exterior • Exterior design • Signage • Parking • Landscape • Surrounding environment


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Facility interior • Interior design • Equipment • Signage • Layout • Air quality/temperature


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Other Tangibles• Business cards • Stationary • Billing Statements • Reports • Employee dress • Uniforms • Brochure • Internet / web pages


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Services Communication through physical evidence

• Heavy Hospitals Resorts Childcare

• Limited Insurance Courier service


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Types of physical evidence • Self–service (customer only) • Interpersonal services (Both

customer and employee ) • Remote service (employee only)


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Self-Service– Customer performs most of the activities – Very few employees involved

ATMs– Various locations– Mostly self service – How should the facilities be – Physical evidence – Pleasing – Easy to use for customers


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REMOTE SERVICES• Other extreme • Virtually no customer involvement • Customer rarely visits facilities • It may be another country • How physical evidence is designed • Employee interests and preferences • Motivate employees


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GE call centre in India • Harrod’s • Customer care• Done by GE in India • Facilities design in India • Indian flavour • Local culture Facilities design according to employee

taste and preferences


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Interpersonal services – Between two extremes – Both – Customer – Employee are present

Examples Hotels Hospitals Banks

How should the physical evidence be ?


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Interpersonal services Hospital• Physical evidence design • Take care of customer interest • Take care of employee interest• Affects the quality of interaction


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ROLES OF THE SERVICESCAPE – Package – Facilitator – Socializer – Differentiator


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Package • Would you buy an ‘Arrow’ shirt • From a grocery shop • Unlikely to buy• Why ? • Poor packaging and physical surroundings • In services, similar concept conveys an image • ‘Dress for success’• Potray a particular image


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PVR Multiplex • Movie content is same • Why people prefer PVR multiplex • The way it is packaged • Well designed facilities

Booking counter Lobby Chair Seats

• Huge successPackaging a key success factor


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Facilitator • How it improves your efficiency• Better facilities • Improves performance

Singapore Airlines • Reclining seats in 60s• Seats become like beds in 90s • Headphones • Video on seats • Facility to work on computers

Improves the customer efficiency


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Socializer • Employees and customers interact• Most offices • Seating place for employees • Customer meeting place • Closed room also provided • Privacy and confidential matters • Employees seating plan • At lower levels • Open space • No cabins • Conductive for socialization


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Socializer• Barista• Coffee parlor• Not just to sip coffee• Interaction• Read magazines• Play guitar• People sit for longer hoursAmbience conducive for socialization


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Differentiator • Physical design • Differentiates from competitors • Unusual/exotic experience In Hotels • Different designs • Unique experiences


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Differentiator Shakti restaurant – Hyderabad – Created on tree – Rooms are on different branches of tree – Has three floors– Unique experience


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Physical evidence strategies

• Recognise the strategic impact of physical

evidence • Map the physical evidence of service • Clarify roles of the servicescape• Assess and identify physical evidence

opportunities • Be prepared to update and moderate the

evidence • Work cross–functionally


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Recognize the strategic Impact of physical evidence

• Role of physical evidence must be defined • Before designing and executing service

strategy• Clarify the overall role of physical evidence • Decisions on physical evidence are

• Costly • Permanent


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Changing external design of a hotel

• Can you change the external design of a hotel

• Unlikely as changing the design is difficult

• Why ? • Need to break and rebuilt is a costly

decision


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Map the physical evidence of service

• Before deciding physical evidence • Take every employee into confidence • Show even customers • Get feedback • Finalise after consultation


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Clarify role of the servicescape • Identity roles of

Customers Employees

McDonald’s • Customers role • Created playing space for children • Keeping children busy • Informal and place to enjoy


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Assess and identify physical evidence opportunities

• Current Physical evidence • Is it enough • May be outdated• Physical evidence upgradation AirIndia • 1986 • Interiors design changed • Customers feedback • Airlines lacked modern image


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Be prepared to update and modernise the evidence.

• Everything has an element called ‘fashion’. • Design, colours and styles change. British Airways. • Earlier government company. • Privatised in 80’s. • Changed

• logo, • colour • aircraft, • dress.


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. Work cross-functionality.• What dress should employees wear when employees

service customers.• Different views.• Operations dept.• Comfort of employees.• Marketing department.• Appealing to customers.• Conflict.Something which is comfortable may not be

appealing and vice versa.


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How to ensure success• All have to work together.• Have a team which has members from

all departments.• Marketing• Operations• Finance

• Teamwork matters.

Date post:	16-May-2015
Category:	Education
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PRICING in Service Marketing Module 5

Education