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Effective Pricing is Central to Financial Success

The creation of a viable service require

Any pricing strategy must be based on
a business model that allows for the
clear understanding of a company’s
costs of creating and delivering the
pricing objectives.
Objectives of Service Pricing

•  Gain Profit and cover costs

•  Build demand and develop a
user base
•  Support positioning strategy
Pricing Tripod

1. Unit Cost to Firm 2. Value to Customer

(Cost-based (Value-based
Pricing) Pricing)

3. Competitor Pricing

1. Cost-based Pricing
•  Establishing the Costs of Providing Service
•  Activity-Based Costing
•  Pricing Implications of Cost Analysis
2. Value-based Pricing
•  Understanding Net Value
•  Managing the Perception of Value
•  Reducing Related Monetary and Non-Monetary Costs
3. Competition-based Pricing
•  Price Competition Intensifiers
•  Price Competition Inhibitors
Revenue Management
•  It is most effective when applied to service businesses
characterized by :
–  High fixed cost structure and relatively fixed capacity, which
result in perishable inventory
–  Variable and uncertain demand
–  Varying customer price sensitivity
Reserving Capacity for High-Yield Customers
•  Revenue management involves setting prices according to predicted
demand levels among different market segments.
•  Firms need a disciplined approach to save capacity for them instead
of simply selling on a first-come, first-served basis.
Price Elasticity
•  How sensitive demand is to changes in price.
•  If a small change in price has a big impact on sales, demand for that
product is said to be price elastic.
Rate Fences

•  Price Customization - Charging different customers different prices

for what is actually the same product.
•  Rate fences allow customers to self-segment on the basis of service
characteristics and willingness to pay.
•  Fences can be either physical or non-physical.
Key Categories of Rate Fences

•  Physical (Product-related) Fences

–  Basic Product
–  Amenities
–  Service Level
–  Other Physical Characteristics

•  Non-Physical Fences
Transactional Characteristics
Time of booking or reservation
Location of booking or reservation
Flexibility of ticket usage
Consumption Characteristics
Time or duration of use
Location of consumption
Fairness & Ethical Concerns in Service Pricing

•  Service Pricing is Complex

•  Piling on the Fees
•  Designing Fairness into Revenue Management
–  Design Price Schedules & Fences That Are Clear, Logical & Fair.
–  Use High Published & Frame Fences as Discounts.
–  Communicate Consumer Benefits of Revenue Management.
–  “Hide” Discounts through Bundling, Product Design & Targeting.
–  Take Care of Loyal Customers.
–  Use Service Recovery to Compensate for Overbooking.
Putting Service into Pricing

•  How Much Should Be Charged?

•  What Should Be the Specified Basis for Pricing?
•  Who Should Collect Payment and Where Should Payment Be Made?
•  When Should Payment Be Made?
•  How Should Payment Be Made?
•  How Should Prices Be Communicated to the Target Markets?