Chapter 6

Setting prices and implementing revenue management

Strategy for setting a price must be based on the fact that what is understanding of companies
pricing objective. The most common pricing objective are related to revenues and profit as well
as building demand and developing a user base. Revenue target can be further broken as
division, Geographic unit, type of service and by customer segments. For following this practice,
a good knowledge of Costing, competition, and price elasticity market segments and their value
propositions is required. Market leadership often comes with low cost per user; as a result,
volume is necessary to generate revenue for future investments.

Once pricing objectives are clear, one has to focus on pricing strategy. Pricing strategy has
mainly three pillars: cost to provider, competitors pricing and value to the customer. In pricing
strategy, the cost a firm needs to recover usually sets a minimum price and for a specific service
offering and the customers perceived value of the offerings set a maximum price.

Cost based pricing - service cost can be estimated using fake semi variable and variable cost
with a notion of contributions in break-even analysis. For Complex product lines with shared
infrastructure, activity based costing approach will be useful. Activity based costing recognizes
virtually all activities taking place within a firm directly or indirectly support the production
marketing and delivery of complexity of goods & services.

Value based pricing- No customer will pay more for the service then he or she thinks it is
worth. Therefore, marketers needs to understand the perceived service value in order to set an
appropriate price. For a customer weighing the perceived benefit of services against perceived
cost they will incur. Value can be anything like low price, what a customer want in product, and
quality for the price. Service pricing strategies are often and successful all black a clear
Association price and value.
At the time of consideration of customer’s net value, we must understand the customers
perceived costs. It can be related monetary costs that incur in searching for purchasing and using
the services. Or it can be non-monetary cost like time costs, physical cost, psychological cost and
sensory cost. Pricing can also be done based on two segments of customer: one that spends time
to save money and another spends money to save time.
Competition based pricing- when firms have relatively undifferentiated services, they need to
monitor the competitor what they are charging and try to price accordingly. Otherwise, if there is
no differentiation in services customer will go to the cheapest service provider. Price competition
intensifies with increasing number of competitors, increasing substitutes, distribution channel
presence and an increasing surplus capacity in the industry.
Revenue management- revenue management is most effective when applied to service
businesses characterized by high fixed cost structure and relatively fixed capacity, variable and
uncertain demand and varying customer price sensitivity. The least price sensitive market is the
first to be allocated capacity with charging the highest price. Revenue management system must
has ability to predict 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.
Rate fences are needed to be well designed to define product for each target segment so that
customers with high value for a service offer are unable to take advantage of lower price buckets.
Rate fences can be physical or nonphysical. Designing fairness into revenue management can
help build perception of fairness and satisfaction in customers mind. It can be achieved by
designing price schedule and fences that are cleared logical and fare, use high-published prices
and frame fences as discounts, use bundling to hide discounts, and use recovery to compensate
for overbooking.
Customers appreciate when firm makes it easy to obtain price information and make reservation.
There are two basic options charge customer either pay in advance or when you have used the
service. Now a days payment process has shifted to credit cards debit card online payments,
which is basically providing convenience customer. Once the price is set, this must be presented
to humus in an unambiguous way so that customers will not be misled and question the ethical
standards of the firm.