Pricing is a critical consideration for any organisation to be successful. The price of a service communicates the value of that service to consumers, but also considerable strategy is required to ensure pricing is feasible for the consumer as well as covering costs and achieving profit for the service organisation. However, as you will discover in this topic, pricing of services can be complicated and lead to frustration in the consumer.
Welcome to Topic 6: Developing Pricing Strategies to Match Customer Expectations. In this topic, you will learn about:
- The foundations of pricing strategy
- Formulating pricing objectives, strategies, and policies
- Different types of costs
- The significance of revenue management for service organisations
- How to communicate and implement service pricing strategies.
These relate to the Subject Learning Outcomes:
- Discuss the key concepts, principles and unique challenges of services marketing in relation to the extended marketing mix.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read Chapter 6 of the prescribed text - Lovelock et al. 2014, Marketing in the service economy, 6th edn., Pearson Australia.
Read the following journal article:
- Kim, J, Franklin, D, Phillips, M & Hwang, E 2019, ‘Online travel agency price presentation: examining the influence of price dispersion on travelers’ hotel preference’, Journal of Travel Research, 00(0):1-18.
Watch the following video:
Read the following articles:
- Dholakia, U 2017, When does pay what you want pricing work? Psychology Today.
- Nanayakkara, N 2019, How to align pricing with value through transparency and variety, EY.
Read the two (2) case studies:
- 'Spoilt for choice – finding the right private health insurance' on p. 160 of the prescribed text.
- 'Pricing and product bundling at Foxtel' on p. 166 of the prescribed text.
Read and watch the following content.
Pricing objectives
In order to develop appropriate pricing strategies for a service, we must first understand the broader objectives of the service organisation. The main categories of pricing objectives, as outlined in the Lovelock et al. (2014) text, are common regardless of whether you are selling a good or a service. You can have:
Revenue and profit objectives
Revenue and profit objectives seek to make the largest profit possible, achieve a specific monetary target, or otherwise maximise revenue. There are some revenue management systems that are unique to service settings, which we will explore in more detail. Within this objective, you also seek to cover all the associated costs with delivering the service.
Patronage and user base-related objectives
Patronage and user base-related objectives are for where the desired outcome is maximising demand (within certain revenue boundaries) or achieving full-capacity utilisation. This objective is common for service organisations seeking to build a user base. For new organisations, this objective centres around encouraging trial and adoption of a service. For developed organisations, this focus can be around building market share and expanding a user base.
Non-monetary pricing objectives
A third, less utilised objective (more applicable to government or non-for-profit sectors) is non-monetary pricing objectives. Here, the focus is on building demand with no revenue boundaries. The emphasis here is about providing equitable access to a service to benefit the market or community served, and to demonstrate the organisation’s values.
The role of price in marketing strategy
Once we know what broad organisational objectives are desired, an appropriate pricing strategy can be chosen. There are three (3) foundations of pricing strategy, commonly referred to as the pricing tripod (Lovelock et al. 2014):
- Cost-based pricing – setting a service price where all associated costs are covered, plus an additional profit margin.
- Perceived customer value – price is set according to what customers are willing to pay, based on their perception of service value.
- Competitor pricing – in highly competitive industries with relatively undifferentiated offerings, the service organisation with the lowest price has the advantage.
Perceived customer value
Let us consider perceived customer value in more detail. Value (in a service context) is a balance between all of the associated costs and benefits derived from a service (Lovelock et al. 2014). There are various types of costs and benefits, as outlined in the following table:
| Cost | Definition | Examples |
|---|---|---|
| Financial | Monetary cost of the service |
|
| Time and effort | Time and effort required to find, evaluate, purchase and access the service |
|
| Functional or performance risk | Ability of the service provider to meet customers’ needs |
|
| Psychological risk | Confidence in the service provider |
|
| Social | Approval of friends and relatives |
|
| = Total customer cost | ||
| Value | Definition | Examples |
|---|---|---|
| Functional or instrumental | Value is created if a service has the desired characteristics, is useful or performs a desired function |
|
| Hedonic or experiential value | focusing on the sensual experience, the emotional experience, or social connectedness |
|
| Symbolic or expressive value | customers attach psychological meaning to a service, especially ‘feeling good about ourselves’ |
|
| Cost or sacrifice value | Customers can increase their net value by reducing the cost of purchasing and using a service |
|
| = Total customer value | ||
Revenue (yield) management for services
Service organisations are in a unique position where offerings are perishable. A hotel room that is left empty does not yield any revenue, and this lost revenue cannot be recovered later.
Demand for the service can also vary according to many different factors (such as the individual’s time, need and availability), and some customers are willing to pay more for the same service than others (for example, a business passenger on a flight versus a leisure passenger).
Combining these factors leaves service organisations with a fascinating and important conundrum – how to maximise revenue in the face of all of these fluctuating variables? If a hotel sells their rooms at too high a rate, holding out for those willing to pay a premium, they could run the risk of leaving rooms empty. On the other hand, if they sell their rooms at too low a rate, they could book out early and potentially miss out on additional revenue by customers willing to pay a premium. Therefore, revenue management (also known as yield management or perishable asset revenue management) plays a crucial role in balancing these factors and maximising revenue (Lovelock et al. 2014).
Revenue management allocates perishable capacity units (such as rooms in a hotel) to existing demand in a way that maximises revenues, not patronage. The aim is to obtain the highest possible yield from each available unit of capacity at any given point in time. It is a sophisticated approach to managing supply and demand under varying degrees of constraint which allocates capacity to the highest paying customer segment.(Lovelock et al. 2014, p. 172)
Revenue management techniques can be utilised in any industry where the following factors apply:
- Capacities are relatively fixed and perishable
- Different market segments exist
- Service is sold in advance (or bookings)
- Variable and uncertain demand
- Low marginal sales variable but high marginal production cost (Lovelock et al. 2014, p. 173).
Pricing relative to demand levels
The key factor within revenue management is the idea that consumers have different levels of demand and willingness to pay for the same core service. Therefore, the way to maximise revenue is to understand who these different consumer segments are when they are likely to purchase, and prioritise those willing to pay a premium while still ensuring that capacity limits are monitored (Lovelock et al. 2014). There is no point having an empty plane hoping for last-minute business passenger bookings when those seats could yield some (lower) level of revenue. Once the plane leaves the airport, each empty seat is missed revenue.
One significant attribute of the price-insensitive consumer (the premium price segment) is that they often book closer to the time of consumption. For example, a business passenger will book a flight and hotel much closer to their departure date relative to leisure consumers and are willing to pay a premium to do so. Therefore, a certain amount of seats must be left unsold in anticipation of last-minute sales from price-insensitive consumers. Thanks to company data, reasonably accurate projections can be made about levels of demand at each price level, allowing service organisations to anticipate future demand (Lovelock et al. 2014).
Learning Task 1: Dynamic pricing
Read this article by Chitty, T 2019, This is how airlines price tickets, CNBC (and watch the 6 minute video within) on dynamic pricing in the airline industry.
Pricing relative to service conditions
Rather than relying solely on this timing aspect of demand – anticipating that price-insensitive consumers will purchase close to the time of consumption – there are further strategies that service organisations can employ to cater to the different consumer segments. For example, providers can include a slightly better service for those who place greater value or importance on the service for a higher price.
A great example of this is the varied prices of tickets at a concert venue. Seats closer to the stage will cost a higher price, while those with restricted views or further away will cost less. In situations where overall demand is higher, such as a long-anticipated famous musical production, the relative price of all seats will be much higher than a local musical performed in the same theatre (Lovelock et al. 2014).
Rate fences can also be used so that customers can self-select according to their willingness to pay. In this context, consumers select services with enhanced or reduced conditions, terms and rules with associated price differences (Guillet, Liu & Law 2014).
Again, using airlines as an example, most carriers employ rate fences where customers can select the inclusions/exclusions associated with the service. Consumers can opt out of check-in baggage for a lower fee, not receive drinks and snacks during the flight, and incur high costs if they need to change their flight. Conversely, for a higher fee, consumers can receive preferential check-in and boarding, food and drink services, pre-flight access to the business lounge and incur little to no cost for flight changes.
In this situation, customers are not simply paying a different price arbitrarily based on their price sensitivity, but rather they are getting a different level of service altogether. Therefore, this method is perceived as more fair and justified, as consumers have control over which offering they select. They see value in the different prices based on the exclusions/inclusions provided (Guillet, Liu & Law 2014).
Ethical considerations for pricing strategy
There are various ethical implications of pricing strategy in a service context. Key ethical considerations include (Lovelock et al. 2014):
- Layers and complexity of service costs
- Fees
- Exploiting customer ignorance.
In particular, organisations within the financial sector receive a lot of criticism in this regard (Lovelock et al. 2014). It can be difficult for consumers to understand or compare different service offerings and how they are charged. There can be hidden fees that seek to generate revenue once a consumer has committed to the service, rather than being a part of their consideration set during initial decision-making. Given general levels of financial literacy and interest or involvement in financial topics, those in the financial sector can exploit the fact that consumers might be unaware of what they are signing up to.
Learning task 2: Super funds
Read the article by Roberts (2018) about Australians disengaging with their superannuation and the idea that Super funds themselves are partially to blame for keeping consumers uninformed.
Therefore, fairness must be designed into revenue management to ensure consumers are treated equitably. Any potential short-term gain based on consumer manipulation is unethical, which ideally should be enough to deter that behaviour in its own right, but it also will likely yield in long-term disadvantage when consumers become privy to these manipulations. In recent years, the Banking and Financial Sector Royal commissions in Australia have forced banks to repay debts to consumers, making them the subject of public ridicule and scepticism and has led to incredibly stringent government regulation (Chalmers & Worthington 2019).
The Lovelock et al. (2014) text describes various strategies to design fairness into revenue management, including:
- Design price schedules and fences that are clear, logical and fair
- Use the complete service offering (high price) as the point of reference and frame fences as discounts/value for money options
- Communicate consumer benefits of revenue management
- Use bundling to draw focus to the total combination of benefits, rather than simple price differences
- Take care of loyal customers
- Use service recovery to compensate for overbooking.
Putting service pricing into practice
Once the service organisation has considered their pricing objectives and strategy, they can put it into practice by going through this checklist of common pricing considerations. Click on each of the questions to learn more about each stage of the checklist.
- What costs are the organisation attempting to recover? Is the organisation trying to achieve a specific profit margin or return on investment by selling this service?
- How sensitive are customers to different prices?
- What prices are charged by competitors?
- What discount(s) should be offered from basic prices?
- Are psychological pricing points (for example, $4.95 versus $5.00) customarily used?
- Execution of a specific task
- Admission to a service facility
- Units of time (hour, week, month, year)
- Percentage commission on the value of the transaction
- Physical resources consumed
- Geographical distance covered
- Weight or size of object serviced
- Should each service element be billed independently?
- Should a single price be charged for a ‘bundled’ package?
- The organisation that provides the service
- A specialist intermediary (travel or ticket agent, bank, retailer and so on)
- How should the intermediary be compensated for this work – flat fee or percentage commission?
- The location at which the service is delivered
- A convenient retail outlet or financial intermediary (for example, a bank)
- The purchaser’s home (my mail or phone).
- Before or after delivery of the service
- At which times of day?
- On which days of the week?
- Cash (exact change or not?)
- Tokens (where can these be purchased?)
- Stored value card
- Cheque (how to verify?)
- Electronic funds transfer
- Charge card (credit or debit)
- Credit account with service provider
- PayPal
- Third-party payment (for example, an insurance company or government agency).
- Through what communication medium (advertising, signage, website, electronic display, salespeople, customer service personnel)?
- What message content (how much emphasis should be placed on price)?
Knowledge check
Complete the following three (3) tasks. Click the arrows to navigate between the tasks.
Key takeouts
And that is it for Topic 6! Here are some key takeouts:
- Pricing objectives and subsequent pricing strategies at a general level are common for both goods and services. However, there are various factors of services that mean unique pricing mechanisms can be employed.
- The key factors at play for services are perishability (a hotel room that is left empty does not yield any revenue and that lost revenue cannot be recovered later) and variation in demand (some customers are willing to pay a higher price for essentially the same service). This dynamic means that service organisations must consider revenue management strategies to maximise profitability and balance demand.
- The service pricing issues of price layering, the complexity of service costs, hidden fees, and exploiting customer ignorance are examples of important ethical implications that arise in a service context. Therefore, fairness must be designed into revenue management to ensure customers are not exploited.
- Once pricing objectives, strategies and revenue management techniques are understood, service organisations must think about pricing issues on a more granular and operational level. For example, who, when, where and how should payment be made.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your seminar.
The following learning tasks will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified here will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
In a breakout room assigned by your lecturer, you will be given one (1) of the following questions to discuss. At the end of the discussion, you will share your responses with the class:
- What is the role of monetary and non-monetary costs in determining service prices?
- What is revenue management, how does it work, and what type of service operations benefit most from good revenue management systems?
In a breakout room assigned by your lecturer, you will be given one (1) of the following case studies from the prescribed text to discuss. At the end of the discussion, you will share your responses with the class:
- Spoilt for choice – finding the right private health insurance (p. 160).
- What are the price-specific ethical considerations highlighted in this case study?
- Consider the elements of service pricing implementation (the 7 pricing issues listed in table 6.6, p. 185). How does iSelect impact the pricing implementation strategies of the health insurance providers they compare on their website?
- Pricing and product bundling at Foxtel (p. 166)
- How has the industry landscape changed for Foxtel with the introduction of streaming services such as Netflix, Stan, Disney+ and so on? What pricing strategy differences are apparent in these streaming services versus Foxtel?
- What pricing strategy changes would you recommend to Foxtel in response to streaming services and why?
In a breakout room assigned by your lecturer, you will be given one (1) of the following questions to discuss. At the end of the discussion, you will share your responses with the class:
- How might revenue management be applied to each of the following services? What rate fences would you use and why?
- A theme park
- A movie theatre
- A golf course?
- Compare the pricing strategies of two (2) main competitors in a service industry that you are interested in. How far does the pricing tripod play a role? Can you determine who is the leader and who is the follower regarding pricing decisions?
Welcome to your post-seminar learning tasks for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of these are to be completed during your consultation session. Click on each of the following headings to read more about the requirements for each of your post-seminar learning tasks.
In your reflective journal, prepare a list of key terms and concepts from this topic that will be useful for your audit report. Find supporting references relevant to your chosen company in relation to these concepts.
You can access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
Your presentation is due for submission this week. Make your final preparations, rehearse and trial your presentation. When you are ready, film your presentation and submit it online.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
For those who want to go the extra mile, here are some additional useful resources:
- Avlonitis, GJ & Indounas, KA 2005, 'Pricing objectives and pricing methods in the services sector', Journal of Services Marketing, 19(1):47-57.
References
- Chalmers, S & Worthington, B 2019, Banking royal commission calls for compensation, crackdowns and an overhaul of financial regulators, ABC News, https://www.abc.net.au/news/2019-02-04/banking-royal-commission-report-at-a-glance/10777188
- Chitty, T 2018, This is how airlines price tickets, CNBC, https://www.cnbc.com/2018/08/03/how-do-airlines-price-seat-tickets.html
- Guillet BD, Liu, W, Law, R 2014, ‘Can setting hotel rate restrictions help balance the interest of hotels and customers?’, International Journal of Contemporary Hospitality Management, 26(6):948-973.
- Kim, J, Franklin, D, Phillips, M & Hwang, E 2019, ‘Online travel agency price presentation: examining the influence of price dispersion on travelers’ hotel preference’, Journal of Travel Research, 00(0):1-18.
- Lovelock, C, Patterson, P & Wirtz, J 2014, Services marketing, 6th edn., Pearson Australia.
- Roberts, N 2018, What is it with Australians not getting super?, Yell Creative, https://yellcreative.com/why-australians-dont-get-super/
