L6: Setting Prices & Revenue Mgt
1️⃣ Objectives of Pricing Strategies
Revenue and Profit Objectives - Seek profit, cover costs
Patronage and User-Based Objectives - Maximise demand
Build a user base - Stimulate trial and adoption, build market share
2️⃣ Pricing Strategies
Value-based
Competition-based
Cost-based
Traditional
Activity-based Costing
May result in reducing value generated for customers
Relative to costs - problems arise when end cost is too high b/c of fixed costs and overhead
More accurate to allocate indirect costs based on resource needed to perform each service/activity
Set price higher than costs allow achieving desire profit BUT in reality, set price lower than costs
ABC approach is more complex
Firm increases perceived value with added benefits to the core service
Managing perception of value:
Net Value = Perceived Benefits - Perceived Costs
Relate price to value perceived by customer
Reduce non-monetary costs
Reduce related-monetary costs
Need effective comm. and personal explanations to explain value
Physical costs
Psychological
Time-costs
Sensory costs
Create competitive advantage by reducing monetary and non-monetary costs
Minimise unwanted psychological costs
Eliminate unwanted physical costs
Reduce purchase, delivery and consumption patterns
Decrease unpleasant sensory costs
Suggest ways for customers to reduce other monetary costs
Non price-related costs of using competing alternatives are high
Personal relationships matter
When Price Competition is Reduced
Switching costs are high e.g. compensation with contracts, transfer fees
Don't compete $ to $, examine all financial and non-monetary costs
3️⃣ Rate Fences
Types of Fences
Help companies to restrict lower prices to customers willing to accept certain restrictions on their purchases and consumption patterns
Allow customers to self-segment on the basis of service characteristics and customers' willingness to pay
Non-physical fences: Differences in consumption, transaction, or buyer characteristics, but the service is basically the same e.g. cheaper to book the same plane ticket 3-6 months ahead
Physical fences: tangible product differences related to the different prices e.g. seat location in the cinema
Categories of Fences
Physical (product related)
Amenities - airport transfer, complimentary breakfast
Service level - priority queue e.g. check-in, special airport lounge
Basic product - class of travel, hotel room type, cinema seat location
Non-physical
Consumption-based - time/duration of use, location of consumption
Buyer characteristics - group membership, size of customer group, geographic location
Transaction-based - time of booking, location of booking, flexibility of usage