Business Model and Pricing strategies

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2. Exploring Business Models: Pricing
and Revenues
Module: Services Marketing
Module Instructor: Ma’am Shahwana
Group Members: Ali Zaidi BBS-14-06
Nida Fatima BBS-14-07
Maria Naveed BBS-14-08
Tooba Javed BBS-14-31
Ezza Zahid BBS-14-58
Bahauddin Zakariya University, Sub-Campus Sahiwal
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3. Effective pricing is central to financial
success
 What is business model ?
 Use of effective pricing mechanism:
 Sales are transformed into revenues
 Costs are covered
 Value is created for the owners of the business.
 Pricing in services is complicated like fee schedules of cell phone services provider.
 Services organization even use different terms to describe the prices they set.
E.g universities tuition fee, bank impose interest and services charges.
 Consumer often find services pricing difficult to understand like insurance products
or hospital services.
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4. Objectives for establishing prices
 Revenue and profit objectives
 Seek profit
 Make the largest possible contribution or profit
 Achieve a specific target level , but don’t seek to maximize profit.
 Cover cost
 Cover fully allocated costs, including corporate overhead.
 Cover cost of providing one particular service , excluding overhead.
 Cover incremental
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5. Patronage and user base-related
objectives
 Build demand
 Maximize demand .provided a certain minimum level of revenue is achieved.
 Achieve full capacity utilization.
 Build a user base
 Encourage trail and adoption of services. cell phone service subscription or life insurance
plans
 Build market share or large user base. If development or fixed costs are high.
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6. Pricing strategy
stands on three
foundation
 It consists on three legs
 Cost based pricing
 Competition
 Value to customer
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7. Cost based pricing
 Its involves setting prices relative to financial costs. Companies seeking to make a
profit must set a price sufficient to recover the full costs, variable, semi-variable,
and fixed of producing and marketing a services.
 Service business with high fixed cost include those with expensive physical
facilities such as hospital or colleges.
 Activity based costing
 Which recognize that virtually all activities taking place within a firm directly or indirectly
support the production, marketing, and delivery of goods and services.
 This type of strategy used in textile and food production.
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8. Competition-Based Pricing
 When customers don’t see a difference between competitive offerings, they choose the
cheapest
 Price competition is reduced when
 Non- price related costs of using competing alternatives are high
 Personal relationships matter e.g hairdresser, family medical care
 Switching costs are high
 Time and location specificity reduce choice
 When competing on price take into account the entire cost to customers including:
 All related financial and non-monetary costs PLUS switching costs
 Compare this cost to the competition
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9. Value-Based Pricing
 In value-based pricing, the price is based on what customers are willing to pay. The
more value your product or service has to your customers, the higher the price you can
charge. Value-based pricing strategies therefore are based on the value of the product
to individual.
 Examples of Value-Based Markets
The fashion industry is an example of a sector where value-based pricing is common. If a particular
designer becomes popular, the designer can charge more for the goods they create than if they
were not as popular. This same principle can apply to other markets where the idea of the
consumer’s outward image may be affected by possessing the item in question. Other industries
subject to value-based pricing include the automotive industry, name-brand pharmaceuticals,
cosmetics and personal care.
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10. Value-Based Pricing:
Understanding Net Value
 Net value
= Perceived benefits to customer (gross
value) minus all Perceived outlays (Money, Time,
Mental/Physical effort)
 Consumer surplus:
Difference between price paid and amount
customer would have been willing to pay in
absence of other options.
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11. Value-based Pricing:
Strategies for Enhancing Net Value
 Enhance gross value—benefits delivered
 Add benefits to core product
 Enhance supplementary service
 Manage perceptions of benefits delivered
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12. Value-based Pricing:
Enhancing Perceptions of Gross Value
 Reduce uncertainty
 Service guarantees
 Benefit-driven—pricing aspect(s) of service that create value
 Flat rate (quoting a fixed price in advance)
 Relationship pricing
 Nonprice incentives
 Discounts for volume purchases
 Discounts for purchasing multiple services
 Low-cost leadership
 Convince customers not to equate price with quality
 Keep economic costs low to ensure profitability at low price
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13. REDUCING RELATED MONETARY AND
NONMONETARY COSTS
When we consider customer net value, we need to understand the customers
perceived costs .From a customer point of view, the price charged by a supplier is only
part of the cost involved in buying and using a service.
 Incremental financial outlays
Customers often incur significantly financial costs in searching for purchasing and
using their service, above and beyond the purchase price paid to the supplier. For
instance the cost of an evening at the theater for a couple with young children usually
for exceeds the price of the two tickets. Because it can include such expenses as hiring
a babysitter, travel, parking, food and beverages.
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14. REDUCING RELATED MONETARY AND
NONMONETARY COSTS
 Non-monetary costs
Non-monetary cost reflect the time, effort and discomfort associated with search
purchase and use of a service. Non monetary tends to be higher when customer
involved in the production and must travel to service site. Services high on experience
and credence attributes. There are four categories of nonmonetary costs.
 Time costs: time usage
 Physical costs: fatigue and discomfort
 Psychological (mental) costs: mental effort, perceived risk, cognitive dissonance, fear etc
 Sensory costs; unpleasant sights, sounds, feel, tastes, smells
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16. Trading Off Monetary and Non-Monetary Costs
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17. Revenue Management:
What it is and How it works
Many services business now focus on strategies to maximize the revenue that can be
derived from valuable capacity at an given point in time . revenue management is
important in value creation.
 Revenue management is most effective when applied to business service
characterized by:
 Higher fixed cost structure and relatively fixed capacity , which results in perishable
inventory.
 Variable and uncertain demand.
 Varying customers price sensitivity.
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18. Reserving Capacity for High-Yield Customers
 Revenue management also know as yield management involve setting prices
according to predicated demand among different market segment. the least price
sensitive segment is first to be allocated capacity, paying the highest price, other
segments follow at lower prices for example business travelers often reserve airline
seats .hotel rooms, and rental cars at short notice but vacationers may book leisure
travel months in advance and convention organizer often block hotel space years in
advances of a big event.
 A well designed management system can predict with reasonable accuracy how
many customers will use a given service at a specific time at each of several different
price and then relevant amount of capacity at each level.
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19. How does competitor pricing affect revenue
management
 Because revenue management system monitor booking pace , they indirectly pick
up the effect of competitors . if a firm price is to low , it will experience higher
booking pace, and it cheaper seats fill up quickly .that is not good and it means
higher share of late booking but higher fare paying customers will not be able to
get their seats confirmed and will therefore fly on competing airlines.
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20. Price Elasticity
 For management revenue to work effectively, there need to be two or more
segments that attach different value to the service and have different price
elasticity. To allocate and price capacity effectively, the revenue managers need to
determine how sensitive demand is to price and what net revenue will be
generated at different prices for each target segment.
 Price elasticity = Percentage change in demand
Percentage change in price
 When price elasticity is at unity ales of a service rise by the same percentage the
price falls. If a small change in price has a big impact on sales demand for that
product is said to be elastic.
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21. Designing Rate Fences
The basic idea of price customization is simple. Have people pay prices based on the
value they put on the product? Obviously you can not just hang out a sign saying ,”Pay
me its what to you or its $80 if you value it that much but only $40 if you do not.” You
have to segment customers by their valuation. You have to built a fence between high
and low valued customers.
 Physical fences:
Tangible product differences related to the different prices such as seat location in
cinema hall and etc.
 Non-physical fences:
Refer to the consumption, transaction or buyer characteristics. For example cancelation
or change in reservation, using helpline centres and etc.
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22. Examples of common rate fences (Table
5.2)
 Physical (product related) fences:
 Basic Product (class of travel, seat location in theatre).
 Amenities (free breakfast at hotel, free clothes against shopping).
 Service Level (Dedicated service hotlines, dedicated account management team)
 Non-physical fences:
 Transaction characteristics
 Time of booking (full payment before departure).
 Location of booking (different prices from different booking locations in different
countries for same route).
 Flexibility of ticket use(fees on cancelation or changing reservation)
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23. Non-physical fences (cont.)
 Consumption characteristics
 Time or duration of use (must stay for 5 hours or 5 nights).
 Location of consumption (prices vary by locations).
 Buyer characteristics
 Frequency of consumption (platinum member).
 Group membership (children, students, senior citizens).
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24. Related Price Buckets to the Demand
Curve
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25. Ethical Concerns in Service Pricing
Do you sometimes have difficulty understanding how much it going to cost you to use a
service? Do you believe that many prices are unfair? If so, you are not alone. The fact is,
service users can not always be sure in advance what they will receive in return for their
payments. There’s an implicit assumption among many customers that a higher priced
service should offer more benefits and batter quality than a lower priced.
 Are Services Pricing Schedules too Complex?
Many people find it difficult to forecast their own usage which makes it hard to compute
comparative prices when evaluating competing supplier whose fees are based on variety
of usage-related factors.
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26. Designing fairness into revenue
management
Design price schedules
and fences that are
clear, logical and fair.
(no show or
cancelation charges.)
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Use high published
prices and frame
fences as discounts.
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Use bundling to
“Hide” discounts.
3
Take care of loyal
customers.
4
Use service recovery
to compensate for
overbooking.
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27. Putting Service Pricing into Practice
1. How much should be charged for this service?
The reason went into business selling to customers was to make profit. If service marketers
giving away services for less than cost, or just breaking even, then it’s mean he is operating
a non-profit venture- or a business that’s likely to fail. So, service marketers should create
and implement a well-thought pricing strategy.
 What costs are the organization attempting to recover?
The organization trying to achieve a specific profit margin or return on investment by
selling the service.
 How sensitive are customers to various prices?
The customers which are paying a money against any services are sensitive to various prices
 What prices are charged by competitors?
Service marketers need to be aware of what competitors are charging for similar services in
marketplace
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28. Putting Service Pricing into Practice
 What discounts should be offered from basic prices?
Need to know how much and when discount should be offered
 Are psychological pricing points customarily used?
Need to know either using odd pricing such as charging $4.95 instead of $5 or not
2. What should be the basis of pricing?
Define a unit of service as the specified basis for pricing. Many options may exist:
 Completing a task:
Price may be based on completing a promised service task (such as repairing a piece
of equipment or cleaning a jacket)
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29. Putting Service Pricing into Practice
 Admission to a service facility:
Price may be based on admission to a service performance (such as educational
program or a sport event)
 Units of time Percentage commission on the value of the transaction:
Price may be related to a monetary value associated with service delivery, as when an
insurance company scales its premium to reflect the amount of coverage provided
 Physical resources are consumed:
Service prices are tied to the consumption of physical resources such as food ,drinks,
natural gas
 Geographic distance covered:
Calculation of an average cost per mile
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30. Putting Service Pricing into Practice
 Weight or size of object serviced:
Freight companies using a combination of weight and distance to set their rates
 Should each service element be billed independently?
Service marketers may charge price component elements separately
 Should a single price be charged for a bundled package?
Service marketers may charge an inclusive price for all elements
3. Who should collect payment?
Customers appreciate when a firm makes it easy to obtain price information and make
reservations. They also expect well-presented billing and convenient procedures for
making payment
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31. Putting Service Pricing into Practice
 The organization that provides the service:
The firm that provides the services to the customer itself collect the payment
 A specialist intermediary:
Firm may delegate these tasks to intermediaries such as travel agents, retailer etc.
 How should the intermediary be compensated for this work:
Original supplier pays a commission (flat fee or percentage commission)
4. Where should payment be made?
Service delivery sites are not always conveniently located
 The location at which the service is delivered:
Consumer pay against the service at the place where one get the service directly from
company or intermediaries
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32. Putting Service Pricing into Practice
 A convenient retail outlet or financial intermediary:
Another way of paying against the service is to hand-over the money at the location of
intermediaries
 The purchaser's home:
Another way where the payment can be made is at the purchaser’s location
5. When should payment be made?
 Before or after delivery of the service:
A service provider may ask for an initial payment in advance of service delivery, with
the balance due later. This approach is quite common for expensive repair
 At which times of day:
Sometimes it is inconvenient to pay each time a regularly patronized service such as
the Postal Service or public transport
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33. Putting Service Pricing into Practice
6. How should payment be made?
When choosing payment methods, think about their advantages and disadvantages
affect the customers
 Cash:
Cash may appear to be the simplest method, but it raises security problems
 Electronic funds transfer:
It’s the electronic transfer of money from one bank account to another, either within a
single financial institution or across multiple institutions
 Charge card (credit or debit):
Credit and debit cards can be used around the world. As their acceptance has become
almost universal, business that refuse to accept them increasingly find themselves at a
competitive disadvantage
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34. Putting Service Pricing into Practice
 Vouchers:
Vouchers are sometimes provided by social service agencies to elderly or low income
citizens
 Third-party payment:
It’s may be done by third party such as insurance company
7. How should prices be communicated to the target market?
People need to know the price for some product offerings well in advance of purchase.
They also need to know how, where and when that price is payable
 Through what communication medium:
Which medium service marketers should use to communicate the prices to the target
market such as advertising, electronic display, salespeople, customer service personnel
 What message content:
The message should be easily understandable and comprehensive. The content of the
message should be attractive
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