service marketing (demand & capacity,pricing and distribution)

PRICING AND DISTRIBUTION OF SERVICE

By:

Subhrat Sharma

Sahil Dhawan

Sumit Singh

Rajesh Kumar

Agenda

Demand and Capacity Management

Pricing the Services

Distribution of Services


Issues for capacity-constrained service: lack of inventory capabilities.

Variation in demand pattern.

Strategies to adjust supply and demand.

Inventory Demand Through Waiting Lines and Reservations

• Shifting demand to match capacity

• Adjusting capacity to meet demand.


One of service industry is hospitality industry : Prominent problem is seen in the hotels.

Case of Ritz-Carlton Hotel in Phoenix, Arizona Challenge for the hotel is to fill 281 rooms 365 days of the year.

The variation in demand is tremendous.

Form November –mid April the demand is high but as the temp rises the demand fallsconsiderably.

Hotels have a decent traffic of business travelers, so demand on weekends decreases.

The focus is to manage the peaks and valleys of these demands


The fundamental issues is “The lack of inventory capabilities”.

Unlike manufacturing firms, service firms cannot built up inventories during the period of slowdemand to use later during high demands.

And this happen because of basic nature of the service.

So, Ritz-Carlton’s cannot move around to alternative location in the summer months.

The lack of inventory capability combined with fluctuating demand leads to a variety ofpotential outcomes:

Excess demand

Demand exceeds optimum capacity

Demand and supply are balanced at the level of optimum capacity

Excess capacity


Source: C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy: chap9, p261

Demand and Capacity ManagementT

ime Legal

Consulting

Accounting

Medical

Lab

or Law firm

Accounting firm

Consulting firm

Health clinic

Eq

uip

men

t Delivery service

Telecommunication

Network services

Utilities

Health club

Fac

iliti

es

Hotels

Resturants

Hospitals

Airlines

Schools

Theatres

Chruches

Capacity Constraints


Analyzing Demand patterns :

• Record Demand

• Demand may seem random, but analysis mayreveal a demand cycle for different segments

• Keep good records of transactions to analyzedemand patterns. For this we can use varioussoftware . E.g. : “Feastic” does it for restaurants.


Analyzing Demand patterns :

• Predictable cycles


Analyzing demand patterns:

• Random demand fluctuations

• Underlying causes of randomly changing demandlevels

• Weather

• Health problems

• Accidents, Fires, Crime

• Natural disasters


Strategies for matching capacity with demand

Shifting demand to match capacity

Shifting capacity to match demand.



• The strategy is to shift customers away from periods inwhich demands exceeds capacity, by convincing them touse the service during periods of slow demand.

• E.g.: happy hours in fast food chains, 50% discounts indominos in office hrs, all ladies night in cafes,

• This all is done to attract more customers to increasedemand and thus better utilize its productive capacity.


Demand too high Communicate busy days and times to

customers.

Modify timing and locations of servicedelivery

Offer incentives for nonpeak usage

Set priorities by taking care of loyal orhigh-need customers first.

Charge full price for the service –nodiscounts.

Demand too low Stimulate business from current

market segments.

Advertise peak usage times andbenefits of non-peak use

Vary how the facility is used.

Differentiate on price.

Vary service offering.



Adjusting capacity to meet demand

• This strategy focuses on matching supply and demand focuses on adjusting capacity.

• The main aim is to adjust, stretch and then align capacity to match customer demand.

• During period of high demand organization seek to expand capacity and in case of low demand it shrink the capacity to not waste the resources.


Demand too high Stretch time, labor, facilities and

equipment temporarily.

Use part-time employees

Cross-train employees

Hire part-train employees

Request overtime work fromemployees

Subcontract or outsource activities.

Rent or share facilities and equipment

Demand too low Schedule downtime during periods of

low demand.

Perform maintenance, renovations.

Schedule vacations

Schedule employee training

Lay off employees

Modify or move facilities andequipment.

Adjusting capacity to meet demand



• When demand exceed supply

• Steps to take to inventory demand (keep for use later)

• Asking customers to wait in line (queue), usually on a first-come first-served basis

• Offering customers the opportunity to reserve or book capacity in advance



• Waiting lines

• Almost nobody likes to wait

• An average person may spend up to 30 minutes/day waiting in line—equivalent to 20 months in an 80 year lifetime

• Not all queues take physical waiting in a single location

• Queues may be physical but geographically dispersed

• Some are virtual


Source:C. Lovelock and J. Wirtz, Service Marketing : People, Technology, Strategy



• Reservations

• Benefits of reservations

• Controls and smooth the demand

• Data captured helps organizations

• Prepare financial projections

• Plan operations and staffing levels

• Benefits businesses. Allows management to make sure some time is kept free foremergency jobs

• Pre-sells service

• Informs and educates customers in advance of arrival

• Saves customers from having to wait in line for service (if reservation times are honored)



• Reservations

• characteristics of well designed reservations

• Fast and user-friendly for customers and staff

• Answers customer questions

• Offers options for self service (e.g. Web)

• Accommodates preferences (e.g., room with view)

• Deflects demand from unavailable first choices to alternative times and locations



• Reservations

• Reservations strategies

• Reservations Strategies Should Focus on Yield

• Yield= actual revenue/potential revenue

• Yield analysis helps managers recognize opportunity cost of allocating capacity to one customer/segment when another segment might yield a higher rate later

• Decisions need to be based on good information

• Detailed record of past usage

• Supported by current market intelligence and good marketing sense

• Realistic estimate of changes of obtaining higher rated business

• When firms overbook to increase yield,

• Victims of over-booking should be compensated to preserve the relationship

PRICING THE SERVICES

PRICING OF SERVICES

• An effective pricing is central to financial success.

• Services organizations even use different terms todescribe the prices they set;

• Consumers often find service pricing

universities talk about tuition

Professional firms collect fees

Banks impose interest & services charges- the list goes on.

Different to understand- insurance products or hospital bills

Risky- when you make a hotel reservation on 3 different days, you may be

offered 3 different prices.

Sometimes even unethical- many bank customers complain about an array of

fees & charges they perceive as unfair.

OBJEVCTIVES OF PRICING OF SERVICES

Make the largest possible maximize demand, provided a

contribution or profit. Certain minimum level of revenue is

achieved.

Achieve a specific target

level, but do not seek to achieve full capacity utilization.

Maximize profits.

build market share and/or a

Cover fully allocated costs, large user base, especially if there are a

including corporate overhead. Lot of economies of scale that lead to

competitive cost advantage.

Cover costs of providing one FOR EXAMPLE:

particular service, excluding If development or fixed costs are high.

Overhead.

REVENUE & PROFIT OBJECTIVES

PATRONAGE & USER

BASED OBJECTIVES

THREE FOUNDATIONS OF PRICING STRATEGY

Once the pricing objectives are understood, we can focus on thepricing strategy.

The foundations of pricing strategy can be described as:

PRICING

STRATEGIES

COSTS

(to the

provider)

COMPETITORS

(PRICING)

VALUE TO

THE

CUSTOMERS

In many service industries, pricing used as to be viewed from financial andaccounting standpoint; therefore, cost-plus pricing often was used.

In these three pricing strategy, the costs a firm needs to recover usuallysets a minimum price, or floor, for specific service offering.

THREE FOUNDATIONS OF PRICING STRATEGY

APPROACHES TO PRICING SERVICES

COST BASED PRICING

(PRICE= DIRECT COST+ OVERHEAD COST+

PROFIT MARGIN)

COMPETITION BASED PRICING

1. When services are standard across providers, such as in dry cleaning

industry:

2. In oligopolies with a few large service providers, such as in airline or

rental car industry.

DEMAND BASED PRICING• Involves setting prices consistent with customer perception of

value: prices are based on what customers will pay for the

service provided.

Three Basic Price Structures and Difficulties Associated with Usage for Services

PROBLEMS:1. Small firms may charge too

little to be viable

2. Heterogeneity of services

limits comparability

3. Prices may not

reflect customer

value

PROBLEMS:1. Costs difficult to trace

2. Labor more difficult to

price than materials

3. Costs may not equal value

PROBLEMS:

1. Monetary price must be adjusted to reflect

the value of non-monetary costs

2. Information on service costs less available to

customers, hence price may not be a central factor

COST-BASED PRICINGIn this approach, a company determines expenses from raw materials

and labor, adds amounts or percentages for overhead and profits.

direct costs=> materials & labor that are associated withdelivering the service.

overhead costs=> share of fixed costs.

profit margin=> percentage of full costs

(DIRECT+OVERHEAD COSTS).

PRICE= DIRECT COSTS+ OVERHEAD

COSTS+ PROFITS MARGIN

F

COMPETITION BASED PRICING

r market.

SITUATIONS WHEN THIS APPROACH IS USEDPREDOMINANTLY:

i. when services are standard across providers, such as in the drycleaning industry.

ii. in oligopolies with a few large service providers, such as in theairline or rental car industry.

=> difficulties involved in provision of services sometimes makecompetition based pricing less simple than it is in goods industries.

DEMAND BASED PRICING

involves setting prices consistent with customer perceptions of the value: prices are based on what customer will pay for the services provided.

=> services and goods differ with respect to this form of pricing is that information on service costs may be less available to the customers, making monetary price not as salient a factor in initial service selection as it is in goods purchasing.

SUMMARY OF SERVICE PRICING STRATEGIES FOR FOUR CUSTOMER DEFINITIONS OF VALUE

Discounting

Odd Pricing

Synchro-pricing

Penetration Pricing

In detail….

A. Pricing strategies when the customers means “Value Is Low Price”

DISCOUNTING:

Service providers offer discounts or price cuts to communicate to price-sensitive

buyers that they are receiving value.

ODD PRICING:

It is the practice of pricing services just below the exact dollar amount to make

buyers perceive that they are getting a lower price.

SYNCHRO-PRICING:

It is the use of price to manage demand for a service by capitalizing on customers

sensitivity to prices.

PENETRATION PRICING:

In which new services are introduced at low prices to stimulate trial and

widespread use.

This strategy is appropriate when;

i. Sales volume of the service is very sensitive to price, even in the early stage of

introduction.

ii. It is possible to achieve economies in unit costs by operating at large volumes.

B.

Pricing strategies when the customer means “Value Is Everything IWant In a Service”

PRESTIGE PRICING:

It is a special form of demand-based pricing by service marketers who

offer high-quality or status services.

For certain services- restaurants, health clubs, airlines and hotels- a

higher price is charged for the luxury end of the business.

SKIMMING PRICING:

Skimming, a strategy in which new services are introduced at high

prices.

In this situation, customers are more concerned about obtaining the

service than about the cost of the service, allowing service provider

to skim the customers most willing to pay the highest prices.

C. Pricing strategies when the customers means “Value Is The Quality I Get For The Price I Pay”

VALUE PRICING:

It involves assembling a bundle of services that are desirable to a

wide group of customers and then pricing them lower than they

would cost alone.

MARKET SEGMENTATION PRICING:

with this strategy, a service marketer charges different prices to

groups of customers for what are perceived to be different quality

level of service, even though there may not be corresponding

differences in the costs of providing the service to each of these

groups.

D. Pricing strategies when the customer means “Value Is All That I Get For All That I Give”

PRICE BUILDING:

When customers find value in a package of services that are interrelated, price

bundling is an appropriate strategy . Bundling allows customers to pay less than

when purchasing each of the services individually.

COMPLEMENTARY PRICING:

this strategy includes 3 related strategies;

i. CAPTIVE PRICING=> the firm offers abase service or product and then

provides the supplies or peripheral services needed to continue using the

service.

ii. TWO PART STRATEGY=> the service price are broken into a fixed fee

plus variable usage fees.

iii. LOSS LEADERSHIP=> is the term typically used in retail stores

provides place a familiar service on special largely to draw the customer

to the store and reveal other levels of services available at high prices.

DISTRIBUTION OF SERVICES

APPLYING THE FLOW MODEL OF DISTRIBUTION TO SERVICES

Distribution embraces three interrelated elements:

Information and promotion flow To get customer interested in buying the service

Negotiation flow To sell the right to use a service

Product flow To develop a network of local sites

DISTINGUISHING BETWEEN DISTRIBUTION OF SUPPLEMENTARY AND CORE SERVICES

Distribution relates to both core services andsupplementary services

Core services for people processing and possession processing services requirephysical locations

Core services for mental stimulus processing and information processing can bedistributed electronically

Supplementary services can be tangible or intangible in nature; latter can bedistributed widely and cost-effectively via nonphysical channels

Telephone

Internet

INFORMATION AND PHYSICAL PROCESSES OF AUGMENTED SERVICE PRODUCT

Exceptions

Billing

Payment

Informationprocesses

InformationConsultation

Safekeeping

Physical processes

Order-taking

Core

Hospitality

DISTRIBUTION OPTIONS FOR SERVING CUSTOMERS

Customers visit service site Convenience of service factory locations and operational schedules important when

customer has to be physically present

Service providers go to customers Unavoidable when object of service is immovable

More expensive and time-consuming for service provider

Service transaction is conducted remotely Achieved with help of logistics and telecommunications

SIX OPTIONS FOR SERVICE DELIVERY

Customer goes to service organization

Service organization comes to customer

Customer and service organization transact remotely (mail or electronic communications)

Theater

Barbershop

Bus service

Fast-food chain

House painting

Mobile car wash

Credit card company

Local TV station

Mail delivery

Broadcast network

Telephone company

Type of Interaction between Customer and Service Organization

Single Site Multiple Sites

Availability of Service Outlets

CHANNEL PREFERENCES VARY AMONG CUSTOMERS

For complex and high-perceived risk services, people tend to rely on personalchannels

Individuals with greater confidence and knowledge about a service/channel tendto use impersonal and self-service channels

Customers with social motives tend to use personal channels

Convenience is a key driver of channel choice

PLACES OF SERVICE DELIVERY

Cost, productivity, and access to labor are key determinants to locating a servicefacility

Locational constraints Operational requirements

- Airports

Geographic factors

- Ski resorts

Need for economies of scale

- Hospitals

THE CHALLENGE OF DISTRIBUTION IN LARGE DOMESTIC MARKETS

Marketing services (i.e., physical logistics) face challenges due to: Distances involved (geographic areas)

Existence of multiple time zones

Multiculturalism (especially, immigrants and indigenous people)

Differences in laws and tax rates

Large U.S. companies counter this by: Targeting specific market segments

Seeking out narrow market niches

Serving multiple segments across a huge geographic area is biggest marketingchallenge

PLACES OF SERVICE DELIVERY

Mini-stores Creating many small service factories to maximize geographic coverage

- Automated kiosks

Separating front and back stages of operation

- Taco Bell

Locating in multipurpose facilities Proximity to where customers live or work

- Service stations

- Service Perspectives

TIME OF SERVICE DELIVERY

Traditionally, schedules were restricted

Service availability limited to daytime, 40 to 50 hours a week

Sunday historically considered as a rest day in Christian tradition,Saturday in Jewish tradition, and Friday in Muslim tradition

Today

For flexible, responsive service operations:

- 24/7 service—24 hours a day, 7 days a week, around the world

Some organizations still avoid 7-day operations, for example:

- Atlanta-based Chick-fil-A

“Being closed on Sunday is part of our value proposition”

SERVICE DELIVERY INNOVATIONS FACILITATED BY TECHNOLOGY

Technological Innovations

Development of “smart” mobile telephones and PDAs as well as Wi-Fi high-speed Internettechnology that links users to Internet from almost anywhere

Voice-recognition technology

Websites

Smart cards

- Store detailed information about customer

- Act as electronic purse containing digital money

Increase accessibility of services

Deliver right information or interaction at right time

Create and maintain up-to-date real-time information

E-COMMERCE: MOVE TO CYBERSPACE

Internet facilitates 5 categories of “flow” Information

Negotiation

Service

Transactions

Promotion

Electronic channels offer complement/alternative to traditional physical channels

Convenience (24-hour availability, save time, effort)

Ease of obtaining information online and searching for desired items

Better prices than in many bricks-and-mortar stores

Broad selection

E-COMMERCE: MOVE TO CYBERSPACE

Recent Developments link Websites, customer management (CRM) systems, andmobile telephony

Integrating mobile devices into the service delivery infrastructure can be used asmeans to: Access services

Alert customers to opportunities/problems

Update information in real time

SPLITTING RESPONSIBILITIES FOR SUPPLEMENTARY SERVICE ELEMENTS

Challenges for original supplier

Act as guardian of overall process

Ensure that each element offered by intermediaries fits overall service concept

As created by originating firm

As enhanced by distributor

As experienced by customer

+Core = Core

Core product Supplementary services

Total experience and benefits

FRANCHISING

Popular way to expand delivery of effective service concept

Franchising is a fast growth strategy, when Resources are limited

Long-term commitment of store managers is crucial

Local knowledge is important

Fast growth is necessary to preempt competition

Study shows significant attrition rate among franchisors in the early years of anew franchise system One-third of all systems fail within first 4 years

Three-fourths of all franchisors cease to exist after 12 years

Disadvantages of franchising Some loss of control over delivery system and, thereby, over how

customers experience actual service

Effective quality control is important yet difficult

Conflict between franchisees may arise especially as they gainexperience

Alternative: license another supplier to act on the original supplier’sbehalf to deliver core product, for example: Trucking companies

Banks selling insurance products

References:

Zeithaml, Valarie A; Mary Jo Bitner, Dwayne D. Gremler and Ajay Pandit (2011). Service Marketing: Integrating Customer Focus across Firm 6e; McGraw Hill Education (India) Pvt. Ltd, New Delhi. Chapter 15,12 and 17.

Lovelock,Christopher; Jochen Wirtz and Jayanta (2011) Service Marketing-People, Technology, Strategy, 7e.: Pearson, New Delhi.

harbert.auburn.edu/~lettwil/servch4

http://www.entrepreneur.com/encyclopedia/pricing-a-service

service marketing (demand & capacity,pricing and distribution)

Marketing

equipment demand

fluctuating demand

service firms

service marketing

service offering

service pricing universities

periods of low demand

period of slow demand