1. JAN 2013 Semester
1
Service Quality
MKTG 1268
Lecture Four
• Distributing Services Through
Physical and Electronic
Channels (Chap 5)
• Setting Prices and
Implementing Revenue
Management (Chap 6)

2. This lecture:
2
 Another heavy lecture week.
 Two chapters involved (5 and 6)
 Rather technical in nature especially for Chapter Six
(revenue management)
 Last week focused on Positioning and Product
 This week focus on two additional Ps
Place
Price

3. • Distributing Services Through Physical and
Electronic Channels
3 Chapter Five
Distributing Services Through Physical
and Electronic Channels

4. Overview Of Chapter 5
4
 Distribution in a Services Context
 Distribution Options for Serving Customers:
Determining Type of Contact
 Place and Time Decisions
 Delivering Services in Cyberspace
 The Role of Intermediaries
 Distributing Services Internationally

5. Distribution in a Services Context
5
 In a services context, we
often move nothing
 Experiences, performances
and solutions are not being
physically shipped and stored
 More and more informational
transactions are conducted
through electronic and not
physical channels

6. So what is being distributed?
6
The three interrelated elements of distribution are:
 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

7. Distribution Options for Serving Customers
7
 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
 Needed for remote areas
 Greater likelihood of visiting corporate customers than
individuals
 Service transaction is conducted remotely
 Achieved with help of logistics and telecommunications

8. Six Options For Service Delivery
(Table 5.1)
8
8

9. Channel Preferences Vary Among Customers
9
 For complex and high-perceived risk services,
people tend to rely on personal channels
 Individuals with greater confidence and
knowledge about a service/channel tend to use
impersonal and self-service channels
 Customers who are more technology savvy
 Customers with social motives tend to use
personal channels
 Convenience is a key driver of channel choice

10. 10

11. Place and Time Decisions
11
 The place and time decisions must reflect customer
needs and expectations, competitive activity and the
nature of the service operation.
 The strategies employed may also differ between
those used to deliver the supplementary elements and
the core product.

12. For some types of specialty services, customers
are willing to travel farther from their homes
12

13. Place and Time Decisions
Places Of Service Delivery (1)
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14. Automated Kiosks (we will cover the topic on Self
Service Technology in a later lecture)
14

15. Office Buildings as Multi-purpose Facilities
15

16. Multi-purpose Facilities : Gas Stations and
Supermarkets
16

17. Place and Time Decisions
Places Of Service Delivery (2)
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18. 18

19. When Should Service Be Delivered?
19
 Traditionally, schedules were restricted
 Service availability limited to daytime, 40-50
hours a week
 Today situation has changed
 For flexible, responsive service operations:
-24/7 service – 24 hours a day, 7 days a
week, around the world (see Service Insights 5.2)

20. 20 Delivering Services in Cyberspace

21. Distribution of Supplementary Services in Cyberspace
21
 Five of the supplementary services are information-
based
 These services can all be distributed electronically.
They are:
 Information
 Consultation
 Order-taking
 Billing
 Payment
 Distribution of information, consultation and order-
taking has reached very sophisticated levels in
global service industries (e.g., hotels, airlines, car
rental companies)

22. Information and Physical Processes of
Augmented Service Product (Fig 5.14)
22
22

23. Service Delivery Innovations Facilitated by Technology
23

24. 24

25. e-Commerce: Move to Cyberspace
25

26. 26 Role of Intermediaries

27. Splitting Responsibilities For Supplementary Service
Elements (Fig. 5.19)
27
Challenges for original supplier
 Act as guardian of overall process
 Ensure that each element offered by intermediaries fits overall service concept 27

28. Franchising (1)
28
• Popular way to expand delivery of effective service
concept, without a high level of monetary investments
compared to rapid expansion of company-owned and -
managed sites
• Franchisor provides training, equipment and support
marketing activities. Franchisees invest time and finance,
and follow copy and media guidelines of franchisor
• Growth-oriented firms like franchising because
franchisees are motivated to ensure good customer
service and high-quality service operations

29. Franchising : Subway
29

30. Franchising (2)
30

31. 31 Distributing Service Internationally

32. Distributing Services Internationally : How to Enter
International Markets?
32
 The key determinants are the control of intellectual
property (IP) and sources of value creation, as well as
the degree of required customer interaction required.
 If IP and value creation source is high and degree of
customer interaction is low, then exporting directly
would be the mode of entry.
 At the other extreme, with low need to control IP and
the source of value creation lies within the firm and the
level of customer interaction required is high, then entry
through direct foreign investment is desirable (see
Figure 5.22).

33. Distributing Services Internationally : How to Enter
International Markets?
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34. How Service Processes Affect International Market
Entry (1)
34
 People processing services require direct contact with
customers
 Export service concept
- Acting alone or in partnership with local suppliers
e.g., chain restaurants, hotels, car rental firms
 Import Customers
- Inviting customers from overseas to firm’s home country
e.g., hospitals catering to “medical tourism”
 Transport customers to new locations
- Passenger transportation (air, sea, rail, road)

35. How Service Processes Affect International Market
Entry (2)
35
 Possession processing involves services to customer’s physical
possessions
-e.g., repair and maintenance, freight transport
 Information-based services include mental processing services
and information processing services
 Export the service to a local service factory
- Hollywood films shown around the world
 Import customers
 Export the information via telecommunications and transform it
locally
- Data can be downloaded via CDs or DVDs

36. Summary of Chapter 5: Distributing Services
• Distribution in services often involve moving nothing and many
information-based services can be distributed electronically
• Options for service delivery include:
 Customers visit the service site
 Service providers go to their customers
 Service transaction is conducted remotely
• Channel preferences vary among customers
• Place and time decisions include where services should be
delivered in bricks-and-mortar context, when it should be
delivered
36 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

37. Summary of Chapter 5: Distributing Services
• Delivery in cyberspace is facilitated by technology
and e-commerce allows 24-hour delivery, saving time
and effort
• Intermediaries play roles in distributing services
 Franchising brings both advantages and disadvantages to the
firm
• The mode of entering international markets depends
on the control of IP and sources of value creation
37 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

38. 38 Chapter Six
Setting Prices and Implementing Revenue
Management

39. Overview Of Chapter 6
39
 Effective Pricing is Central to Financial Success
 Pricing Strategy Stands on Three Legs
 Revenue Management: What it is and How it
Works
 Ethical Concerns in Service Pricing
 Putting Service Pricing into Practice

40. What Makes Service Pricing Strategy Different and
Difficult?
40
 Harder to calculate financial costs of creating a
service process or performance than a manufactured
good
 Variability of inputs and outputs: How can firms
define a “unit of service” and establish basis for
pricing?
 Importance of time factor – same service may have
more value to customers when delivered faster
 Customers find service pricing difficult to understand,
risky and sometimes even unethical

41. Objectives for Pricing of Services (Table 6.1)
41
 Revenue and Profit Objectives
 Seek profit
 Cover costs
 Patronage and User-Based Objectives
 Build demand
- Demand maximization
- Full capacity utilization
 Build a user base
- Stimulate trial and adoption of new service
- Build market share/large user base

42. 42

43. The Pricing Tripod (Fig. 6.3)
43
43

44. Three Main Approaches to Pricing
44
 Cost-Based Pricing
 Set prices relative to financial costs (problem:
defining costs)
 Activity-Based Costing
 Pricing implications of cost analysis
 Value-Based Pricing
 Relate price to value perceived by customer
 Competition-Based Pricing
 Monitor competitors’ pricing strategy (especially if
service lacks differentiation)
 Who is the price leader - does one firm set the
pace?

45. Cost-Based Pricing - Railways
45

46. Cost-Based Pricing:
Traditional vs. Activity-Based Costing
46
 Traditional costing approach
 Emphasizes expense categories (arbitrary overheads
allocation)
 May result in reducing value generated for customers
 ABC management systems
 Link resource expenses to variety and complexity of
goods/services produced
 Yields accurate cost information
 When looking at prices, customers care about
value to themselves, not what service production
costs the firm

47. Fixing prices for budget airlines in order to cover costs and increase
load factors in order to break even
47

48. Value-Based Pricing
Understanding Net Value (Fig. 6.7)
48
 Value exchange will not take place
unless customer sees positive net
value in transaction
 Net Value = Perceived Benefits to
Customer (Gross Value) minus All
Perceived Outlays (Money, Time,
Mental/Physical Effort)
 Monetary price is not only
perceived outlay in purchasing,
using a service
 When looking at competing
services, customers are mainly
comparing relative net values

49. What is the real value? Confusing the customer
49

50. What value are you really getting from this
transaction?
50

51. Value-Based Pricing:
Managing Perception of Value
51
 Need effective communication and personal
explanations to explain value
 Reduce related-monetary costs
 Cut time spent searching for, purchasing and
using service
 Reduce non-monetary costs
 Time Costs
 Physical Costs
 Psychological (Mental) Costs
 Sensory Costs (unpleasant sights, sounds,
feel, tastes, smells)

52. Defining Total User Costs (Fig. 6.11)
52
52

53. Value-Based Pricing: Approaches to Reducing Non-
monetary and Related-monetary Costs
53
 Reduce time costs of service at each stage
 Minimize unwanted psychological costs of service
 e.g. eliminate/redesign unpleasant/ inconvenient
procedures
 Eliminate unwanted physical costs of service
 Decrease unpleasant sensory costs of service
 Unpleasant sights, sounds, smells, feel, tastes
 Suggest ways for customers to reduce other monetary
costs

54. Trading Off Monetary and Non Monetary Costs
(Fig. 6.12)
54
54

55. Competition-Based Pricing:
When Price Competition is Reduced
 Non-price-related costs of using competing
alternatives are high
 Personal relationships matter
 Switching costs are high
 Time and location specificity reduces choice
• Managers should not only look at competitor’s prices
dollar for dollar, but should examine all related
financial and non-monetary costs
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56. Personalized services could prevent switching to competitors
services
56

57. Revenue Management: What It Is and How it
57
Works

58. What is Revenue Management all about in a
Services context?
58
 Revenue management allocates
perishable capacity units to existing
demand in a way that maximizes
revenues, not patronage.

59. Revenue management for services
Revenue management can be applied if:
 Capacities are relatively fixed and perishable
 Different market segments exist
 Service is sold in advance
 Variable and uncertain demand
 Low marginal sales variable cost but high marginal
production cost
59

60. With high fixed cost
structures, golf
courses need to
implement effective
revenue management
systems
60

61. Maximizing Revenue from
Available Capacity at a Given Time (1)
61
 Most effective when:
 Relatively high fixed capacity
 High fixed cost structure
 Perishable inventory
 Variable and uncertain demand
 Varying customer price sensitivity
 Revenue management is price customization
 Charge different value segments different prices for
same product based on price sensitivity

62. Maximizing Revenue from
Available Capacity at a Given Time (2)
62
 Revenue management uses mathematical models
to examine historical data and real time
information to determine
 What prices to charge within each price bucket
 How many service units to allocate to each bucket
 Rate fences deter customers willing to pay more
from trading down to lower prices (minimize
consumer surplus)

63. Price Elasticity (Fig. 6.15)
63

64. Price Elasticity : customers are willing to pay higher prices for their
favorite shows
64

65. Key Categories of Rate Fences: Physical (1)
(Table 6.2)
65
65

66. Key Categories of Rate Fences: Non-physical (1)
(Table 6.2)
66
66

67. Key Categories of Rate Fences: Non-physical (2)
(Table 6.2)
67
67

68. Key Categories of Rate Fences: Non-physical (3)
(Table 6.2)
68
68

69. Relating Price Buckets and Fences to
Demand Curve (Fig. 6.17)
69
69

70. Pricing Practices in Airlines
 Tickets purchased in advance typically cheaper
 Fares can change quickly
 Saturday night stay discount
 Minimum stay restrictions (e.g. overnight)
 Non-refundable tickets have lower fares
 Last minute “deals” / internet fares
 One-way tickets cost more than ½ roundtrip
 Frequent flyer miles
 Bulk discounts to companies
 Intentional Overbooking
70 70

71. Use of Different Pricing Buckets
► High Priced/Refundable Tickets (High Price Buckets)
 Fully Refundable
 Few if any restrictions
 Mean fare = $631
 26% of tickets
► Medium Price/Nonrefundable/Unrestricted Tickets (Medium Price Buckets)
 Nonrefundable, but
 No travel or stay restrictions
 Mean fare = $440
 32% of tickets
► Low Price/Nonrefundable/Restricted Tickets (Low Price Buckets)
 Nonrefundable
 Travel and/or stay restrictions
 Mean fare = $281
 42% of tickets
71 71

72. 72 Case Study
How Revenue Management is applied to
selling of Concert Tickets

73. (courtesy of Ms Perlyn Sim)
Seen by over 50 million people
THE LION KING around the world, Disney’s
internationally-acclaimed
musical THE LION KING will
have its Southeast Asian
Premiere when it opens March
2011 at the Sands Theater at
Marina Bay Sands®.
THE LION KING explodes with
glorious colours, stunning
effects and enchanting music
including Elton John and Tim
Rice’s Academy Award-winning
‘Can You Feel The Love Tonight’.
At its heart is the powerful and
moving story of Simba - the epic
adventure of his journey from
wide-eyed cub to his destined
role as King of the Pridelands.
73
73

74. Ticket Prices DATE
8 Shows A Week
Tue - Fri, 8pm
Sat and Sun, 2pm & 8pm
DURATION
Approx 2 hrs 30 mins
INTERVAL
Approx 20 mins
VENUE(S)
Sands Theater at Marina Bay Sands
TICKET PRICE (Exclude Booking Fee)
Platinum - S$240 (Includes a drink and a gift)
A Reserve - S$185
B Reserve - S$165
C Reserve - S$125
D Reserve - S$85
E Reserve - S$65
F Reserve - $165 (Restricted View)
74
74

75. 75
75

76. Revenue Management In Action
PRICE CATEGORIES (In Singapore Dollars)
30 October 2011
(Sun) 8:00 PM CAT 1 CAT 2 CAT 3 CAT 4 CAT 5 CAT 6
(Plantinum) (A) (B) (C) (D) (E)
STANDARD
S$240.00 S$185.00 S$165.00 S$125.00 S$85.00 S$65.00
15% Group
(10 tix & - - -
S$157.25 S$140.25 S$106.25
above)
Early Bird
Upgrade (10
- - - -
Days in S$165.00 S$125.00
Advance)
76
76

77. Why Restrictions on Ticket Prices?
S$555 ( $185 cheaper for A Reserve) and S$495 ($165 cheaper for B
Reserve) for OCBC Family Package of 2 Adults & 2 Children (Up to 16 years old)
[Payment must be made with a Singapore Issued OCBC Credit / Debit Cards]
[Promotion is not applicable to Friday and Saturday evening shows]
[Promotion is applicable from 2 Aug to 20 Sep 2011]
[Promotion is applicable for shows in August and September only]
Free Seat Upgrades when you book at least 10 days in advance
[Valid for A and B Reserve tickets only] - $240 and $185 ticket prices
[Purchase must be made at least 10 days in advance]
[Upgrade from B Reserve to A Reserve – Save S$20]
[Upgrade from C reserve to B Reserve – Save S$40]
[Discount is not applicable to Friday and Saturday evening shows]
15% Discount for 10 tickets and above
[Purchase must be made at least 10 days in advance]
[Discount is applicable for A, B & C Reserve only]
77 [Discount is not applicable to Friday and Saturday evening shows] 77

78. Why Special Prices for Seniors & Students?
Through Marina Bay Sands Box Offices & SISTIC Authorised Agents
25% Discount for Senior Citizen (65 years old and above)
[Discount is applicable to Wednesday evening shows only]
[Discount is applicable from 2 Aug 2011 onwards]
25% Discount for Students (OCBC Credit Card Holders)
[Upon presentation of valid Student Pass]
[Payment must be made with an OCBC Credit Card]
[Discount is applicable to Wednesday evening shows only]
[Discount is applicable from 2 Aug to 20 Sep 2011]
[Discount is applicable for shows in August and September only]
78
78

79. Key Categories of Rate Fences:
Application to Theatre Seating
Difference in seating proximity to the
stage: Cat 1 cost 3.6x more than Cat 4
Provide free parking or valet parking for
first-class seats
Food and beverage lounge for first class
seats during concert break
79 79

80. Key Categories of Rate Fences:
Application to Theatre Seating
Discounts for 10 days advance booking
Discount Tickets cannot be
used on Fri and Saturday
80
evenings shows)

81. Key Categories of Rate Fences: Non-physical (3)
(Table 6.2) By Buyer Characteristics
Special Prices for OCBC Credit Card
Holders - Family Packages (2 Adults
& 2 Child)
Special Prices for senior citizens &
students (wed evenings shows
only)
Discounts for group of 10 or more
81

82. Ethical Concerns in Pricing
82
 Customers are vulnerable when service is hard to evaluate as
they assume that higher price indicates better quality
 Many services have complex pricing schedules
 Hard to understand
 Difficult to calculate full costs in advance of service
 Quoted prices not the only prices
 Hidden charges
 Many kinds of fees
 Too many rules and regulations
 Customers feel constrained, exploited
 Customers face unfair fines and penalties

83. Problems faced by customers as a result of
complex pricing structures and terms
83

84. Designing Fairness into Revenue Management
1. Design clear, logical and fair price schedules and fences
2. Use high published prices and present fences as
opportunities for discounts (rather than quoting lower
prices and using fence as basis to impose surcharges
3. Communicate consumer benefits of revenue
management
4. Use bundling to “hide” discounts
5. Take care of loyal customers
6. Use service recovery to compensate for overbooking
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85. Bundling prices – cruise packages
85

86. Pricing Issues:
Putting Strategy into Practice (Table 5.3)
• How much to charge?
• What basis for pricing?
• Who should collect payment?
• Where should payment be made?
• When should payment be made?
• How should payment be made?
• How to communicate prices?
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87. Putting Service Pricing into Practice (1)
• How much to charge?
 Pricing tripod model is a useful to use for costs, price
sensitivity of customers and competitors
 Depends on whether discounts are offered
 Any psychological pricing points used?
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88. Putting Service Pricing into Practice (2)
• What basis for pricing?
 Completing a task
 Admission to a service performance
 Time based
 Monetary value of service delivered
(e.g., commission)
 Consumption of physical resources
(e.g, food and beverages)
 Distance-based (e.g., transportation)
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89. Putting Service Pricing into Practice (3)
• Who should collect payment?
 Service provider or specialist
intermediaries
 Direct or non-direct channels
• Where should payment be made?
 Conveniently-located intermediaries
 Mail/bank transfer
 Credit card payment through internet,
phone, fax
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90. Putting Service Pricing into Practice (4)
• When should payment be
made?
 In advance
 Once service delivery has been
completed
• How should payment be made?
 Cash
 Check
 Charge Card (Debit / Credit)
 Tokens or vouchers
 Stored value card
90 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

91. Putting Service Pricing into Practice (5)
• How to communicate prices?
 Relate the price to that of
competing products
 Use salespeople and customer
service representatives
 Good signage at retail points
 Ensure price is accurate and
intelligible
91 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

92. 92

93. Summary of Chapter 6:
Pricing and Revenue Management (1)
• Pricing objectives can include
 Generating revenues and profit
 Building demand
 Developing user base
• Three main foundations to pricing a service
 Cost-based pricing
 Value-based pricing
 Competition-based pricing
93 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

94. Summary of Chapter 6:
Pricing and Revenue Management (2)
• Cost-based pricing seeks to recover costs plus a margin for profit;
includes both traditional and activity-based costing
• Value-based pricing should reflect net benefits to customer after
deducting all costs
• Firm must be aware of competitive pricing but may be harder to
compare for services than for goods
• Revenue management
 Maximizes revenue from a given capacity at a point in time
 Helps manage demand and set prices for each segment closer to perceived
value
 Involves use of rate fences to deter segments willing to pay more from trading
down to lower prices
94 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

95. Summary of Chapter 6:
Pricing and Revenue Management (3)
• Ethical issues in pricing
 Customers are vulnerable when service is hard to evaluate
 Many services have deliberately complex pricing schedules
 Fees and hidden charges catch customers by surprise
 Too many rules and regulations
• Questions to ask when putting service pricing into practice
 How much to charge?
 What should the specified basis for pricing be?
 Who should collect payment
 Where should payment be made?
 When should payment be made?
 How should payment be made?
 How should prices be communicated to the right target market?
95 © Pearson Education South Asia Pte Ltd 2013. All rights reserved

96. Sample Exam Essay Question
96
You are about to open a chiropractic practice. You need
to develop a pricing schedule for your service. You are
sensitive towards consumers’ ethical concerns with regard
to pricing.
 What are some of the ethical concerns that consumers
may have and what can you do to overcome these
concerns specific to your business?
 What are the seven questions you need to address in
order to design an effective pricing strategy for your
business? Please provide your recommendations and
response to each of the seven questions.

97. Practice Question: Why is pricing more difficult for services
marketing?
97
 Pricing is more complex in services than in
manufacturing because it’s more difficult to calculate
the financial costs involved in serving a customer than
it is to identify the labor, materials, storage, and
shipping costs associated with producing a physical
good.
 The variability of inputs and outputs means that units
of service may not cost the same to produce, nor will
they be of equal value to customers if quality is not
consistent.

98. Practice Question: Why is pricing more difficult for services
marketing?
98
 The inability to inventory services also places a
premium on balancing demand and supply, a task
where pricing plays a large part. Time may influence
customers’ perceptions of value. Customers may be
willing to pay more for a service delivered fast than
one delivered more slowly (such as express photo
development or laundry services)

99. Practice Question: What is Revenue management?
How does it work?
99
• Revenue management is concerned with strategies for
maximizing the revenue that can be derived from the sale of
available capacity at any given time. It is particularly
important for organizations whose capacity is relatively
fixed, which serve large numbers of customers from multiple
market segments, and which face wide swings in demand as
well as competitive pricing pressure.
• In revenue management, the challenge is to work within the
constraints listed above to maximize revenue yield by
discriminating among its target market and carefully
controlling the matching demand and capacity. Different
prices are charged at different times, different service
segments and for different markets. Hotels and airlines are
important examples.

100. Practice Question: What is Revenue management?
How does it work?
100
• The challenge is to capture sufficient customers to fill all or
most of the firm’s perishable capacity without excessive
price discounting that creates consumer surplus for
customers, who would have been willing to pay more.
Mathematical modeling plays an important role in yield
management. Advances in software and computing power
have made it possible for firms to use historical databases
to predict the probability of future demand levels at
different prices, thus making better pricing decisions.

101. Practice Essay Question
101
(a) Explain the concept of revenue management.
(b) How might revenue management be applied
to the following services:
i. consulting services
ii. restaurant
iii. a golf course

102. Application : Consulting
•Have a dedicated account management team for the large
accounts. Account managers often understand the service
needs and pricing points of their clients rather well, and are
therefore able to effectively position and price services.
•Use differential pricing, bundle items, and introduce special
promotions so that lower prices are offered during low
demand periods to shift demand patterns.
•Predict demand and capacity utilization, and adjust prices
and business development activities accordingly. During
periods of high-predicted utilization, only actively pursue high
priced/high margin projects, and during periods of low
predicted utilization, pursue even merely cost-covering
projects to maintain the capacity and cover fixed costs.
102

103. Application: Restaurant
•Advance reservations only with credit card guarantees.
•Overbooking to compensate for no-shows and
cancellations.
•Implement a table management system.
•Improve communication between host and seaters.
•Do not suggest dessert and coffee during peak hours.
•Use differential pricing, bundle items, and introduce
special promotions so that lower prices are offered
during low demand periods to shift demand patterns.
•Decrease table size to allow more customer parties to
be seated.
103

104. Application : Golf Course
•Multi-tiered membership systems with exclusives benefits
(e.g., free golf cart at the golf course or free breakfast) for the
top tier customers.
•Billing of payment
•Group membership or group discounts based of size of
groups.
•Use differential pricing, bundle items, and introduce special
promotions so that lower prices are offered during low
demand periods to shift demand patterns.
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