The Pricing and Revenue Management of Services

A Strategic Approach

Irene C.L. Ng

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134267439
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In a world of changing lifestyles brought about by new services, technology and e-commerce, this book enters the arena of contemporary research with particular topicality. Integrating both theory and real world practices, Ng advances the latest concepts in pricing and revenue management for services in a language that is useful, prescriptive and ye

Chapter synopses

Chapter 1: Introduction

Chapter 1 sets the tone for the book, introducing service pricing in practice today. It examines the study of pricing and the study of price theory, and how, despite its importance in helping firms achieve better profits, pricing is still very much a neglected area of research. It discusses the importance of the service sector in today’s global economy, resulting in the growth of service research and the emergence of ‘service science’, a transdisciplinary field aimed at improving the performance of service businesses. It then looks at the elusive definition of a service, given its much-contended characteristics of heterogeneity, intangibility, perishability, and inseparability. Issues and challenges in service pricing are also examined, such as the impact of these service characteristics on the pricing decision, and how the cost-plus approach in pricing may not necessarily be the best approach for services.

Part I: The buyer as an individual

Chapter 2: The expected net value (ENV) framework

Chapter 2 is the first of three chapters that looks at pricing issues surrounding the buyer as an individual. It looks at the issues of buyer’s choice and buyer’s willingness to pay, and what value means to the buyer. It introduces the Expected Net Value (ENV) framework and its crucial role in forming pricing policies. The ENV is derived from buyers’ expected benefits and expected outlays; expected benefits include tangible and non-tangible attribute-driven benefits, while expected outlays comprise of monetary costs and non-monetary costs. This chapter explains how all this has an impact on the ENV and eventually, on pricing decisions. It also considers risks as an outlay and how risk is a factor in pricing.

Chapter 3: Advanced purchase and the separation of purchase and consumption

This chapter examines how the separation between the purchase and consumption of a service has implications on pricing, and considers the risks faced by buyers at the point of purchase, which could be well in advance of consumption, i.e. advanced purchase. It discusses two types of risks; valuation risk and acquisition risk, and how they factor into the ENV framework. Chapter 3 also looks at the marketing mix and its role in delivering net value, and how competition influences the ENV. The chapter also considers the random component in every buyer’s choice; the psychological factors that influence how buyers perceive price. It discusses the expectations of service customers, and the two critical gaps that influence the pricing of a service; the customer gap and the provider gap. Finally, Chapter 3 presents the strategic use of the ENV, introduces the concept of the pareto loss that assist firms in identifying revenue gains, and also looks at how the ENV framework enables the analysis of trade-offs between benefits and outlays.

Chapter 4: Seven strategies for higher revenues

This chapter, which concludes the section on the buyer as an individual, summarises the knowledge expounded in the previous two chapters into workable action plans; seven strategies that firms can employ for higher revenue. These strategies include pricing based on value and not cost; how to convert pareto loss into revenue; decoupling purchase and consumption; mitigating valuation risk for advanced purchase; and changing the benefits of the service. It also considers the role of customer effort in pricing and hence yielding higher revenue, and the role of intermediating services in providing the highest end-value.

Part II: Buyers in aggregate

Chapter 5: The economics of pricing in services

Chapter 5 begins the second part of the book, which deals with buyers in aggregate. In discussing demand, it looks at the traditional demand function and price elasticity, then moves on to the role of supply and capacity, examining marginal analysis and revenue functions. The practice of price discrimination, which is very important for services, is explained with a closer look at its usage in the advanced selling of services. Finally, the chapter presents a discussion on dynamic pricing and its two major research streams; demand-based dynamic pricing, and capacity-based dynamic pricing.

Chapter 6: The revenue management of services

The subject of revenue management is introduced in Chapter 6, with a look at the systems used in this challenging practice of obtaining the highest revenue from selling the capacity of a service firm. In examining the evolution and scope of revenue management, the chapter reviews research in the subject matter, with a discussion on revenue management and advanced demand behaviour, demand distribution, and the issue of re-selling capacity. Revenue management practices and tools are critically analysed, as well as the need to incorporate competition into the practice. The chapter closes with a discourse on one of the major issues in the practice; the perceived fairness of revenue management pricing.

Chapter 7: Strategic pricing and revenue management: four more strategies for higher revenue

In concluding the section on buyers in aggregate, Chapter 7 continues on the subject of revenue management with a look at the ability of some firms, as well as the inability of others, to practise it. It goes on to introduce the new revenue management system, which incorporates four interdependent decision sets in a service and takes into consideration the crucial role of capacity. This system is then used as the basis to offer four more strategies to help firms achieve higher revenue, including how to re-segment, re-design and re-price; the practice of segmentation and pricing through self-selection; using refunds in advanced selling as a strategic lever; and selling availability of a service, rather than delivery.

Chapter 8: Conclusion

Chapter 8 concludes the book by advocating a need to implement with care, the pricing strategies presented in the preceding chapters. This is in view of the complexity of the task of service pricing, given the perception of consumers and stakeholders of service pricing strategies in terms of fairness, and also vis-à-vis goods pricing. Other issues that need to be taken into consideration going forward include the advent of more distribution channels, finer market segments and the proliferation of brands, suggesting a cross-functional approach to be adopted by firms towards setting pricing policies.

1
Introduction

Service pricing in practice

We live in a world today where a cinema ticket can be obtained for 20p, flight tickets at £1, songs at 55p and where even the most discerning marketer might wonder if the pricing for services has gone mad, or if not, perhaps a little out of control. To top it all, there are now multiple prices for buying any service, depending on where you are, who you are, why, when and how you are buying. With new technologies, the capability of firms to offer even more innovative pricing options is set to grow¹(See Table 1.1).

Table 1.1 When is a buyer charged different prices?

For consuming the same service, different prices are charged for	Examples
When you buy	Hotel and flight reservations ...