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Chapter Eight

Chapter Eight. Pricing. Role of Pricing in Services. Forming expectations Making purchase decisions Evaluating service quality Controlling demand. Price Determinants. Organizational pricing objectives Cost Demand/price curve Elasticity of price Competition Operational position

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Chapter Eight

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  1. Chapter Eight Pricing

  2. Role of Pricing in Services • Forming expectations • Making purchase decisions • Evaluating service quality • Controlling demand

  3. Price Determinants • Organizational pricing objectives • Cost • Demand/price curve • Elasticity of price • Competition • Operational position • Marketing mix compositions

  4. Organizational Pricing Objectives • Profit maximization • Sales maximization • Market share maximization • Competitive parity

  5. Costs • Price floor • Contribution margin • Fixed costs • Variable costs • Labor

  6. Demand/Price Curve Market Share Maximization

  7. Demand/Price Curve Profit Maximization Sales Maximization $8,000 $4,550

  8. Elasticity • Elastic • Inelastic % Change in Demand % Change in Price

  9. Determinants of Elasticity • Availability of substitutes and complements • Relationship to competitors’ prices • Necessity or luxury • Buyer’s personal characteristics • Time perspective

  10. Competition • Pricing • Primary • Second-level • Third-level

  11. Pricing determinants (con’t) • Operational Position • Marketing Mix

  12. Business-to-Business Pricing • Competitive bidding • Closed bidding • Open bidding

  13. Probabilistic Bidding Model E = PZX E = Expected profit at price X P = Probability the bid will be accepted at price X Z = Profit margin of bid at price X X = Amount of bid

  14. Table 8-1 Lake Shore Project Costs Comp #1 % Bid Comp #2 % Bid 1 $ 25,000 $ 36,000 144% $ 41,000 164% 2 $ 34,000 $ 47,000 138% $ 45,000 132% 3 $ 90,000 $125,000 139% $130,000 144% 4 $ 75,000 $108,000 144% $106,000 141% 5 $ 50,000 $ 58,000 116% $ 64,000 128% 6 $ 48,000 $ 66,000 138% $ 75,000 156% 7 $ 19,000 $ 30,000 158% $ 28,000 147% 8 $105,000 $145,000 138% $160,000 152% 9 $ 13,000 $ 23,000 177% $ 21,000 162% 10 $ 8,000 $ 14,000 175% $ 11,000 138%

  15. Table 8-2 Bid as % of Costs No. Bids Higher Probability of Winning 110% 20 100% 120% 19 95% 130% 18 90% 140% 12 60% 150% 7 35% 160% 4 20% 170% 2 10% 180% 0 0%

  16. Table 8-3 Est. Costs Bid % of Costs Bid Amt. Probability Value of E $40,000 110% $44,000 100% $ 4,000 $40,000 120% $48,000 95% $ 7,600 $40,000 130% $52,000 90% $10,800 $40,000 140% $56,000 60% $ 9,600 $40,000 150% $60,000 35% $ 7,000 $40,000 160% $64,000 20% $ 4,800 $40,000 170% $68,000 10% $ 2,800 $40,000 180% $72,000 0% $ 0

  17. Price Modifications • Differential pricing • Yield management • Price bundling • Multiple-use discounts

  18. Conditions for Differential Pricing • Segments must value service differently. • Segments must be identifiable and profitable. • Lower-paying segments cannot sell to higher-paying segments. • Cost of implementation must not be higher than incremental revenue. • Must not be confusing to current and future customers. Time of usage Time of reservation Time of purchase Target market Location of consumption

  19. Price Bundling • Pure bundling • Mixed bundling • Mixed leader bundling • Mixed joint bundling

  20. Multiple-Use Discounts

  21. Meeting Objectives with Multiple-Use Discounts Limited Usage Unlimited Usage Fixed Unlimited Fixed Unlimited ObjectivesDurationDuration Gain new customers………. Poor Fair Poor Good Shift demand……...……...... Excellent Poor Good Poor Stimulate demand……….… Excellent Poor Good Poor Increase repeat purchase behavior…...….. O.K. Excellent O.K. Good

  22. Price Increases • Wait for someone else to increase prices. • Communicate to customers why a price increase is necessary. • Make no acknowledgment of price increase. • Make price increase in small increments. • Modify service to justify price increase.

  23. Customer-Focused Pricing • Value • Risk • Level of involvement • Level of customer participation

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