Designing and Managing Services PDF

DESIGNING AND MANAGING SERVICES The Nature of Services **Service** - Any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product. Categories of Service Mix - *...

DESIGNING AND MANAGING SERVICES The Nature of Services **Service** - Any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product. Categories of Service Mix - *Pure tangible good* - soap, toothpaste, or salt with no accompanying services. - *Tangible good with accompanying services* - the more technologically advanced the product, the greater the need for high-quality supporting services. - *Hybrid* - offering of equal parts goods and services. - *Major service* - with accompanying minor goods/services. - *Pure service* - primarily an intangible service. **Characteristics of Services** 1\. **Intangibility**: unlike physical products, services cannot be seen, tasted, felt, heard, or smelled before they are bought. 2\. **Inseparability:** services are typically produced and consumed simultaneously. 3\. **Variability:** quality of services depends on who provides them, when and where, and to whom; services are highly variable. 4\. **Perishability:** services cannot be stored, so their perishability can be a problem when demand fluctuates DEVELOPING PRICING STRATEGIES AND PROGRAMS **Price** is the only marketing element that produces revenue; the others produce costs. **Consumer Psychology and Pricing** **a. Reference Prices** Although consumers may have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices. When examining products, however, they often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted "regular retail price." When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price. **b. Price-Quality Inferences** Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. **c. Price Endings** Many sellers believe prices should end in an odd number. Customers perceive an item priced at \$299 to be in the \$200 rather than the \$300 range; they tend to process prices "left to right" rather than by rounding. Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for the popularity of "9" endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic. Customers may have a **lower price threshold**, below which prices signal inferior or unacceptable quality, and an **upper price threshold**, above which prices are prohibitive and the product appears not worth the money. Different people interpret prices in different ways. **Setting the Price** A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. Most markets have three to five price points or tiers. Firms devise their branding strategies to help convey the price-quality tiers of their products or services to consumers. **Step 1: Selecting the Pricing Objective** The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership. **Step 2: Determining Demand** **Price Sensitivity.** The demand curve shows the market's probable purchase quantity at alternative prices, summing the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when **Estimating Demand Curves.** Most companies attempt to measure their demand curves using several different methods. **Price Elasticity of Demand.** Marketers need to know how responsive, or elastic, demand is to a change in price. If demand hardly changes with a small change in price, we say it is **inelastic.** If demand changes considerably, it is **elastic**. **Step 3: Estimating Costs** Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. A company's costs take two forms, fixed and variable. 1. **Fixed costs**, also known as overhead, are costs that do not vary with production level or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output. 2. **Variable costs** vary directly with the level of production. For example, each tablet computer produced by Samsung incurs the cost of plastic and glass, microprocessor chips and other electronics, and packaging. **Total costs** consist of the sum of the fixed and variable costs for any given level of production. **Average cost** is the cost per unit at that level of production; it equals total costs divided by production. Management wants to charge a price that will at least cover the total production costs at a given level of production. **Step 4: Analyzing Competitors' Prices** If the firm's offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor's price. If the competitor's offer contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor. **Step 5: Selecting a Pricing Method** *three major considerations in price* - Costs = price floor - Competitors' prices = orienting point - Customers' assessment of unique features = price ceiling **Markup pricing**. Add a standard markup to the product's cost. The most elementary pricing method is to add a standard markup to the product's cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs. **Target-return pricing**. Price that yields its target rate of return on investment. In target-return pricing, the firm determines the price that yields its target rate of return on investment. Public utilities, which need to make a fair return on investment, often use this method. **Perceived-value pricing.** Based on buyer's image of product, channel deliverables, warranty quality, customer support, and softer attributes (e.g., reputation) **Value Pricing.** Companies that adopt value pricing win loyal customers by charging a fairly low price for a high-quality offering. Value pricing is thus not a matter of simply setting lower prices; it is a matter of reengineering the company's operations to become a low-cost producer without sacrificing quality to attract a large number of value-conscious customers. **Everyday Low Pricing** **EDLP.** A retailer using EDLP charges a constant low price with little or no price promotion or special sales. **Going-Rate Pricing**. In going-rate pricing, the firm bases its price largely on competitors' prices. Going-rate pricing is quite popular. **Auction-type pricing** is growing more popular, especially with scores of electronic marketplaces selling everything from pigs to used cars as firms dispose of excess inventories or used goods. *These are the three major types of auctions and their separate pricing procedures:* a. **English auctions (ascending bids)** have one seller and many buyers. On sites such as eBay and Amazon.com, the seller puts up an item and bidders raise their offer prices until the top price is reached. b. **Dutch auctions (descending bids)** feature one seller and many buyers or one buyer and many sellers. In the first kind, an auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts. In the other, the buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price. c. **Sealed-bid auctions** let would-be suppliers submit only one bid; they cannot know the other bids. The U.S. and other governments often use this method to procure supplies or to grant licenses. **Step 6: Selecting the Final Price** Pricing methods narrow the range from which the company must select its final price