THE TRADITIONAL SERVICES MARKETING MIX

The traditional marketing mix involves the four ps. 1. Service outcome /product The product component of the marketing mix is the outcome of the service. It consists of two components: the technical and the functional outcomes. The technical outcome is the end result of the service or the what of the service. For dental services, it would be the completed crown. The functional outcome is the process of receiving the service or how the service was provided. Functional service is the way the customer or client was treated by the firms staff. For dental service, it is the way the dentist, the dental assistant, and the receptionist interacted with the patient.

2. Price

Because services are intangible and experiential in nature, the price becomes more important to consumers as a cue of what to expect.

Consumers often use price as one of the inputs or tangible cues into forming expectations of a service and in making purchase decisions. The more consumers pay for a service, the more they expect. Higher prices tend to convey higher quality. However, an extremely high price may be viewed by consumers as rip-off. Lower prices tend to convey lower quality but for some services and for some consumers, this is acceptable. Price is an important element in controlling demand. Increasing the price at peak demand times reduces the demand. Restaurants, movie theaters, and airlines often use this strategy when demand exceeds supply. The higher price will cause some demand to shift from high-to lowerusage periods. Services may lower the price at low- usage times. lower price will not only cause a shift of demand, but it will also stimulate new demand.

PRICE DETERMINANTS
1.

2.
3. 4. 5. 6. 7.

Pricing objectives Cost Demand/price curve Elasticity of price Competition Operational position and Marketing mix composition.

Organizational Pricing objectives

1.

2.

3.

4.

Profit maximization - the price is set at the level that will yield the highest total revenue for the firm within a pre specified profit constraint. Sales maximization - the price is set at the level that will yield the highest total revenue. Market share maximization - the price is set at the level that will provide the firm with the largest market share or total unit sales. Competitive parity - prices are set that are approximately equal with the competition.

Cost Analysis

Costs normally serve as a pricing floor. Calculating the cost of a service is more difficult than goods. The first step in analyzing costs is to separate costs into variable and fixed components. Variable costs are those that change with demand. Food and fuel costs for an airplane are variable costs. Chemicals for a pest control service are variable costs. Fixed costs do not change with the quantity demanded although demand may have some impact on them. The cost of an airplane is a fixed cost for an airline.

Demand/ Price Curve

Demand/ price curve shows the demand for a service at various prices. The demand/ price schedule can be generated from historical data or sales forecasts. See the diagram Demand increases as the price declines until the price reaches $35. Customers feel the quality of the service will be unacceptable at lower price. If the firms pricing objective is market share maximization, the $40 price will yield the highest demand. Variable cost is $25 per service unit. The $50 price would be the sales maximization price because it would yield the highest total revenue at $8,000. The profit maximization price would be $60 because it yields the highest gross margin, $4,550.

Price Elasticity

Price elasticity of demand is the percentage change in demand divided by the percentage change in price. If the percentage change in demand is greater than the percentage change in price, the price is said to be elastic at that price point. If the percentage change in demand is less than the percentage change in price, the price is said to be inelastic at that price point. Determinants of Price Elasticity The availability of substitutes and complements The relation to competitors prices, Whether the service is a necessity or a luxury, The time perspective Personal income of the consumer

Competition

Prices that are drastically different than competitors will be more elastic than prices that are close to the competition. In addition to primary competitors, firms must be aware of secondary and third level competitors.

Operational Position

The operational position chosen by the service will have a major impact on the price. Firms using the cost efficiency operational approach will have a lower price than firms using the other approaches. Firms using the customization approach will tend to have the highest prices. Firms using service quality approach will tend to be in the middle price range.

Marketing Mix

The marketing mix composition will have an impact on the price. if the firm is planning an extensive advertising campaign to stimulate demand, the price is normally higher to cover the campaign costs. If the service is going to use salespeople, the price for the service will normally be higher because of the cost of the sales staff. If a service is going to use a multi distribution strategy with multiple outlets, normally the service will be priced lower. firms with better images can obtain higher prices for their service than firms with poorer consumer images.

Pricing Modifications
1. 2. 3. 4.

Service firms have four variations of pricing which they can use to boost sales and profits. Differential pricing Yield management Price bundling Multiple-use discounts

Differential Pricing

1.
2. 3. 4.

The purpose of differential pricing is to either shift demand from high- demand periods to low- demand periods or to stimulate demand during low- demand periods. For differential pricing to be effective and to increase revenues it must meet the following five criteria. Segments must value the service differently. Segments must be large enough to be identifiable and profitable. A mechanism must prohibit customers in the lowerpaying segment from selling to higher-paying segments. The cost of implementing the differential pricing system must not exceed the incremental revenue generated. The differential pricing system must not be confusing to current and future customers.

Four Ways of Using Differential pricing

1. The Time of service usage.
Theater charges less for an afternoon show than it does for evening showings. A telecommunication company is using differential pricing when it charges different fees for daytime, evening, and weekend calls. 2. The Time of Reservation. Airlines use this system. Passengers who reserve their seat 30 days in advance will pay less than passengers who reserve their seat four days in advance. 3. Different Target Markets. A cinema may charge less for children under say 12 than it does for adults. 4. Location of consumption. Football fans at Addis Ababa stadium will pay different prices for the different types of seats.

Yield Management

Yield management is a differential pricing methodology designed to produce the highest revenues based on a detailed analysis of the past purchase behavior of each market segment served by a company. The goal of yield management is balancing capacity utilization, pricing, market segmentation, and financial return The goal is to produce the best possible financial return from a limited available capacity. Yield = Actual revenue Potential revenue Yield management is primarily used in the airline industry but has also been used in other service industries such as hotels, trucking, restaurants, and banking.

Price Bundling

Price bundling is offering consumers two or more goods or services in a single package for a special price.

Pure vs. Mixed Bundling Pure bundling is combining two or more goods or services not sold individually into a single package for the consumer. Pure bundling is used when the combination of goods or services is more valuable to the consumer than any of them would be independently. The typical fast lube service facility not only lubes a vehicle and changes the oil but they also may check tires, batteries, brake fluid, power steering fluid, transmission fluid, and tire air pressure. Mixed bundling is combining two or more goods or services sold individually into a single package for a special price. By combining all of these services into one package, greater revenue is generated than if each were sold individually. by combining all of the services into one package, economies of scale and operating efficiencies can be obtained. It is less confusing to consumers since they do not have to decide which services they need.

Mixed Joint Bundling

Mixed bundling consists of two types: mixed leader and mixed joint. Mixed leader pricing offers service B for a discount if you purchase service A. Mixed joint is when two or more services or products are offered together at a fixed price. The purpose of the mixed joint bundle is to increase total revenues. Items are packaged together that are complements and that are often purchased together. By pricing the package cheaper than the combination of items individually, consumers feel they are getting a bargain.

Multiple-use Pricing Discounts

Multiple-use pricing discounts are price reductions given to customers for repeat usage of a service. The multiple-use discount can be for:

A fixed number of uses or be unlimited. A fixed duration of time or it can be for an unlimited amount of time.

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Duration Usage Example Movie Theatre Offering

Limited

Limited

10 sessions during January for $50.00

$30.00 for April, no limit to number of sessions 10 sessions for $50.00 10% discount to children

Limited

Unlimited

Unlimited

Limited

Unlimited

Unlimited

Price Increases

Price increase strategies: 1. Wait until someone else increases their prices, and then quickly follow. 2. Use a communications program to explain to customers why the price increase is necessary. 3. Make no acknowledgement of a price increase, and then hope that customers will not notice it. 4. Increase price in small increments over a period of time. 5. Modify the service offering or add a service feature that would justify the price increase to the consumer.

Value and Price

When choosing a service, consumers tend to pick the brand that offers them the best value. Value to consumers is the best combination of price, service quality, and firm image. The value of a service provided by a specific vendor is based on the consumers perceptions of the service. The value will be based on past experience with the vendor. If past experiences have been positive, the customer will tend to place a higher value on the service providers offering. Value is also based on what other firms offer. Keep in mind that value is the best combination of price, quality, and image.

Risk and Price

Consumers see price as a means of modifying risk. Suppose a hotel manager wants to install a swimming pool with four bids for installing the pool were Birr 2,000,000 Birr 1,900,500, Birr 1,800,700 and Birr 1,600,600. The low bid will be eliminated. The manager views the low bid as too risky. consumers will shy away from purchasing from low- priced vendors because of perceived risk. High bids are not always viewed as being less risky. If a high bidder is substantially higher than the competition, consumers normally feel that it is not a good value because the higher price is not justified.

Level of Involvement and Price

Personal level of involvement in the purchase affects how consumers view the price of a service. For high-involvement services, pricing tends to be more inelastic than for low- involvement service. If Bekeles dentist increases the fee for dental exams and treatments, Bekele will probably not look for another dentist. Because dental service is a high-involvement decision, firm switching costs are perceived to be higher.

Level of Customer Participation and Price

Final factor buyers consider when evaluating price is their level of participation in the service. the more customers are involved in the production of the service, the less they expect to pay. Customers expect to pay less at a self- service facility

Distribution

Distribution is the availability and accessibility of a service to consumers Availability means the service is available to the consumer when he or she wants it. Accessibility means it is relatively easy for the consumer to conduct a transaction with the service vendor. To increase the accessibility of banking services, banks have added ATMs as well as lengthening their branch hours.

Channel Structures

The channel length tends to be shorter for services than for goods. Direct Channel - Many services are performed by a service provider for the consumer with no intermediaries using a distribution system called a direct channel. Indirect Channel - Other services use agents or intermediaries to perform one or more functions. The service process rendered by service providers to customers can be divided into 4 components:
1. 2.

3.
4.

information, reservation, payment, and consumption.

Service providers can use agents or third parties to perform any of the 4 functions. Airlines use travel agents to perform the first three functions. Travel agents provide information, make reservations, and collect payment. The consumption phase is performed by the airlines.

Channel Options
1.

2.

3.

Exclusive Distribution - involves the use of a limited number of agents or outlets who sell only the one brand. Selective Distribution - involves the use of a few intermediaries but not all who would like to carry the brand. Intensive Distribution - involves placing the service with as many different agents or third parties as possible.

Multichannel Systems

To increase market coverage, many service firms are using a multichannel approach. Multichannel distribution involves the use of two or more channels to reach one or more market segments. In addition to increasing market coverage, multichannel distribution strategy lowers costs of distribution. Most airlines use a multichannel distribution strategy. Tickets can be purchased directly through an airline such as the airline or they can be purchased through a local travel agent. Distribution Growth Options 1. multisite, 2. multiservice, 3. multisegement. 4. Multisite, multiservice 5. Multisite, multisegement 6. Multiservice, multisegement 7. Multisite, multiservice, multisegement

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A multisite distribution strategy is expansion of a service to another location. A multiservice distribution strategy is the addition of a new service to a firms existing portfolio. A multisegement distribution strategy is the expansion of the current service to a new market segment. A multisite, multiservices strategy involves the addition of new services in different site locations. a multisite, multisegement strategy involves serving different market segments with different site locations. A multiservice, multisegement strategy is an option allowing firms to expand their operation by offering new services to new market segments. A multisite, multiservice, multisegment strategy allows firms to expand their operation by offering new services to new market segments with different site locations.

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Multisite

Growth strategy

Benefits

Concerns

1. rapid expansion 2. sales growth 3. easiest to manage

1. 2. 3. 4. 5.

good locations financial resources managing multiple outlets quality control too rapid growth

Multiservice

1. serve current customers better 2. can gain new customers 3. sales growth
Multisegement 1. better utilization of facility 2. sales growth

1. 2. 3. 4.

decline in efficiency financial resources managing multiple service quality control

1. locating a complementary segment 2. customer confusion 3. quality of service

Multisite, multiservice

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1. sales growth 2. one-stop shopping for customers 3. serve current customers better 1. sales growth 2. each site can specialize in a segment 1. overhead costs 2. managing service structure 3. quality of services

Multisite, multisegement

1. overhead costs 2. managing service structure 3. quality service

Multiservice, multisegement

1. sales growth 2. serve current customers better 3. gain new customers 1. sales growth 2. one-stop shopping 3. prevent competition from eroding market share

1. quality of service 2. managing service structure 3. customer confusion

Multisite, multiservice, multisegement

1. 2. 3. 4. 5.

Overhead costs. managing service structure quality of service financial resources customer confusion

Franchising

Franchising is a method of expanding rapidly with low capital investments. Franchising is a multisite distribution growth strategy involving the selling of a service concept to a third party who agrees to establish and operate a service facility according to a franchisors specifications. Most franchise contracts maintain tight controls over the franchise guidelines The franchisor will receive a percentage of the franchisees income which is normally between 2% to 3% of the franchisees net income.

Benefits of Franchising Franchising provides outside capital for growth. Franchising provides additional management with prior experience for managing the business. Franchising provides lower risk for a franchisee than building ones own business. The franchise offers an established brand name and a business plan that has proven to be successful. Most franchisors assist with advertising, promotions, and operations management. Expert help is available for franchise operators when problems arise. These services, provided by the franchisor, reduce the risk of a franchise failing

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Advantages to the Franchisor capital for growth faster growth additional management additional income Disadvantages to the Franchisor lower potential profits controlling service quality controlling firm image

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Advantages to the Franchisee Lower risk Established brand name Successful business plan Expert assistance Disadvantages to the Franchisee Franchise fees Lack of freedom Controlled by the franchisor

Branding

Many services have become commodities to consumers. A commodity is an undifferentiated good or service. To many consumers, air travel has become a commodity. To avoid the consequences of a commodity classification, service firms will use branding. Branding assures the consumer they will receive uniform service. For service firms, branding provides value by enhancing the efficiency and effectiveness of the marketing programs. Brand loyalty and repeat purchase behavior are increased. Once a brand name is established, it allows a firm to leverage their position through brand extension, higher prices, and higher margins. A highly established brand name can provide a firm with a strong competitive advantage.

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To maximize the benefit of a brand, service providers should meet the following four characteristics:
1.

2.
3. 4.

The brand is distinctive the brand is relevant the brand has a tangible quality the companys most important services are branded and linked

Distribution Management
Distribution management involves two components: an organizational management structure and economies-of-scale plan. Organizational structure Centralization and decentralization are the two forms of organization structure. In a centralized organization, key decisions and power are located with the top managers of the firm. In a decentralized organization, key decisions and power are shared among both top and middle management. Using a centralized organizational structure is common with:

a multisite growth strategy because of the highly standardized, branded service offering. services using the cost efficiency or technical service quality approach.

It is more difficult to achieve when using a multiservice or a multisegement growth strategy. A decentralized organizational structure seems to work better:

when multisite strategies are coupled with a multiservice or a multisegement strategy. for firms using a functional service quality or a customization operational approach.

Customer- Focused Distribution

A customer-focused distribution strategy involves managing five components of distribution from the viewpoint of the customer.
1. 2. 3.

4.
5.

identification of market segments being served identification of benefits sought by customers matching customer needs to corporate channel and distribution growth strategies managing quality control managing corporate growth