1
Q
What are the three things prices depend on?
A
Cost, customer (demand), and competition
2
Q
What are the reasons customers usually lack reference price for services?
A
- Service heterogeneity limits knowledge (i.e. cellular phone service, life insurance)
- Individual customer needs vary (i.e. hair-styling, hotel, braces)
- Hard to gather price information on services (i.e. medical procedures)
- Sometimes, in some services, providers are unwilling to provide precise pricing information (i.e. medical, legal costs)
3
Q
profit maximizing pricing
A
K = (P*Q) - C
4
Q
Factors that affect price sensitivity:
A
- Base price of a product; higher the base price, greater the price sensitivity to a percent change in price (i.e. x% change in price of a toothpaste versus a car)
- Who pays? I.e. self-pay vs. insurance company pays
- Availability of comparable product substitutes (i.e. when many products of nearly equal quality are available - higher price sensitivity)
- Price comparisons - easy? Difficult?
- Switching costs - high? Low?
- Income level
- Purpose of the specific purchase
5
Q
Cross price elasticity of demand:
A
other things being equal, how does the quantity demanded of one product respond to price change in another product?
- Positive: price of X goes up; demand for Y goes up (i.e. butter and margarine) – products X and Y are substitutes
- Negative: price of X goes up; demand for Y goes down (i.e. hot dogs and hot dog buns; safety razors and razor blades) – products X and Y are complements
6
Q
What are the non-monetary costs of services?
A
- Search costs
- Time costs
- Inconvenience
- Psychological costs
7
Q
What are weaknesses of a cost-based pricing system?
A
- Establishing the cost of a service is often not easy
- Non-monetary costs of services
- Pricing implications of cost structure
- Price: an indicator of quality
- Solely cost-based pricing may ignore demand and competition
8
Q
What are the critical criteria (i.e., necessary conditions) for effective price segmentation?
A
- Different groups of consumers must have different response to price
- Individuals in lower-priced segment should not be allowed to sell their tickets to those in other segments
- The customers should not be confused by the use of different prices
9
Q
Zeithmal describes four types of “value” perceptions, what are they and what pricing strategy or strategies are appropriate for each case?
A
- “Value is low price.”
- Use penetration pricing
- Discounting
- Odd number pricing (creates preception of lower price)
- Synchro-pricing (synchronize demand and supply) - “Value is everything I want in a product or service.”
* price is less important than perceived quality or other features
- Skimming pricing (prestige pricing) - “Value is the quality I get for the price I pay.” *both price and quality are relevant bust customer sees a trade-off between price she pays and quality she receives
- Value pricing or giving more for less - “Value is all that I get for all that I give.”
- Price bundling: selling services as a group rather than individually
- Create price bundles to take into account the total cost: money, time, effort, and psychological cost
10
Q
What is price bundling? Under what conditions is bundling more likely to be effective?
A
- Bundle pricing suggests that in services requiring hardware, service provider should be willing to accept a reduced profit margin or even loss on the hardware to increase demand for the service and potential revenue (i.e. satellite TV, cell phones, etc.)
- When bundle (or package) values vary less across buyers than do the individual product values, bundling should increase profits
- — Movie distributors often sell packages of films rather than selling individual film rights because package values vary less across buyers than do the individual firm values
11
Q
What is yield management?
A
- Yield management is a pricing structure that drives prices higher as the time of use of the product/service approaches (i.e. the seller tries to maximize the profits by changing the price over time - increase as capacity approaches exhaustion)
- Yield management is a form of dynamic pricing technique
12
Q
The 4 key requirements for using yield management:
A
- Capacity is limited and perishable
- Units of capacity can be reserved by customers ahead of time
- The company can sell the units of capacity at varying prices - also known as fare classes - each which has a fixed price
- The firm can change the availability of the predefined fare classes over time
13
Q
What happens when (a) demand exceeds supply? (b) supply exceeds demand?
A
- D>S: Overcrowding, unhappy customers, leaving money on the table
- S>D: Lose money from fixed costs, idle capacity
14
Q
Why demand management is more difficult for services than for physical products?
A
- More critical because services can’t be inventoried
- Because services are an experience that happen in real time and there isn’t an inventory for them; for products there is an inventory and they don’t have to be as time sensitive because you can just give the product to the customer
15
Q
Service capacity consists of _____, _____, _____.
A
- Physical facility (# of hospital beds)
- People
- Equipment
16
Q
How is capacity utilization measured?
A
A. % of total time facility/equipment in operation
B. % of total physical space actually utilized during operation
17
Q
What is the characteristic of a balanced service operation?
A
- No lines forming
- No excess capacity
18
Q
Why is the distinction between maximum and optimum capacity important?
A
- Maximum capacity ≠ optimum capacity; just because you can fit the most people, does not mean that it will be the best experience for the people paying for the service (i.e. airlines).
- Sometimes, maximum capacity = optimum capacity because it makes the experience better for the people paying for the service (i.e. ballpark)
19
Q
Cyclical Demand
A
Causes: employment schedule, tax payment time, school schedule, public holidays, payday)
20
Q
Random Demand
A
Causes: weather related (rain, affecting outdoor recreation), Acts of nature (Tsunami, Tornados)
21
Q
How can demand be disaggregated by market segment?
A
Can demand be disaggregated (separated) by market segment?
- Type of customer
- Purpose
- Profitability
22
Q
what are various strategies for Managing Demand?
A
- Partition demand
- Shift demand from peak to off-peak
- Promote off-peak demand
- Develop complimentary service
- Inventory demand (reservations)
- Communications strategies to shift demand from peak to off peak
- Distribution changes
23
Q
what are various strategies for managing supply?
A
- Use work-shift scheduling
- Create adjustable capacity
- Share capacity
- Cross-train employees
- Using part-time employees in peak demand periods
- Work personnel at higher level of efficiency
- Utilize facility for longer periods
- Utilize idle capacity by tapping additional customer segments
24
Q
what are various strategies for managing wait times?
A
- Improvements in service operations
- Change in human resource strategies
- Customer-oriented improvements to the delivery system
25
7 Principles about waiting time
1. Unoccupied wait feels longer than occupied wait
2. Pre-process waits feels longer than in-process waits
3. Anxiety makes waits seem longer
4. Uncertain waits are longer than known, finite waits
5. Unexplained waits are longer than explained waits
6. Unfair waits are longer than equitable waits
7. The more valuable the service, the longer people will wait
8. Solo waits feel longer than group waits
26
What are the managerial implications of the psychological considerations in waiting?
- Make waiting more palatable
- Keep customers occupied in some other activity
- Assign agents to get information from customers to begin process early
27
Why are service employees crucial to the success of a service? What challenges do
service employees face? How do these challenges differ for employees in subordinate
service roles versus those in the professional capacity?
- In services, investing in people quality = investing in service quality
- Contact personnel => source of product differentiation
- Human face of the organization
- Caught btwn the organization and the customer
- Challenges: Role conflict/stress/turnover/burnout
- --- Turnover is expensive: cost of hiring and training new employees plus cost due to disruption in customer service
28
What are the three sources of conflicts in such roles?
| What are the personnel-implications of stress caused by these conflicts (e.g., getting into a “people process” mode)?
1. Person/role conflict: when service providers are required to perform a “role,” they may inherently dislike (doing a job to pay the bills)
2. Organization/client conflicts: conflicts between the demands of the organization and those of the client
3. Inter-client conflict: client fights with another client
29
Understand the role of vision in managing employees. What steps can a company take to successfully manage its employees?
Steps:
1. Become the preferred employer
2. Minister to people (human development)
3. Mobilize people (empower and enfranchise)
a. Empowerment
b. Enfranchisement
30
What is empowerment? On what beliefs is the empowerment predicated?
- State of mind produced via high involvement management practices
- State of mind includes:
- -- Control over what happens on the job
- -- Awareness of the context in which the job is performed
- -- Accountability for work output
31
What are the advantages of each: the production-line approach; the empowerment approach?
- Production-line:
- --- Efficient; low-cost; high-volume; greater control over and uniformity in service quality
- Empowerment:
- --- More customer-focused employees (quicker in response and more customized service)
- --- More satisfied employees: ownership of their jobs + control (i.e. call the shots)
- --- The difference = have you ever washed a rental car?
- --- Less turnover and absenteeism, higher productivity, and genuinely warmer and friendlier to customers; satisfied customers → spread positive WOM, hence less need to spend on advertising (vs. industry)
- --- Great source of ideas on improving customer service
32
What conditions are necessary to create empowerment?
- High-involvement management practices that push down
- --- Power
- --- Information
- --- Knowledge
- --- Rewards
- Create in employees an “empowered state of mind” in which they feel:
- --- More control over what happens on the job
- --- More awareness of the context in which the job is performed
- --- More accountability for work output
- That leads to these positive outcomes:
- --- Employees who work hard for customers
- --- Customers whose expectations are met or exceeded
- --- Organizations that enjoy the returns from customer satisfaction and retention
33
What are the four costs of empowerment?
1. Increased selection & training costs:
- Selection - screen out those who might break the rules but not creativity
- Training cost - new customer service reps at Land’s End and LL Bean spend a week in training before handling their first call
2. Higher labor costs
- Many service industries depend on large number of part-time and seasonal workers to meet their highly variable staffing needs
- Temps’ tenure is often brief and their compensation is typically low - minimum wage or near it and limited or no benefits
3. Slower or inconsistent service delivery
- Empowered employees can be flexible and hence, slow. But, customers value speed in service
- Also customers don’t want service providers cutting specific deals with other customers → fairness, no surprises
4. Employees may give away the store or simply make bad decisions
- Willie the doorman at a four seasons hotel
- Creative rule-breaking can cause major problems for an organization. Hence, cost-benefit analysis of empowerment is needed.
34
What are the three methods of setting boundaries on empowerment?
1. Line of sight or line of visibility training (so you don’t get in the way of others)
2. Monetary limits: general and fine-tuned to reflect customer value
3. Role playing - sharing good/bad examples
35
When to empower:
- Business strategy: differentiation, customized, personalized
- Tie to customer: Relationship, long time period
- Technology: non-routine, complex
- Business environment: unpredictable, many surprises
- Types of people: theory Y managers, employees with high growth needs, high social needs, and strong interpersonal skills
36
What is the meaning of globalization?
Relatively smooth flow of goods, labor, and capital across national borders
37
Understand the scope of services’ globalization.
Scope for service-standardization (and therefore economies of scale is much less than the scope for product standardization
38
What forces have fueled globalization in the last three decades?
- Early 1990s: end of Cold War and US the sole superpower; Western-style capitalism steered by the US; creation of the WTO and heyday of multilateralism
- Increased efficiency of global supply chains with falling cost of transportation and communication, many multilateral free-trade agreements led to burgeoning of global trade in goods and services
- 1986-2008 trade in goods and service grew at more than twice the rate of GDP growth
- From 2009 growth in trade has barely exceeded the GDP growth
39
What are the barriers to services’ expansion abroad?
1. Government regulations
2. Logistics
3. Delivery of quality service
4. Cultural difference: more crucial in services as they tend to be more culture-bound (i.e. restaurant chains, entertainment)
5. Staffing and personnel
40
Globalization has, in general, lowered prices of products. However, prices of many services haven’t come down. Why?
1. Scope for service-standardization (and therefore economies of scale is much less than the scope for product standardization
a. Due to service characteristics: Intangibility, perishability, heterogeneity, factories in the field
b. Low mechanical penetration in services requiring more human participation in production (service sector suffers from Baumol’s Disease)
2. Lack of foreign competition in many services
41
Why do economists favor outsourcing?
- Because preventing outsourcing is a form of protectionism that will harm the US economy
- Outsourcing makes US companies more efficient and productive thus creating same amount of goods with fewer resources - result: lower prices and making US companies more competitive
- In the long-run it will strengthen US economy
- Cost savings from offshoring/outsourcing 30% to 70%
42
What can be done to help those workers who have been displaced by globalization?
- Massive movement of economic migrants (250 million people and work outside their country of birth - 90% voluntary)
- Economic migrants contribute $6.7 trillion/year to global economy
- Rising protectionism: Since November 2008, G-20 countries have enacted more than 6,600 protectionist measures
- Rules of the game are in dispute: free-market vs managed economies
- Help these workers in the re-adjustment process by expanded training and relocation assistance + employment benefits and health insurance
43
Should services be customized for foreign markets?
Factors favoring standardization:
1. Common customer needs: function performed by the product/similarity of needs/similarity of usage conditions (is there a market for your service in a foreign country?)
2. Scale economies: what are scale economies in services? 3. Experience in delivering service in one market can help reduce the cost in another
3. Other scale economies: negotiate better advertising/media rates
44
Ethical behavior is a function of what factors?
Character, culture, and consequences + globalization of service adds a new dimension
45
Why do global settings create challenges for ethical behavior?
Because of differences in:
- Culture
- --- Norms, values, customs, rites, rituals, media, legends, heroes, history, religion, etiquette
- Consequences
- --- Social sanctions and legal sanctions (i.e. stealing)
46
What are some sources of moral reasoning?
- Religion
- Self
- Significant others
- Golden rule
- Formal codes of ethics (professional societies, corporations, etc.)
47
What is the relationship between ethics and laws?
- Some things are ethical but not legal, some things are legal but not ethical
- --- Remember the ethical matrix made in class - some things could fit into all categories depending
48
What are the two levels of normative ethics?
1. Moral common sense (rooted in various sources of moral reasoning))
2. Frameworks for critical thinking or avenues of critical thinking
a. Search for criteria that will justify the inclusion or exclusion of common sense norms; clarify their applicability and resolve conflicts among them
49
Understand the three avenues or frameworks of critical thinking about ethics.
1. Utilitarianism: most happiness for everyone affected in the long run
- --- “The ends justify the means”
- --- “Goal-based”
2. Contractarianism: the main idea is giving each person his/her due
- --- Focus on fairness, individual rights/liberties
3. Pluralism
- --- Focus on duty: categorical imperatives - higher order (perfect) duties/lower order (imperfect) duties (fidelity vs charity)
50
What can a company do to promote ethical behavior in its employees?
- Fostering a culture of ethical behavior
- --- Code of ethics
- --- Ethics committees
- --- Incentives and disincentives
- --- Senior managers as role models
MKTG 445
flashcards
Decks in class (5)
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