Part 2 (this page): [Time] [Yield Management] [Delivery Mode] [Options] [Bundling] [Be-spoke] [Promotions] [Conclusions]
Part 1 (previous page):
[New Customer Discount]
[Distribution Channel] [Product Variations] [Location]
Absolute time as well as elapsed time can both impact price. Travel companies such as airlines and hotels, offer price incentives to travel or stay at off-peak times or seasons or to purchase at the last minute - see LastMinute.com. EasyInternetCafes charge more in peak hours and Burger King was reported to be considering discounting cooked burgers that are about to spoil through lack of demand. On the service front, 24 x 7 service will cost more than 9 to 5 Monday to Friday - plumbers want more for a night time or weekend call out.
Response time can also impact price. Service level agreements will often have a choice of call-out response times from perhaps 1 hour through to 2 days. Delivery times likewise, from same day to 4 days or even months if an item is sent by sea rather than by air.
As society moves to a 24 hour modus operandi, round the clock service as
no additional cost is being taken as given. We have seen under
location (on page 1) that some companies
are able to service customers on a world wide basis for little increase in
cost. Other companies will find it a challenge to meet these expectations,
not least with their employees who will be expected to earn the same hourly
rate irrespective of the time of day, or the day of the week when they are
working. Even government is not immune from these pressures.
Ambulance services now use sophisticated computer modelling to predict the timing and location of emergency calls. They can then position ambulances at key road interchanges rather than at the ambulance headquarters. The aim is to deliver a better service at the same or less cost. The UK government has recently launched NHS Direct, a call centre, to take patient calls 24 x 7. The aim is to offer improved service whilst reducing the number of visits patients make to their doctor, often necessitating time off work and a long wait.
In fact the author was instrumental in the launch of a pilot system that used dynamic pricing and dynamic payments based on time.
Other government initiatives are on the way to extend call centre and electronic delivery to all services, providing not just increased accessibility but also speedy and simple one stop "shopping" for government services. These changes are causing debate as to whether improved service delivery is costing more or less. If it is indeed more, then given the UK government's commitment not raise price (i.e. taxation levels), will the money allocated to the actual product be less?
When Time based pricing is combined with Demand based pricing and the product is capital intensive and perishable then a company can deploy a Yield Management based pricing strategy. The Easy Group of companies have been the fore-runner in the UK of yield management. In fact it now claims that it's skills in YM are it's competitive edge. Initially deployed in EasyJet air travel, the model was then used for EasyCar (car hire), EasyCafe (Internet Cafe), EasyCinema and soon EasyDorm (hotels), EasyCruise and EasyPizza.
Read more about Yield Management.
EasyInternetCafe's dynamic pricing a material factor in the company's
significant under-performance? Read the case study and decide.
The cheapest air and rail tickets have no flexibility to change bookings. An interesting phenomena in the airline industry is the fact that the cheapest tickets with the budget airlines are so low, compare to the standard open and flexible ticket, that passengers can book two cheap tickets to provide some flexibility and still save compared to the full price open ticket. Airlines are therefore deprived of selling an empty seat until the check-in time has past. Some airlines are trying to stop this double booking by checking for an existing booking. This is only possible because current security requirements mandate that the purchaser must be the person flying and must provide identifying documents.
Closely allied to Location (see page 1) and Time is delivery mode. For example, distant location combined with urgency may result in using air transport, an expensive mode incurring a delivery surcharge. In many cases, customers are willing to pay the extra in order to avoid disruption to their own processes and failure to meet their customer's expectations. Choosing a mode of delivery provides at different price points provides customer with choice but possibly at the expense of complexity for the supplier. For this reason, some suppliers offer no choice, and in order to keep the most demanding customer happy, always providing a next day guaranteed courier service. In turn they have negotiated with the courier company for a fixed price for say all parcels up to a certain weight. This also simplifies the billing and the collection service for the courier company.
However, increasing prices for faster delivery is not always the case:
Currently the UK Post Office (now call Consignia) has switched much long distance transport from rail to air. This was due to the disruption following the Hatfield rail crash when it was discovered that significant sections of the rail network suffered from metal fatigue. Consignia did this to try to meet its public service level targets yet it had to absorb the increase cost as basic postage prices are regulated.
Many organisations are finding that initiatives a such as just-in-time delivery and plant rationalisation is requiring the deployment of sophisticated logistic and predictive modelling systems. Where such systems fail then the companies may be forced to use expensive delivery methods in order to meet contractual commitments.
Options provide a way for a company to offer choice to customers so that
customers can to a degree maximise the value of an offering. It is very common
in motor vehicles.
There may be choice of seat fabric, type of wheels, paint colour and finish, audio equipment, navigational aids and so on. Options may include service items, for example, extend warranty, liability, legal and breakdown insurances. In reality, for any one model, the manufacturer usually limits the selection of options to stop customers purchasing the base models and then adding options to bring the specification up to the level of a higher priced model. It also avoids eroding the status that is associated with the higher priced models. For example, tinted windows are perhaps only available on the top of the range, a visible indicator to friends and colleagues that a buyer has spent considerable money on his new car.
Too many options can confuse buyers, make the purchasing decision difficult, add sales and service complexity, and create likelihood of errors where some options are mutually in conflict. Some companies have been accused of using option and complex rules to confused customers and to make comparison shopping difficult (often referred to as Confusion Marketing).
The range of options can also be tailored to distribution channels (on page 1) with say direct lines offering basic products with no or few options, through to agent delivered channels offering a full range sold by trained and qualified personnel. Generally speaking the availability of computer systems with embedded rules based software is supporting more complex option choices.
One way to handle the difficulties of options is to bundle them into collections of options that are usually priced with a discount. The selling process is simplified and the compatibility issues addressed by technical people before the offer is marketed. British Telecom has a range of bundled options under the Select scheme offering features such a Call Minder, Call Waiting, Caller Line Identifier and Ring Back.
Customers with specific or unique needs and who require a custom solution will turn to a be-spoke service. Having a garden landscaped, a house painted, a portrait picture commissioned and a suit made-to-measure are examples, though for the last 2 examples the price may well be fixed as the amount of work involved and /or the cost of the materials can be accurately estimated.
Because be-spoke services usually involve discussion between the potential customer and the potential supplier, it provides an opportunity for the supplier to gauge the value to the customer and thus opens the possibility of moving beyond a cost basis to a value basis for setting the price. Customers therefore tend to seek quotations from a number of suppliers.
With the new interactive services like the internet together with the use of modern manufacturing systems, it is possible to offer a be-spoke like service at a price comparable to mass produced items. This technique is known as mass customisation. The alternative of course is to charge a premium for the be-spoke nature of the product.
Promotions in there various form have been a phenomena of the second half of the 20th century. Trial prices, coupons, multi-buys, linked-buys, stamps, rebates, loyalty schemes, free options or gifts, and trade-in offers are some of the many incentives offered to consumers to increase sales. They either lower the price or increase the value of the offer. They may be instant or deferred (e.g. collect 6 coupons).
Some schemes, like the loyalty schemes and the post sale rebate, seek to
increase the value to the supplier by tracking or asking for consumer information
in return. To these must be added the more traditional seasonal sales and
end-of line sales. All these methods tend to be non-discrimeratory in that
they offer the same incentive to all takers. A possible exception is loyalty
schemes such as run by the UK food retailer Tesco:
Using the data collected by the check-out scanner and the unique identifier from the customer's loyalty card, Tesco collects information on the shopping habits and lifestyle of over 10m shoppers. It then mails these shoppers personalised rebate coupons plus a personalised lifestyle magazine.
Similarly there are trade incentives such as loyalty schemes, quantity discounts, free gifts and prizes, sale or return, extended credit, and support with advertising. With these incentives the supplier should know the distributor and should better be able to target and measure the impact on sales. But a danger with trade promotions is that they are given to all distributors/retails without consideration to the different value they may have. Another danger, is that they simply used to as "sticking tape" in a declining business when more drastic "open heart surgery" is needed. Xerox, for example, is struggling under the burden of the $11 billion it borrowed to help customers purchase its products through extended credit.
With all promotions there is the danger that customers begin to expect them. If a supermarket regularly promotes its own brand of say coffee, the astute shoppers stock-up when the price is low. Sales then subsequently fall and the retailer has to offer even more incentives to attract further shoppers. If it tries to limit the availability then it alienates loyal customers who find the shelves empty. Similar problems exist with trade sales. We are now moving into the area of buyer behaviour which is the subject of a later section.
Nearly all the pricing methods above are driven by the supplier. Suppliers
have a cost base and a profit margin. They make trade-offs, reducing profit
and hopefully acquiring and increasing sales in the short term, but aiming
to make-up lost profit in the longer term through customer retention and
repeat purchases. We have seen that cost driven pricing plus promotions and
special deals is a potent mix. It can lead to changing customer expectations
and behaviours opposite to that intended. But rather than ease off, most
suppliers increase the spend to match their competitors, who of course had
just increased their spend to match that supplier. Each additional promotional
dollar, yen or pound is actually less effective and so returns less
|In a complex world of multiple products and models, many options, multiple distribution channels, 24 x 7 operation etc., potentially there could be thousands of prices for a single product range. A natural reaction is to simplify some of the variables (e.g. fixed delivery charge based on average order weight and first class post). But when customers have easy access to information and a choice of multiple suppliers, it is simple for them to "cherry-pick". Averages no longer the averages expected and profit margins are eroded. Alternatively, customers no longer fee that the offerings meet their requirements or provide sufficient choice. Profit margins may remain high but sales nether-the-less decline, market share is lost and long term unit costs rise and overall profits decline. Above all, inappropriate promotions can damage brands and lead to an irrecoverable loss of market position.||
Customers will cherry pick the best value options.
These tactics for market share are a zero-sum game with just a couple of winners, a lot of desperate losers and much "spilt blood" along the way. The only winners are probably the advertising agents. Even customers are not necessarily winners. They may have reduced prices but they are probably stressed-out trying to fathom out all the special offers and finding time to cut out and return the coupons! Most worrying is that a whole industry can become crippled, as illustrated in the UK's rail network and in California's electricity supply industry, when consumers find that cheap prices leads to industry melt-down and no product to buy.
In the next section we will look at how customers are asserting their consumer and buyer power, often exploiting new delivery channels such as the internet.
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