Services strategies the advanced sale of services

SERVICES STRATEGIES: THE ADVANCED SALE OF SERVICES LENA IRENE NG CHENG LENG (BSc., NUS) A THESIS SUBMITTED FOR THE DEGREE OF DOCTORATE OF PHILOSOPHY IN MANAGEMENT DEPARTMENT OF MARKETING NATIONAL UNIVERSITY OF SINGAPORE 2003 ACKNOWLEDGMENTS I wish to express my deepest gratitude to the following persons: My husband Boon Chiang – for his love, patience and strength, and for believing in me My children Serene, Lisa and Samantha – for their understanding and their unconditional love My supervisor A/Professor Lee Khai Sheang – for his valuable guidance, his tutelage, his friendship, and for being the source of inspiration in the course of my doctoral studies. Thank you for making this Ph.D. possible My co-supervisor Professor Lim Chin – for being willing to listen, help and support during trying times A/Prof Jochen Wirtz, who taught me so much at the beginning of the Ph.D. and remained supportive of my efforts Dr. Chong Juin Kuan, for understanding the stress and trials, and for his concern and guidance Selina Quek, whom, besides providing me shelter in my weekly travels down to Singapore, have always been there to listen and counsel through my many trying and tiring moments. Alex, Lisa, Maxine, Leonard, Jack, Lee Jr – for all their help and above all, for caring Chiranjeet, who helped me develop a fondness for math. My grandpa, whose passing from this life made for a powerful intercession that helped me obtain the much-needed momentum in my final year Ah Long, Peter and Keng Joon – for their friendship, support and invaluable assistance without whom, this achievement would never be possible. I would also like to acknowledge the financial support of the National University of Singapore Research Scholarship and the Raffles Hotel Research Grant, during my doctoral studies I would like to dedicate this dissertation to my father, Ng Kong Yeam and my mother, Hannah Ling Chooi Sieng, whom, in their own ways, taught me the meaning of passion and perseverance. For the glory of God, who makes all things possible. i Take my Life, and let it be Consecrated, Lord, to Thee Take my moments and my days; Let them flow in ceaseless praise. Take my hands, and let them move At the impulse of Thy love Take my feet, and let them be Swift and beautiful for Thee Take my voice, and let me sing Always, only, for my King. Take my lips and let them be Filled with messages for Thee. Take my silver and my gold; Not a mite would I withhold Take my intellect, and use Every power as Thou choose Take my will, and make it Thine It shall be no longer mine. Take my heart, it is Thine own; It shall be Thy toyal throne. Take my love, I pour At Thy feet its treasure-store. Take myself, and I will be Ever, only, all for Thee Frances Ridley Havergal (1836 – 1879) There is no spoon “The Matrix” (1999) ii TABLE OF CONTENT TABLE OF CONTENT SUMMARY . CHAPTER THE STRATEGIC ROLE OF UNUSED SERVICE CAPACITY . ABSTRACT INTRODUCTION CAPACITY MANAGEMENT - A LITERATURE REVIEW .7 METHODOLOGY .11 DEVELOPMENT OF PROPOSITIONS .13 DISCUSSION AND FUTURE RESEARCH 33 CONCLUDING REMARKS 38 TABLES AND FIGURES 40 REFERENCES .44 CHAPTER . 49 ADVANCED SALE OF SERVICE CAPACITIES: A THEORETICAL ANALYSIS OF THE IMPACT OF PRICE SENSITIVITY ON PRICING AND CAPACITY ALLOCATIONS . 49 ABSTRACT 49 INTRODUCTION 50 LITERATURE REVIEW .52 THE MODEL .55 ANALYSES 57 DISCUSSION AND MANAGERIAL IMPLICATIONS 64 CONCLUSION 66 REFERENCES .68 APPENDIX (PROOFS) 69 CHAPTER . 71 THE PRICING OF SERVICES: A THEORETICAL FRAMEWORK . 71 ABSTRACT 71 INTRODUCTION 72 BACKGROUND OF STUDY 75 DEVELOPMENT OF A CONCEPTUAL FRAMEWORK FOR PRICING IN SERVICES 79 MODEL 87 ANALYSES 92 MODEL EXTENSION: OFFERING A REFUND WHEN THE ABILITY TO RESELL AT SPOT IS PROBABILISTIC 96 ANALYSES 99 DISCUSSION . 104 CONCLUSION . 108 REFERENCES 111 APPENDIX (PROOFS) . 118 CONCLUSION .130 SUMMARY The practice of selling a service in advance of consumption, such as those practiced by hotels and airlines, is not equivocal amongst academics. Literature in this area is scant and there is a good deal of ambiguity as to what drives pricing and capacity allocation considerations in advance, and if advanced selling is in fact optimal. In investigating this phenomenon, this dissertation presents three separate and complete essays on the subject. As each essay delves into different issues and draws separate conclusions pertaining to advanced selling, each is formulated with its own introduction, literature review, some background of the study, results, discussion and references. In the first chapter a qualitative study of various service firms is presented. Through a theory-in-use approach, the study re-constructs the tacit knowledge of practitioners to develop a greater understanding of how service firms actually sell their capacity. In-depth interviews with the top management of service firms were performed and the qualitative data were mapped to literature resulting in seven propositions on how capacity is marketed by the firms. From the propositions, the study concludes with an analysis of the domain of the capacity strategies and the motivations that drives their usage. The second chapter of the dissertation investigates, through a theoretical model, the optimality of advanced selling. In the model, the firm determines the optimal prices and capacities for advanced sale, and for the time of consumption. To examine how demand characteristics affect advanced sale of capacities, price sensitivity is incorporated in the model formulation. The study shows that, with advanced sale, capacity utilization and profits are higher than when advance selling is not undertaken. Furthermore, when price sensitivity at the point of consumption is low, it is optimal to allocate more capacity at the time of consumption and less for advanced sale. However, although profits are greater, the optimal prices for advanced sale and at the time of consumption are lower, when price sensitivity at the point of consumption is low, than when price sensitivity is high. The final chapter provides a deeper understanding of demand behavior and the pricing of services. It argues why all services are sold in advance and show how the specificities of services result in two types of risks faced by buyers who buy in advance, that of unavailability of service and a low valuation of the service at the time of consumption. Furthermore, advanced buyers run the risk of not being able to consume at the time of consumption and this relinquished capacity may be re-sold by service firms. A theoretical model is developed that shows that advance prices are therefore always lower than spot prices. Also, providing a refund to advanced buyers may be optimal. Finally, the chapter shows a counter intuitive result that under certain conditions, the firm’s strategy may be pareto optimal in that a guarantee against capacity unavailability and a refund guarantee against valuation risk may be offered to advanced buyers at a lower advance price than if a refund offer is not provided. Chapter THE STRATEGIC ROLE OF UNUSED SERVICE CAPACITY ABSTRACT Services are by nature perishable. As such, managing a service firm's capacity to match supply and demand has been touted as one of the key problems of services marketing and management practice. This paper advances an alternative perspective of unused service capacity. Based on a review of current literature and an exploratory study, this paper employs a theory-in-use methodology to map out a set of capacity strategy propositions. These propositions show that unused capacity could be employed as a resource to achieve a series of strategic objectives that serve to improve the performance of the firm. The paper also suggests a re-look at capacity policies and proposes that service firms should therefore approach capacity management not only from the standpoint of operations management but from that of marketing as well. Keywords: Capacity Management, Service Strategy, Theory-in-use, Advanced Selling INTRODUCTION Services account for a growing percentage of the gross national output of most countries. As such, service industries are maturing and have become more competitive, and there is a growing need to increase efficiency, productivity and competitiveness (Wirtz, Lee and Mattila 1998). To that end, the capacity of service firms has to be managed to achieve maximum and/or optimum utilization at all times, if possible. Despite its importance, there has been a lack of attention devoted to the study of service capacity in the academic literature. Our field interviews indicated that managers in service firms face a complex and difficult task with regard to capacity management, and have less than adequate information to assist them. Furthermore, it is noted that there seems to be a divergence between what companies should do, according to academic literature, and what they are actually doing. This divergence seems to occur, because the literature often ignores the role of strategy when dealing with capacity issues. As competition intensifies, and despite a dearth in literature, many service firms have learned to survive by creating and innovating strategies with regard to capacity, which have not yet been explored in the academic literature. It is the purpose of this essay to map such practices, conducted in complex real world settings, and formalize the theory within which they operate through a theory-in-use methodology. As this investigation deals with the role of unused capacity as a strategic resource for service firms, insufficient capacity to cope with overfull demand is not addressed here. This essay begins with a literature review on capacity management that will serve to illustrate the inadequacies of academic literature in providing solutions. Following on, the method section outlines the details of the exploratory investigation of thirty-six service firms and their practices of capacity usage. These interviews with the top management of the firms, mapping of their practices, coding and categorizing through a theory-in-use methodology, generated qualitative data and, supplemented by academic literature, formed the basis for seven sets of propositions. The essay then closes with a discussion on the implications of the findings, study limitations and directions for future research. CAPACITY MANAGEMENT - A LITERATURE REVIEW Capacity of a service firm is "the highest quantity of output possible in a given time period with a predefined level of staffing, facilities and equipment" (Lovelock, 1992, p. 26). Capacity amongst service firms has one commonality. For each day a service is not put to profitable use, it cannot be saved (Bateson, 1977; Thomas, 1978). This perishability suggests a need for careful planning and management, as idle capacity due to slack demand, as well as turning away customers due to insufficient capacity, are serious problems critical to the success of many service firms (Harris & Peacock , 1995). There is substantial literature on how to cope with supply and demand imbalances (e.g., Heskett, 1986; Lee, 1989; Lovelock, 1988; Mabert, 1986; Maturi, 1989; Morrall, 1986; Orsini and Karagozoglu, 1988; Sasser, 1976; Shemwell & Cronin, 1994). The literature suggests two ways of dealing with excess or idle capacity. The first is to manage supply to fit demand. Such strategies include reducing a firm's manpower costs, donating work to charity, conduct training for staff, schedule the service so as to match the peaks and the troughs, taking on sub-contracted jobs, and even reducing fixed costs such as renting office space or equipment. The second strategy, to manage demand to fit supply, include offering discounts, lowering prices, increasing advertising, conducting cold-calls, diversify to segments where demand is less fluctuating, selling services under barter arrangements, offering different services, positioning a service differently, accepting reservations, and even use idle staff as walking advertisements. However, if a firm chooses not to deal with the Figure 2: Characterization of the Non-consumption effect when β > δ P0* P0* , PA* α 2( β − δ ) PA* ρ q *A q 0* , q *A α q0* ρ 115 2(1 + ρ ) (2 + ρ ) Figure 3: Game Tree for Refund Offer when the ability to re-sell is probabilistic Able to re-sell π = PA q A + P0 q0 + P0 ρq A − rPA ρq A Unable to re-sell π = PA q A + P0 q − rPA ρq A Able to re-sell π = PA q A + P0 q + P0 ρq A µ N Refund r needs to be offered 1− µ F µ Refund does not need to be offered N Unable to re-sell 1− µ 116 π = PA q A + P0 q0 Table 1: Summary of Results Impact of Impact of decreasing increasing ability to renonsell, µ consumption , ρ 2(1 + ρ ) When β > δ (2 + ρ ) Impact of increasing refund, r , if offered When β > δ ρ Asymmetry High unavailability risk = δ A → and High valuation risk = δ → When β > δ ρ Advanced Price Decrease Increase and µ = Decrease Spot Price Increase Decrease Increase Lower when δ A → than when δ → Advanced Demand Increase Decrease Increase Lower when δ A → than when δ → Spot Demand Decrease Increase Decrease Higher when δ A → than when δ → Profit Increase Decrease Increase when δ < β ⋅ φ (see proposition 3) Higher when δ → than when δ A → 117 Higher when δ A → than when δ → APPENDIX (PROOFS) Lemma 1: q A = α − βPA + δP0 q = α − βP0 + δPA and π = PA q A + P0 q + P0 ρq A Max PA ,P0 {π } will lead to (1) (2) α + ( 2δ − βρ ) P0 2β α (1 + ρ ) + (2δ − βρ ) PA P0 = 2( β − δρ ) PA = (3) (4) Solving for (1) and (2) results in α (2δ + β (2 + ρ )) P0* = 4( β − δ ) − β ρ PA* = (5) α (2δ + β (2 − ρ − ρ )) 4( β − δ ) − β ρ (6) Substituting back to the demand functions will lead to α [ β (2 − ρ − ρ ) − 2δ − βδρ (1 + ρ ) q 0* = 4( β − δ ) − β ρ α ( β + δ )( β (2 + ρ ) − 2δ ) q *A = 4( β − δ ) − β ρ Thus when ρ = , the above yields PA* = P0* = P * (0) = (7) (8) α2 α α , q *A = q0* = q * (0) = and π * (0) = 2( β − δ ) 2( β − δ ) Proposition 1: From the above proof of lemma α α [2δ + β (2 − ρ − ρ )] P * (0) − PA* = − 2( β − δ ) 4( β − δ ) − β ρ α [ ] 4( β − δ ) − β ρ − 2( β − δ )[2δ + β (2 − ρ − ρ )] 2( β − δ )[4( β − δ ) − β ρ ] P * (0) − PA* = P * (0) 4( β − δ ) − β ρ − 4δ ( β − δ ) − β ( β − δ )(2 − ρ − ρ ) [ 4( β − δ ) − β ρ ] P * (0) − PA* = P * (0) 4( β − δ ) − β ρ − βδ + 4δ − (2 β − βδ )(2 − ρ − ρ ) 2 2 [4( β − δ ) − β ρ ] P * (0) − PA* = [ ] [ P* (0) − PA* = P* (0) [ β − 4δ − β ρ − βδ + 4δ − β + β ρ + β ρ + βδ − βδρ − βδρ [4( β − δ ) − β ρ ] P * (0) − PA* = P * (0) P * (0) − PA* = P * (0) [4( β − δ ) − β ρ ] [− β ρ + β ρ + β ρ − βδρ − βδρ )] βρ [− βρ + β + βρ − 2δ − 2δρ ] [4( β − δ ) − β ρ ] 118 ] ] βρ [2( β − δ ) + ρ (2 β − 2δ − β )] [4( β − δ ) − β ρ ] PA* = P * (0)(1 − S [2( β − δ ) + ρ ( β − 2δ ))]) (9) α [2δ + β (2 + ρ )] α P0* − P * (0) = − 2 2 2( β − δ ) 4( β − δ ) − β ρ α [ P0* − P * (0) = 2( β − δ )[2δ + β (2 + ρ )] − [4( β − δ ) − β ρ ]] 2 2 2( β − δ )[4( β − δ ) − β ρ ] α [4δ ( β − δ ) + β ( β − δ )(2 + ρ ) − 4( β − δ ) + β ρ ] P0* − P * (0) = 2( β − δ )[4( β − δ ) − β ρ ] α [ P0* − P * (0) = βδ − 4δ + (2 β − βδ )(2 + ρ ) − β + 4δ + β ρ ] 2 2 2( β − δ )[4( β − δ ) − β ρ ] α [ P0* − P * (0) = βδ − 4δ + β + β ρ − βδ − βδρ − β + 4δ + β ρ 2 2 2( β − δ )[4( β − δ ) − β ρ ] P * (0) − PA* = P * (0)  P0* − P * (0) = P * (0) β ρ − βδρ + β ρ 2 2  [4( β − δ ) − β ρ ]   βρ [2( β − δ ) + βρ ] P0* − P * (0) = P * (0) 2 2  [4( β − δ ) − β ρ ]  * * P0 = P (0)(1 + S [2( β − δ ) + βρ ]) [  (10) α [ β (2 − ρ − ρ ) − 2δ − βδρ (1 + ρ )] 4( β − δ ) − β ρ α [4 β − 4δ − β ρ ] − 2α [ β (2 − ρ − ρ ) − 2δ − βδρ (1 + ρ )] q * (0) − q 0* = 2[4( β − δ ) − β ρ ] α q * (0) − q 0* = (4β − 4δ − β ρ − 2β (2 − ρ − ρ ) + 4δ + 2βδρ (1 + ρ )) 2 2 2[4( β − δ ) − β ρ ] q * (0) − q 0* = q * (0) − q 0* = α ] − α (4β − 4δ − β ρ − 4β + 2β ρ + 2β ρ + 4δ + 2βδρ + 2βδρ ) 2[4( β − δ ) − β ρ ] α (− β ρ + 2β ρ + 2β ρ + 2βδρ + 2βδρ ) 2 2[4( β − δ ) − β ρ ] βρ (− βρ + β + βρ + 2δ + 2δρ ) q * (0) − q 0* = q * (0) 4( β − δ ) − β ρ q * (0) − q 0* = q 0* = q * (0)(1 − S[2( β + δ ) + ρ ( β + 2δ )]) (11) α ( β + δ )[ β (2 + ρ ) − 2δ ] α − 4( β − δ ) − β ρ α q *A − q * (0) = [2 β ( β + δ )(2 + ρ ) − 4δ ( β + δ ) − β + 4δ + β ρ ]] 2 2 2[4( β − δ ) − β ρ ] α q *A − q * (0) = [(2 β + βδ )(2 + ρ ) − βδ − 4δ − β + 4δ + β ρ ]] 2 2 2[4( β − δ ) − β ρ ] q *A − q * (0) = 119 q *A − q * (0) = α [4 β + β ρ + βδ + βδρ − βδ − 4δ − β + 4δ + β ρ ] 2[4( β − δ ) − β ρ ] q *A − q * (0) = q * (0) q *A − q * (0) = q * (0) 4( β − δ ) − β ρ 2 [2 β ρ + βδρ + β ρ ] βρ [2( β + δ ) + βρ ] 4( β − δ ) − β ρ 2 q *A = q * (0)(1 + S [ 2( β + δ ) + βρ ]) βρ Where S = and 4( β − δ ) − β ρ (12) From (5) and (6) above, PA* , P0* > iff the denominator is positive which is when 2 β >δ ⋅ and > QED (4 − ρ ) 4− ρ P * (0) > PA* iff α α [2δ + β (2 − ρ − ρ )] > 2( β − δ ) 4( β − δ ) − β ρ 4( β − δ ) − β ρ > 2( β − δ )[2δ + β (2 − ρ − ρ )] 4( β − δ ) − β ρ > 4δ ( β − δ ) + β ( β − δ )(2 − ρ − ρ ) 4( β − δ ) − β ρ > βδ − 4δ + (2 β − βδ )(2 − ρ − ρ ) β − 4δ − β ρ > βδ − 4δ + β − β ρ − β ρ − βδ + βδρ + βδρ − βρ > −2 β − βρ + 2δ + 2δρ βρ + β > 2δ + 2δρ β (2 + ρ ) > 2δ (1 + ρ ) 2(1 + ρ ) β >δ (2 + ρ ) Show that 2(1 + ρ ) > (2 + ρ ) 4− ρ2 (2 + ρ ) (1 + ρ ) (2 + ρ ) 4− ρ2 > (1 + ρ ) 4− ρ2 > (2 − ρ )(2 + ρ ) > which is true Lemma 2: From lemma above, the optimal profit of the firm would be: π * = PA* q *A + P0* q 0* + P0* ρq *A 120 Replace the results of proposition above (i.e. (9) – (12)) obtain the lemma after rearranging (QED) Proposition 2: α [2δ + β (2 − ρ − ρ )] PA* = 4( β − δ ) − β ρ ∂PA* [−αβ − 2αβρ ][4( β − δ ) − β ρ ] − [−2 β ρ ][2αδ + αβ (2 − ρ − ρ )] = ∂ρ [4( β − δ ) − β ρ ] ∂PA* [−4αβ ( β − δ ) − 8αβρ ( β − δ ) + αβ ρ + 2αβ ρ ] − [−4αβ 2δρ − 2αβ ρ (2 − ρ − ρ )] = ∂ρ [4( β − δ ) − β ρ ] ∂PA* − 4αβ + 4αβδ − 8αβ ρ + 8αβρδ + αβ ρ + 2αβ ρ + 4αβ 2δρ + 2αβ ρ (2 − ρ − ρ )] = ∂ρ [4( β − δ ) − β ρ ] ∂PA* − 4αβ + 4αβδ − 8αβ ρ + 8αβρδ + αβ ρ + 2αβ ρ + 4αβ 2δρ + 4αβ ρ − 2αβ ρ − 2αβ ρ = ∂ρ [4( β − δ ) − β ρ ] ∂PA* αβ [−4 β + 4δ − 8β ρ + ρδ + β ρ + βδρ + β ρ − β ρ ] = ∂ρ [4( β − δ ) − β ρ ] ∂PA* αβ [−4 β + 4δ − β ρ + ρδ − β ρ + βδρ ] = ∂ρ [4( β − δ ) − β ρ ] ∂PA* < if and only if ∂ρ β − 4δ + β ρ − ρδ + β ρ − βδρ > which leads ( ) ( )  ρ ± ⋅ + ρ + 5ρ + ρ   + 4ρ + ρ   which implies  ρ + ⋅ + ρ + 5ρ + ρ   since β > δ and β , δ > β >δ ⋅ + 4ρ + ρ   For the other optimal solutions: β >δ ⋅  ∂  βρ ∂S =  2 2  ∂ρ ∂ρ [4( β − δ ) − β ρ ]  ∂S ∂  ( 4( β − δ ) − β ρ ) β − βρ ( −2 β ρ )  =   ∂ρ ∂ρ  [ 4( β − δ ) − β ρ ]  121 ∂  (4 β − βδ − β ρ + β ρ )  ∂S =   ∂ρ ∂ρ  [4( β − δ ) − β ρ ]  3 ∂S ∂  (4 β − βδ + β ρ )  =   ∂ρ ∂ρ  [4( β − δ ) − β ρ ]  ∂  4( β + ρ ) − βδ  ∂S ∂S which means that = >0  2 2  ∂ρ ∂ρ  4( β − δ ) − β ρ  ∂ρ ∂S 2 > iff β > δ ⋅ which is true since β > δ and , ∂ρ ∂ρ ∂ρ ∂q0* ∂S * ∂S * q (0)( β + δ ) − q (0) ρ ( β + 2δ ) − Sq * (0)( β + 2δ ) < = −2 ∂ρ ∂ρ ∂ρ * ∂q A ∂S * ∂S * =2 q (0)( β + δ ) + q (0) ρβ + Sq * (0) β > ∂ρ ∂ρ ∂ρ and Proposition 3: When r > and µ > q A = α − βPA,R + δP0, R (13) q0 = α − βP0, R + δPA, R (14) and E [π ] = µ [ PA, R q A, R + P0, R q0, R + P0, R ρq A, R − rPA, R ρq A, R ] + (1 − µ )[ PA, R q A, R + P0, R q0, R − rPA, R ρq A, R ] ⇒ E[π ] = PA, R q A, R + P0, R q0, R − rPA, R ρq A, R + µP0, R ρq A, R Max PA, R , P0 , R {E[π ]} will lead to α (1 − rρ ) + (δ ( − rρ ) − µβρ ) P0, R β (1 − rρ ) α (1 + µρ ) + (δ ( − rρ ) − µβρ ) PA, R = 2( β − µδρ ) PA, R = (15) P0, R (16) Solving for (15) and (16) results in α (1 − rρ )[ β ( + µρ ) + δ ( − rρ )] P0*,R = 4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − ( rδ − βµ ) ρ PA*, R = α [ β ( − ρ ( 2r + µ + µ ρ )) + δ ( − rρ (1 − µρ ))] 4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − ( rδ − βµ ) ρ Substituting back to the demand functions will lead to α ( β + δ )[ β ( − ρ ( 2r + µ − µρ ( r − µ ))) − δ ( − rρ (3 − rρ + µρ ))] q0*, R = 4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − ( rδ − βµ ) ρ α ( β + δ )[ β ( − 2rρ + µρ ) − δ ( − rρ )] q *A, R = 4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − ( rδ − βµ ) ρ 122 (17) (18) (19) (20) From the above, I find that ρ ( βµ − rδ )[2( β − δ ) + ρ ( µ ( β − 2δ ) + rδ )] α ⋅ P * (0) − PA*, R = 2 2 2 β ( − 4rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ 2( β − δ ) * * ⇒ PA, R = P (0)[1 − S R ⋅ [2( β − δ ) + ρ ( µ ( β − 2δ ) + rδ )]] ρ ( βµ − rδ )[2( β − δ ) + ρµβ − ρr ( β − δ )] α ⋅ 2 2 β ( − 4rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ 2( β − δ ) * * ⇒ P0, R = P (0)[1 + S R ⋅ [2( β − δ ) + ρµβ − ρr ( β − δ )]] ρ ( βµ − rδ )[2( β + δ ) + ρµβ − ρrδ ] α q *A, R − q * (0) = ⋅ 2 2 β ( − 4rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ * * ⇒ q A, R = q (0)[1 + S R ⋅ [2( β + δ ) + ρµβ − ρrδ ]] ρ ( βµ − rδ )[2( β + δ ) + ρµ ( β + 2δ ) − ρr ( β + δ )] α ⋅ q * (0) − q0*, R = 2 2 2 2( β − δ ) β ( − 4rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ * * ⇒ q0, R = q (0)[1 − S R ⋅ [2( β + δ ) + ρµ ( β + 2δ ) − ρr ( β + δ )] P0*,R − P * (0) = (21) (22) (23) (24) The expected profit if a refund is offered would be E [π refund ] = PA,R q A,R + P0,R q0,R − rPA,R ρq A,R + µP0,R ρq A,R (25) In contrast, if a refund is not offered, the profit would be E [π norefund ] = PA q A + P0 q0 + µP0 ρq A (26) where q A,R = α − βPA,R + δP0,R (13) q0,R = α − βP0,R + δPA,R (14) q A = α − βPA + δP0 (13a) q0 = α − βP0 + δPA (14a) Following the optimization process for (25 above, we find that α [2( β + δ ) + βµρ ] P0* = 4( β − δ ) − β µ ρ PA* = α [2( β + δ ) − ρ ( µ + µ ρ )] 4( β − δ ) − β µ ρ (17a) (18a) Substituting back to the demand functions (13a) and (13b) will lead to α ( β + δ )[2( β − δ ) − ρ ( µ − µ ρ ))] q 0* = 4( β − δ ) − β µ ρ α ( β + δ )[ β ( − 2rρ + µρ ) − δ ( − rρ )] q A* = 4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − ( rδ − βµ ) ρ Substituting (17), (18), (19) and (20) into (25) and (17a), (18a), (19a) and (20a) into (26) yields α ( β + δ )(1 − rρ )( − rρ + µρ ) ⇒ E [π * refund ] = β ( − 4rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ 123 (19a) (20a) (27) ⇒ E [π * E [π * norefund ] = refund α ( β + δ )( + µρ ) 4( β − δ ) − β µ ρ ] > E[π * norefund (28) ] if and only if α ( β + δ )(1 − rρ )( − rρ + µρ ) α ( β + δ )( + µρ ) > β ( − rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ 4( β − δ ) − β µ ρ α ( β + δ )(1 − rρ )( − rρ + µρ ) α ( β + δ )( + µρ ) > β ( − rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ 4( β − δ ) − β µ ρ [4( β − δ ) − β µ ρ ]( β + δ )(1 − rρ )(2 − rρ + µρ ) > ( β + δ )(2 + µρ )[ β (4 − 4rρ − µ ρ ) − δ (2 − rρ ) + 2rβδµρ ] LHS: ( β + δ )(2 − rρ + µρ )(4( β − δ ) − β µ ρ ) − rρ ( β + δ )(2 − rρ + µρ )(4( β − δ ) − β µ ρ ) ⇒ ( β + δ )(2 + µρ )(4( β − δ ) − β µ ρ ) − rρ ( β + δ )(4( β − δ ) − β µ ρ ) − rρ ( β + δ )(2 − rρ + µρ )(4( β − δ ) − β µ ρ ) RHS ( β + δ )(2 + µρ )[ β (4 − 4rρ − µ ρ ) − δ (2 − rρ ) + 2rβδµρ ] ⇒ ( β + δ )(2 + µρ )[ β (4 − µ ρ ) − β rρ − 4δ + 4δ rρ − δ r ρ + 2rβδµρ ] ⇒ ( β + δ )(2 + µρ )(4 β − β µ ρ − 4δ ) − ( β + δ )(2 + µρ )[4 β rρ − 4δ rρ + δ r ρ − 2rβδµρ ] ⇒ ( β + δ )(2 + µρ )(4 β − β µ ρ − 4δ ) − rρ ( β + δ )(2 + µρ )[4 β − 4δ + δ rρ − βδµρ ] Combining LHS and RHS − rρ ( β + δ )(4( β − δ ) − β µ ρ ) − rρ ( β + δ )(2 − rρ + µρ )(4( β − δ ) − β µ ρ ) > − rρ ( β + δ )(2 + µρ )[4 β − 4δ + δ rρ − βδµρ ] − ( 4( β − δ ) − β µ ρ ) − (2 − rρ + µρ )(4( β − δ ) − β µ ρ ) > −(2 + µρ )[4 β − 4δ + δ rρ − βδµρ ] − ( + µρ )(4( β − δ ) − β µ ρ ) + rρ ( 4( β − δ ) − β µ ρ ) > −(2 + µρ )[4 β − 4δ − βδµρ ] − δ rρ (2 + µρ ) + (4( β − δ ) − β µ ρ ) rρ ( 4( β − δ ) − β µ ρ ) + δ rρ ( + µρ ) > −(2 + µρ )[4 β − 4δ − βδµρ ] + ( + µρ )(4( β − δ ) − β µ ρ ) + (4( β − δ ) − β µ ρ ) r> 4( β − δ ) − β µ ρ + βδµρ (2 + µρ ) − β µ ρ ( + µρ ) ρ (4( β − δ ) − β µ ρ + δ (2 + µρ )) 124 4( β − δ ) − 3β µ ρ − β µ ρ + βδµρ (2 + µρ ) and r > ρ ( β − δ ) − β µ ρ + ρδ (2 + µρ ) Denominator: 4( β − δ ) − β µ ρ + δ (2 + µρ ) > r> β − 4δ − β µ ρ + 2δ + δ µρ > β (4 − µ ρ ) − δ (2 − µρ ) > − µρ β2 >δ2 − µ2ρ which is true since β > δ ⇒ denominator is positive + µρ so β > δ Numerator: 4( β − δ ) − 3β µ ρ + βδµρ (2 + µρ ) − β µ ρ > which can be solved for two regions of β that are: β >δ ⋅ − + µρ + µ ρ Therefore which is true and β > δ ⋅ . + µρ 4( β − δ ) − 3β µ ρ + βδµρ (2 + µρ ) − β µ ρ >0 ρ (4( β − δ ) − β µ ρ + δ (2 + µρ )) However, due to speculators, r ≤ which means that the value of r (29) is constrained. So 4( β − δ ) − 3β µ ρ − β µ ρ + βδµρ ( + µρ ) 1≥ r > . Therefore, ρ ( β − δ ) − β µ ρ + ρδ ( + µρ ) 4( β − δ ) − 3β µ ρ − β µ ρ + βδµρ ( + µρ ) ≤ leading to ρ ( β − δ ) − β µ ρ + ρδ ( + µρ ) δ < βφ 4( β − δ ) − 3β µ ρ − β µ ρ + βδµρ ( + µρ ) ≤1 ρ ( β − δ ) − β µ ρ + ρδ ( + µρ ) are δ < βφ where (i) φ = (ii) φ = µρ + µ ρ + (1 − ρ )( − µρ ) ( − ( − µ ) ρ − (1 − µ ) µρ ) and − ρ + µρ µρ + µ ρ − (1 − ρ )(2 − µρ ) (4 − (2 − µ ) ρ − (1 − µ ) µρ ) − ρ + µρ Therefore, the region where the inequalities would hold is (i) for all possible values of µ and ρ , β > δ and β , δ > 125 (29) Proposition Consider the expected profit to the firm when a refund is offered i.e. α ( β + δ )(1 − rρ )( − rρ + µρ ) E [π * refund ] = E[π * ] = β ( − rρ − µ ρ ) − δ ( − rρ ) + 2rβδµρ ∂E[π * ] [α ρ ( β + δ )][ β ( − rρ + µρ ) − δ ( − rρ )][δ ( −2 + rρ (1 − µρ )) + β ( −2 + ρ ( r + µ + µ ρ ))] = ∂r [ β ( − 4rρ − µ ρ ) − δ ( − rρ ) + rβδµρ ]2 The denominator is positive and so is the first term in the numerator. Therefore ∂E[π * ] > if and only if the second term, [ β ( − 2rρ + µρ ) − δ ( − rρ )] > and the ∂r third term [δ ( −2 + rρ (1 − µρ )) + β ( −2 + ρ ( 2r + µ + µ ρ ))] > . Second term gives − rρ − rρ < and β > δ β >δ ⋅ which is true since − rρ + µρ − rρ + µρ Third term gives [δ ( −2 + rρ (1 − µρ )) + β ( −2 + ρ ( 2r + µ + µ ρ ))] > if and only if 2( β + δ ) − βµρ (1 + µρ ) r> . However, r ≤ therefore the condition would only hold δρ (1 − µρ ) + βρ 2( β + δ ) − βµρ (1 + µρ ) [2 − ρ (1 − µρ )] < which is when β < δ ⋅ if where δρ (1 − µρ ) + βρ µρ (1 + µρ ) − 2(1 − ρ ) [2 − ρ (1 − µρ )] > 1. µρ (1 + µρ ) − 2(1 − ρ ) Hence, ∂E[π * ] >0 ∂r holds if [2 − ρ (1 − µρ )] ∂E[π * ] . In this condition, since > , the firm ∂r µρ (1 + µρ ) − 2(1 − ρ ) would choose the highest possible refund i.e. r = . Hence r = if and only if [2 − ρ (1 − µρ )] δ < β [4( β − δ ) − 4r ( β + δ )( β − δ ) ρ − (rδ − β ) ρ ](2δ + β (2 − ρ − ρ )) LHS: [4( β − δ ) − β ρ ][2 β − βρr − βρ − βρ + 2δ − δrρ + δrρ ] [4( β − δ ) − β ρ ][2 β − βρ − βρ + 2δ ] − [4( β − δ ) − β ρ ][2 βρr + δrρ − δrρ ] RHS: [4( β − δ ) − 4rρ ( β + δ )( β − δ ) − (rδ − β )(rδ − β ) ρ ][2δ + β (2 − ρ − ρ )] [4( β − δ ) − 4rρ ( β + δ )( β − δ ) − r 2δ ρ + βrδρ − β ρ ][2δ + β (2 − ρ − ρ )] [−4rρ ( β − δ ) − r 2δ ρ + βrδρ ][2δ + β (2 − ρ − ρ )] + [4( β − δ ) − β ρ ][2δ + β (2 − ρ − ρ )] Combining LHS and RHS: − [4( β − δ ) − β ρ ][2βρr + δrρ − δrρ ] > [−4rρ ( β − δ ) − r 2δ ρ + βrδρ ][2δ + β (2 − ρ − ρ )] − [4( β − δ ) − β ρ ][2 β + δ − δρ ] > [−4( β − δ ) − rδ ρ + βδρ ][2δ + β (2 − ρ − ρ )] − [ 4( β − δ ) − β ρ ][ β + δ − δρ ] > [ −4( β − δ ) + βδρ ][ 2δ + β ( − ρ − ρ )] − rδ ρ [ 2δ + β ( − ρ − ρ )] − [ 4( β − δ ) − β ρ ][ β + δ − δρ ] > [ −4( β − δ ) + βδρ ][ 2δ + β ( − ρ − ρ )] − rδ ρ [ 2δ + β ( − ρ − ρ )] rδ ρ[2δ + β (2 − ρ − ρ )] > [4( β − δ ) − β ρ ][2β + δ − δρ ] + [−4( β − δ ) + 2βδρ][2δ + β (2 − ρ − ρ )] rδ ρ [2δ + β (2 − ρ − ρ )] > 4( β − δ )(2 β ) + 4( β − δ )(δ − δρ ) − [ β ρ ][2 β + δ − δρ ] − 4( β − δ )(2δ ) − 4( β − δ )(2 β ) + 4( β − δ )( βρ + βρ ) + [2 βδρ ][2δ + β − βρ − βρ ] rδ ρ [2δ + β (2 − ρ − ρ )] > β 2δ − β 2δρ − 4δ + 4δ ρ − β ρ − β 2δρ + β 2δρ − β 2δ + 8δ + β ρ − βδ ρ + β ρ − βδ ρ + βδ ρ + β 2δρ − β 2δρ − β 2δρ r> − β 2δ + 4δ + 4δ ρ + β ρ − 3β 2δρ − β 2δρ + β ρ − βδ ρ or r > δ ρ [2δ + β (2 − ρ − ρ )] It remains for us to show that condition (29) holds i.e. β ρ (2 + ρ ) + 4δ (1 + ρ ) − β 2δ (4 + 3ρ + ρ ) − βδ ρ 4( β − δ ) − 3β µ ρ − β µ ρ + βδµρ ( + µρ ) > δ ρ[2δ + β (2 − ρ − ρ ) ρ ( β − δ ) − β µ ρ + ρδ (2 + µρ ) which leads to [2 β + δ (1 − ρ )][ βρ − δ ][ β (2 + ρ ) − δρ ][ β (4 − ρ ) − 4δ ] >0 δ (2 − ρ ) ρ[ β (2 + ρ ) − δ ][ β (2 − ρ − ρ ) + 2δ ] which is true iff 127 β >δ ⋅ β >δ ⋅ β >δ ⋅ β> 2+ ρ ρ 2+ ρ which is true since 4− ρ2 which is true since 2+ ρ ρ 2+ ρ < and β > δ < and β > δ which is true under proposition δ ρ Proposition q A = α − βPA + δ A P0 (30) (31) q0 = α − βP0 + δ PA and π = PA q A + P0 q + P0 ρq A Max PA ,P0 {π } will lead to α + (δ + δ A − βµρ ) P0 2β α (1 + µρ ) + (δ + δ A − βµρ ) PA P0 = 2( β − µρδ A ) PA = (32) (33) Solving for (32) and (33) results in α (δ A + δ + β ( + µρ )) (34) P0* = 2 β ( − µ ρ ) − δ − δ A − βµρδ A + δ ( βµρ − 2δ A ) α (δ (1 + µρ ) + (1 − µρ )( β ( + µρ + δ A )) (35) PA* = β ( − µ ρ ) − δ − δ A − βµρδ A + δ ( βµρ − 2δ A ) Substituting back to the demand functions will lead to α [ β ( − µρ − µ ρ ) + µρδ 02 − βδ A (1 + µρ ) − δ A + δ ( β (1 + µρ − µ ρ ) − δ A (1 + µρ )] * q0 = β ( − µ ρ ) − δ − δ A − βµρδ A + δ ( βµρ − 2δ A ) α [ β ( β (2 + µρ ) + δ A ) − δ 02 − δ ( β − βµρ + δ A )] β (4 − µ ρ ) − δ − δ A − βµρδ A + δ (2 βµρ − 2δ A ) α [ β (2 + µρ ) + (1 + µρ )δ + δ A ] and π * = β (4 − µ ρ ) − δ − δ A − βµρδ A + δ (2 βµρ − 2δ A ) q *A = When δ A → α [ β (1 − µρ )(2 + µρ ) + (1 + µρ )δ ] β (4 − µ ρ ) − δ 02 + βµρδ α [ β ( + µρ ) + δ ] P0* = β ( − µ ρ ) − δ 02 + βµρδ PA* = 128 (37) (38) α [ β ( + µρ ) − βδ (1 − µρ ) − δ 02 ] β ( − µ ρ ) − δ 02 + βµρδ α [ β ( − µρ − µ ρ ) + βδ (1 + µρ − µ ρ ) + µρδ 02 ] q0* = β ( − µ ρ ) − δ 02 + βµρδ q *A = When δ → α (1 − µρ ) β (2 − µρ ) − δ A α P0* = β ( − µρ ) − δ A αβ q *A = β ( − µρ ) − δ A α [ β (1 − µρ ) − δ A ] q0* = β ( − µρ ) − δ A PA* = I need to show that PA* δ A =0 > PA* δ =0 α [ β (1 − µρ )(2 + µρ ) + (1 + µρ )δ ] α (1 − µρ ) > 2 2 β (2 − µρ ) − δ A β (4 − µ ρ ) − δ + βµρδ Let µ = and assume that δ A = δ = δ which would then lead to 2αρ ( βρ − δ )δ PA* − PA* = δ =0 δ =0 [ β (2 − ρ ) − δ ][ β (2 − ρ ) + δ ][ β (2 + ρ ) − δ ] Which is A * A δ =0 A and P − PA* δ =0 > iff which is true since β > δ 2+ ρ which is true since β > δ β >δ ⋅ 2− ρ β >δ ⋅ and β > δ ρ Similarly, P0* P0* δ =0 δ =0 − P0* − P0* δ A =0 δ A =0 = 4αβρδ [ β (2 − ρ ) − δ ][ β (2 − ρ ) + δ ][ β (2 + ρ ) − δ ] > which is true iff β > δ ρ 129 CONCLUSION The issue of advanced selling and pricing for services warrants research attention as service economies mature and become more competitive. However, the cross-disciplinary nature of pricing deters many researchers from this area. Furthermore, the diversity of services results in many pricing variables and parameters being labeled differently across service industries. As a result of this contextualization within each industry, there is greater difficulty in collecting empirical data on pricing, especially across industries. Consequently researchers in service pricing require both experience and theoretical expertise in formulating a link between a conceptual understanding of service pricing and complex reality. However, this challenge is worthwhile to be undertaken as less mature service industries could profit from the experiences of more mature ones if the pricing concepts and strategies could be understood at a more abstract level. Further research in this area should aim to analyse pricing decisions across industries, to derive greater insights into the phenomenon. This dissertation has highlighted a phenomenon that has not yet been rigorously examined in the academic context. Although the computational aspect of advanced selling (through revenue/yield management research) has been amply researched in the operations research, I aim to provide greater insight into service pricing that contributes both to operations research and pricing research in marketing. 130 [...]... of top managers, i.e CEOs and decisions makers in the firms For the purpose of this essay, what is of interest is how service companies deal with their unused capacity, the actions taken by the company to alleviate the problem, and the companies’ reasons for their actions A review of existing literature was then performed The combination of literature and the strategies employed by the firms were then... may be compromised, if the capacity of the service firm is used to the hilt Likewise, other services maintain some idle capacity as the availability of the services on-demand is necessary to establish and maintain service quality and the firm's differentiation efforts (Bassett, 1992) Examples of these services would include tow truck services, lift maintenance and other emergency services, or service... secretarial services, and advertising agencies bundle their creative talents with media buying services Pure bundling is the offer of two or more services at a package price but does not provide the option of purchasing the 15 individual services separately, i.e in their unbundled form Conversely, pure component selling is the selling of individual services in their unbundled state Whilst bundling strategies. .. may provide a wholesaler in Japan with guaranteed allotment of rooms per night The wholesaler, in turn, mounts a promotional program in the Japanese market for the hotel With a guaranteed allotment (usually by way of a binding contract), the wholesaler can be assured of the supplier's commitment to his market, and the service provider gains the assurance of the wholesaler's investment Often, tourism suppliers... sixty-forty between the cruise line and the Australian wholesaler However, the wholesaler was obligated to fund 100% of the amount up front and redeemed the 60% progressively over the year as sales materialized The cruise line provided a guaranteed allotment of cabins; some form of service specificity on board the vessel specifically for the Australian market and total exclusivity to the wholesaler Procedures... intangibility, services channel intermediaries have to be well 26 trained and equipped to sell the service and convey the quality of the service to its fullest degree Hence, they would need to invest in some measure of human assets specificity, to borrow the term from transaction cost theory The inseparability of many services of production and consumption may imply that direct sale is the only option... understanding of the phenomenon The rationale for this approach, applied in this study, is embedded in the 11 pursuit of knowledge1, in the truest sense of the word The purpose is to understand, formalize and document practitioners’ strategies in handling capacity as a contribution to academic literature A case study of a cruise line first provided the authors with insights on the various innovative usage of. .. only one of the products, if they were priced separately, will now buy both in the form of the bundle The reason for this is that the value some customers place on one product is so 17 much greater than its price that the combined value of the two products exceeds the bundled price (Guiltinan, 1987) During the financial turmoil in Asia, Malaysians were willing to pay and subscribe to a bundle of 20 Cable... form of inventorying demand), who will purchase capacity released after cut off date, will substantially reduce that risk, while still giving the service firm the benefits of the pledge The Asian cruise line in this study extended this concept further with a rather innovative deal involving the use of capacity In their effort to expand their network into Australia, a marketing plan was drawn up The. .. employee The quality of a service is often highly dependent on the people that deliver it Back in the 1970s and the early 1980s, little emphasis was placed on the service employees The mindset of service management then was to design quick and impersonal services, maximizing usage of facilities and reducing any possible individualistic intervention that could disrupt the flow of the operation As competition . the domain of the capacity strategies and the motivations that drives their usage. The second chapter of the dissertation investigates, through a theoretical model, the optimality of advanced. advance, that of unavailability of service and a low valuation of the service at the time of consumption. Furthermore, advanced buyers run the risk of not being able to consume at the time of consumption. SERVICES STRATEGIES: THE ADVANCED SALE OF SERVICES LENA IRENE NG CHENG LENG (BSc., NUS) A THESIS SUBMITTED FOR THE DEGREE OF DOCTORATE OF PHILOSOPHY