1. McGraw-Hill © 2000 The McGraw-Hill Companies
1
SMSM
Unit-2
PRICING OF SERVICES

2. McGraw-Hill © 2000 The McGraw-Hill Companies
2
SM
Three Key Ways That ServiceThree Key Ways That Service
Prices Are Different ForPrices Are Different For
ConsumersConsumers
1. Customer Knowledge of Service Prices
Reference Price: A price point in memory
for a good or a service
-Reasons for difference between
reference and actual price:
a) Service variability limits knowledge
-Life Insurance
-Medical Checkup

3. McGraw-Hill © 2000 The McGraw-Hill Companies
3
SM
Three Key Ways That ServiceThree Key Ways That Service
Prices Are Different ForPrices Are Different For
ConsumersConsumers
b) Providers are unwilling to estimate prices
-Legal and medical service providers
c) Individual customer needs vary
-Hairstylist’s service and hotel room
d) Collection of price information is overwhelming
in services
-Display in products
e) Prices are not visible
-Financial services

4. McGraw-Hill © 2000 The McGraw-Hill Companies
4
SM
Three Key Ways That ServiceThree Key Ways That Service
Prices Are Different ForPrices Are Different For
ConsumersConsumers
2. Role of Nonmonetary Cost
a) Time cost
-Waiting
-Interaction
a) Search cost
b) Convenience cost
c) Psychological cost
-Fear of not understanding
-Fear of rejection
-Fear of outcome

5. McGraw-Hill © 2000 The McGraw-Hill Companies
5
SM
Three Key Ways That ServiceThree Key Ways That Service
Prices Are Different ForPrices Are Different For
ConsumersConsumers
3. Price as an indicator of service quality

6. McGraw-Hill © 2000 The McGraw-Hill Companies
6
SM Pricing ObjectivesPricing Objectives
• Revenue oriented objectives
• Operation oriented objectives
• Patronage oriented objectives

7. McGraw-Hill © 2000 The McGraw-Hill Companies
7
SM
Three Basic Price Structures/PricingThree Basic Price Structures/Pricing
Approaches andApproaches and
Difficulties Associated with Usage forDifficulties Associated with Usage for
ServicesServices
Demand-Based
Cost-Based
Competition-
Based
PROBLEMS:
1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
PROBLEMS:
1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
PROBLEMS:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor

8. McGraw-Hill © 2000 The McGraw-Hill Companies
8
SM
Four Meanings of Perceived ValueFour Meanings of Perceived Value
“Value is Low Price” “Value is Everything
I Want in a Service”
“Value is the
Quality I Get for
the Price I Pay”
“Value is All that
I Get for All
that I Give”

9. McGraw-Hill © 2000 The McGraw-Hill Companies
9
SM
Four Meanings ofFour Meanings of
Perceived ValuePerceived Value
1. Value is low price
-For dry cleaning: “Value means the
lowest price”
- For airline travel: “Value is when airline
tickets are discounted”

10. McGraw-Hill © 2000 The McGraw-Hill Companies
10
SM
Four Meanings ofFour Meanings of
Perceived ValuePerceived Value
2. Value is whatever I want in a product or
service
-For an MBA degree:“Value is the very
best education I can get”
- For medical services:“Value is high
quality”

11. McGraw-Hill © 2000 The McGraw-Hill Companies
11
SM
Four Meanings ofFour Meanings of
Perceived ValuePerceived Value
3. Value is the Quality I get for the Price I
pay
-For a hotel for vacation:“Value is price
first and quality second”
- For a hotel for business travel:“Value is
the lowest price for a quality brand”

12. McGraw-Hill © 2000 The McGraw-Hill Companies
12
SM
Four Meanings ofFour Meanings of
Perceived ValuePerceived Value
4. Value is what I get for what I give
-For a housekeeping service: “Value is
how many rooms I can get cleaned for
what the price is”
- For a hairstylist:“Value is what I pay in
cost and time for look I get”

13. McGraw-Hill © 2000 The McGraw-Hill Companies
13
SM
Pricing Strategies When thePricing Strategies When the
Customer Defines Value as Low PriceCustomer Defines Value as Low Price
“Value is Low Price”
Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing

14. McGraw-Hill © 2000 The McGraw-Hill Companies
14
SM
Pricing Strategies When thePricing Strategies When the
Customer Defines Value asCustomer Defines Value as
Everything Wanted in a ServiceEverything Wanted in a Service
“Value is Everything
I Want in a Service”
Prestige Pricing
Skimming Pricing

15. McGraw-Hill © 2000 The McGraw-Hill Companies
15
SM
Pricing Strategies When thePricing Strategies When the
Customer Defines Value asCustomer Defines Value as
Quality for the Price PaidQuality for the Price Paid
“Value is the Quality
I Get for the Price I Pay”
Value Pricing
Market Segmentation
Pricing

16. McGraw-Hill © 2000 The McGraw-Hill Companies
16
SM
Pricing StrategiesPricing Strategies
When the Customer Defines Value asWhen the Customer Defines Value as
All that is Received for All that is GivenAll that is Received for All that is Given
“Value is All that
I Get for All
that I Give”
Price Framing
Price Bundling
Complementary
Pricing
Results-based Pricing

17. McGraw-Hill © 2000 The McGraw-Hill Companies
17
SM
Summary of Service Pricing StrategiesSummary of Service Pricing Strategies
for Four Customer Definitions of Valuefor Four Customer Definitions of Value
“Value is Low Price” “Value is
Everything
I Want in a Service”
“Value is the Quality
I Get for the Price I Pay”
“Value is All that
I Get for All that I Give”
Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing
Prestige Pricing
Skimming Pricing
Value Pricing
Market Segmentation
Pricing
Price Framing
Price Bundling
Complementary
Pricing
Results-based Pricing