1.
Services Marketing
Pricing Of Services
By Himansu S M

2.
Introduction
• Pricing or Price is the key element in the
traditional marketing mix (the 4Ps) and also the
enhanced marketing mix (the 7 Ps). This is the
element which earns revenue. This is highly
critical because this is the strategy which can
make or mar the business.
• The firms must make it both ways –the price
must
• (1) get profits for the firm, and
• (2) give value to its customers.
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3.
Names of Service Pricing
• Pricing for goods is easy and straight
forward, while for services it is
complicated, may be controlled by
several authorities, varies with time,
place, people, etc.
• For goods the price has a single
name “PRICE”, but for services it has
several names like :
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4.
Names of Service Prices
Allowance Assessment Bribe Brokerage
Commission Compensation Consideration Contribution
Coupon Rate Cut Donation Dowry
Expenses Fare Fees Honorarium
Interest Package Premium Rate
Recharge Remuneration Rent Retainer Fee
Salary Service Charge Subscription Tariff
Taxes Ticket Tip Token
Toll Tuition Fee Wages etc.
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5.
WHAT MAKES SERVICE
PRICING DIFFERENT?
1. No Ownership of Services
2. Higher Ratio of Fixed Costs to Variable
Costs
3. Variability of Both Inputs and Outputs.
4. Many Services Are Hard to Evaluate
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6.
No Ownership of Services
• It's usually harder for managers to
calculate the financial costs involved
in creating an intangible performance
for a customer than it is to identify
the labour, materials, machine time,
storage, and shipping costs
associated with producing a physical
good.
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7.
Higher Ratio of Fixed Costs to
Variable Costs
• Because of the labour and
infrastructure needed to create
performances, many service
organisations have a much higher
ratio of fixed costs to variable costs
than is found in manufacturing firms.
Service businesses with high fixed
costs include those with
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8.
Higher Ratio of Fixed Costs to
Variable Costs
• an expensive physical facility (e.g., a hotel, a
hospital, a university, or a theatre), or a fleet
of vehicles (e.g., an airline, a bus company,
or a trucking company),
• or a network dependent on company-owned
infrastructure (e.g., a telecommunications
company, an Internet provider, a railroad, or
a gas pipeline).
• While the fixed costs may be high for such
businesses, the variable costs for serving
one extra customer may be minimal.
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9.
Variability of Both Inputs and
Outputs.
• It's not always easy to define a unit of
service, raising questions as to what
should be the basis for service
pricing.
• And seemingly similar units of service
may not cost the same to produce,
nor may they be of equal value to all
customers.
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10.
Many Services Are Hard to
Evaluate
• The intangibility of service
performances and the invisibility of
the backstage facilities and labour
make it harder for customers to know
what they are getting for their money
than when they purchase any physical
goods.
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11.
KEY CHARACTERISTICS OF
PRICING IN SERVICES :
The following are the different
perceptions in the minds of customers
regarding the price of a service :
1. Price Is A Measure Of Quality In
Services :
2. Non-Monetary Costs and Prices :
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12.
Price Is A Measure Of Quality
In Services :
• The price has a direct relationship with the
quality.
• It is the most prominent where the levels of
the same types of service are differentiated
by price like, air tickets, rail tickets.
• It’s the least prominent between two service
providers offering the same types of services
in different times, at different places, for
different people, with different contents.
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13.
Price Is A Measure Of Quality
In Services :
• Thus on the whole, the customers take
the pricing as a thumb rule or yardstick
for quality and content of services.
• Price is an attraction and a repellent
simultaneously. Because in the absence
of anything visible or tangible, the price is
the only indicator. So pricing must be
done critically.
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14.
Non-Monetary Costs and
Prices :
• More often, the customers incur several non-
monetary costs while consuming a service.
Thus demand is function of not only monetary
price but also non-monetary prices. These can
be the following :
• Time costs
• Search costs (Physical Costs)
• Convenience costs (Sensory Costs)
• Psychological costs
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15.
Defining Total User Costs
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16.
Time costs
• Most services requires direct
involvement of the consumers, which
consumes real time, and this includes
the waiting time too. Today virtually all
services require spending of time to
consume services. Assuming two
services having same monetary price,
but having say different waiting periods
are different in total / overall pricing.
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17.
Search costs (Physical Costs)
• It’s the cost involved in finding out which
service to go for. For goods it’s easy, just
compare the benefits / features with the
price tags. But for services, one needs to
experience to know the details and
generally no price tags of services are
available. Another area of cost increase is
the search for different brands in services.
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18.
Convenience Costs/Sensory Costs
• If the customer is inconvenienced to
avail or consume any services, like
travelling, putting an effort,
rescheduling other activities,
sacrificing some other activities or
time, etc., then this is known as the
convenience cost (or perhaps more
accurately the cost of inconvenience).
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19.
Psychological costs
This is perhaps the most painful and
frustrating experience or non-monetary
costs, like fear of not understanding
(insurance schemes), rejection (bank loans),
uncertainty (high cost, servicing).
Some customers are not comfortable going
thro’ certain hassles of the service
consumption process, like dropping cheques
in drop boxes, paying thro’ internet by giving
credit card numbers.
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20.
Pricing Objectives
• The pricing policy must be based on the
firm’s objectives, policies, concerning
revenues, profit, patronage, market share,
market penetration, etc.
• Survival
• Present Profit Maximisation
• Present Revenue Maximisation
• Prestige
• Product Quality Leadership
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21.
Survival
• When the firm is not doing well in
terms of capacity, competition,
change in consumers’ require-ments,
this is the only objective. The firm
covers whole of VC and a part of FC.
This is short term objective. In the
long run the firm must learn to add
value to its services, or else, face
extinction.
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22.
Present profit maximisation
• The firm sets a price that will
maximise its current profit without
changing the service attributes. They
determine the market demand for
alternative prices and choose the
price where the return, cash flow or
current profit is the maximum. This is
a medium to short term measure. In
the long run the firm may not do well.
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23.
Present revenue maximisation
• Some companies want to maximise
their profit by increasing the market
share by reducing the price or setting
a low price.
• They believe that this will lead to a
higher sales volume, lower unit cost of
production and a long term profit.
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24.
Present revenue maximisation
• The conditions favouring this situations
are
• (1) the market is highly price sensitive
and a low price stimulates market
growth,
• (2) production and distribution cost fall
with accumulated production experience,
and
• (3) low price discourages actual and
potential competition.
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25.
Prestige
• Some companies like putting their
services in the premium category by
charging a high price, which they think
creates an image of class / prestige in
the customers’ view. Ex., Oberoi,
Sheraton Hotels.
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26.
Product quality leadership
• Some firms like to maintain their
position as a quality leader by having
a higher price tag. The quality of
service involves higher cost, which
justifies the price.
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27.
Revenue And Profit Objectives
Seek Profit :
• Make the largest possible contribution or profit.
• Achieve a specific target level.
• Maximise revenue from a fixed capacity by varying
prices and target segments over time, typically using
yield or revenue management systems.
Cover Costs :
• Cover fully allocated costs, including institutional
overhead.
• Cover costs of providing one particular service,
excluding overhead.
• Cover incremental costs of selling one extra unit or to
one extra customer.
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28.
Patronage and User Base-
Related Objectives
• Build Demand :
• Maximise demand (when capacity is not
a constraint), subject to achieving a
certain minimum level of revenues.
• Achieve full capacity utilisation,
especially when high capacity utilisation
adds to the value created for all
customers (Ex. : Full House adds
excitement to a theatre or cinema.
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29.
Patronage and User Base-
Related Objectives
• Build a User Base :
• Stimulate trial and adoption of a service. This is
especially important for new services with high infra-
structure costs and for membership-type services that
generate significant revenues from their continued use
after adoption (Ex. : Life Insurance Plans, Mobile
phone service subscriptions).
• Build market share and/or a large user base,
especially if there are significant economies of scale
that can lead to a competitive cost advantage (Ex. : If
development or fixed costs are high).
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30.
APPROACHES TO PRICING
SERVICES :
Having set the pricing objectives, the firm
has to do the pricing proper. For the
services the pricing can be done in the
three major structures based on (1) cost,
(2) demand (market or value), and (3)
competition.
The firm can adopt any one or more
structure with an appropriate proportion
in combination. They are :
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31.
The Pricing Tripod
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32.
Cost Based Pricing :
• As the name suggests, the company finds
out the costs – direct and indirect, profit
margin, etc. and decides the price. We
have the basic formula for cost as :
• PRICE = FIXED (OVERHEAD OR
INDIRECT) COSTS + VARIABLE
(DIRECT) COST + PROFIT
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33.
1. Cost-Plus pricing
• This is the simplest method of pricing
– the total cost is ascertained and a
mark-up added. It’s easier for goods,
but not so for services.
• But by past experience and
knowledge of estimates, one can
decide the cost, then mark-up, then a
contingency amount which will make
the price.
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34.
2. Fee for Services
• This pricing strategy is adopted by most
of the professionals. Their fees are
based on the no. of hours they put in
their effort. This system has a drawback
too –
• (1) the record keeping can’t be done
accurately,
• (2) for the same result an experienced
and a novice may have the same fee,
and if not then resentment takes place in
the minds of customers.
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35.
Market Oriented Pricing or
Demand Based Pricing (Value
Based Pricing) :
• As the name suggests the pricing is
based on the demand behaviour of
the customers, i.e., setting prices
consistent with customer perception
of value – prices which customers will
pay for the services rendered. Some
are given below :
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36.
1. Market Skimming
• Market skimming is offering high
value or unique services by the
service providers for a higher price.
• This happens where there are no
competitors, and later when
competitors come in the prices may
be reduced.
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37.
2. Penetration Pricing
• This is to some extent the opposite of
market skimming. The initial or
introduction price is kept at a low level so
that it helps in market penetration. Slowly
the value offer increases and if the
demand remains the prices can be
enhanced.
• This is appropriate in the following
conditions, and care must be taken not to
set at too low a price, lest the normal
enhancement will look unacceptable :
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38.
2. Penetration Pricing
–Sales volume of the services are
sensitive to the price,
–It is possible to achieve economies in
unit costs by operating at large volumes,
–A service which faces threats of strong
potential competition, soon after
introduction,
–There are no class buyers willing to pay
a higher price to avail the service
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39.
3. Price Discrimination
This is also known as differential
pricing, which is applied more often.
The major deciding factors are:
• Place : For the customers who have a
sensitivity to location, like cinema
circles, different rows of concerts, etc.
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40.
3. Price Discrimination
• Time : At different times of the day or any
period, say peak and off-peak hours of
internet surfing, telephone service, etc.
• Quantity : For volume purchase, say for
assurance for future purchases by the
customers the company offers a lower price.
By this the firm locks or ascertains the future
business volume.
• Incentives : This is usually given to the
regular or more frequent users in the form of
incentives, discounts, etc.
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41.
4. Discounts
• Discounts, price cuts or mark-downs
are very important and popular in the
pricing of services and goods.
• These are offered on some
occasions, like festive seasons, to a
specific category of customers, and
may be in the lean seasons, etc. It
attracts customers and the sales
volume increases.
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42.
Competition Based Pricing :
This is another approach of pricing which
relate to the pricing made by the
competitors. That doesn’t always mean the
prices to be the same as the competitors’.
But the knowledge of their costs and pricing,
and the customer expectations acts as a
starting point. This is applied in mostly two
situations –
• (1) When the services are standard across
the providers,
• (2) in Oligopolies where there are a few large
service providers.
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43.
1. Price Signalling
• This phenomenon occurs when there is a
high concentration of sellers in the
market. Here the prices offered by one
seller is matched by others to avoid any
low-price advantage to any seller.
• Ex., in airline industries or mobile phone
service if any provider drops the fares or
call rates others follow too.
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44.
2. Price Matching / Going rate pricing :
This is adopted for playing safe in a
mature market, by pricing at the same
level, like taxi service, internet café, etc.
3. Price Bidding / Closed Bid Pricing :
This strategy is mostly adopted by the
construction, building, manufacturing
services and involves sending biddings
to the buyer, which the buyer chooses
according to its best requirement.
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45.
4. Destroyer Pricing :
• It is setting such a low price that it can’t
be matched by any competitor, without
loss.
• This is mostly used for driving the
competition from the market.
• The firm adopting this strategy should be
very careful in setting the price such that
it doesn’t suffer loss, and also if the
competitors are strong enough, the firm
itself may be driven out of business.
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46.
PROBLEMS ENCOUNTERED IN
THESE PRICING SYSTEMS
No Cost Based
(Problems)
Demand Based
(Problems)
Competition
Based (Problems)
1. Costs are
difficult to
trace.
Monetary price must be
adjusted to reflect the
value of non-monetary
costs.
Small firms may
charge too little to
be viable.
2. Labour is more
difficult to price
than materials.
Information on service
costs is less available to
customers, hence price
may not be a central
factor.
Heterogeneity of
service limits
comparability.
3. Costs may not
equal value.
Price may not effect
customer value.
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47.
Cost Based (Problems) :
• The one special problem in cost based
pricing is the unit in which a service is
purchased, the unit price is a well defined
idea, but is a vague concept in services.
Hence most of the professional services are
sold by not the output unit but the input unit,
like consultancy services are priced by the
no. of hours the professional have put in.
• Costs are difficult to trace : Costs are difficult
to trace or calculate in service business,
particularly where multiple services are
provided by the firm.
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48.
Cost Based (Problems) :
• Labour is more difficult to price than
materials : A major component of cost is
employee time rather than material cost, and
value of people’s time particularly non-
professional time, is not easy to calculate or
estimate.
• Costs may not equal value : Actual service
costs may under-represent the value of the
service to the customer. The same service
given against different context/back drop has
different value attached to it even though it
needs same time and effort.
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49.
Demand Based (Problems) :
• In case of services the non-monetary
costs and benefits must be factored into
the calculation of perceived value to the
customer. When services require
inconvenience, time, search and
psychological costs, the monetary price
must be adjusted to compensate.
• Information on service costs may be less
available to customers, making monetary
price not a large or salient factor in initial
service selection.
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50.
Competition Based Problems
• Small firms may charge too little and are not
able to make margins high enough to remain in
business.
• Heterogeneity of services across and within
providers makes this approach complicated and
limits comparability, where the service providers
charge in wide variation.
• Price may not effect customer value : Some
experts say that such wide variation is difficult
to compare across providers and may not effect
customer value.
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51.
INCORPORATING PERCEIVED
VALUE INTO SERVICE PRICING
• One of the most appropriate ways to price
services is on the basis of the perceived value of
the services in the minds of customers.
• Now the important point is what is value in
customers’ view ? And how to create value in the
services so that customers like it.
• In general “value” is what you get minus what
you pay, or what you get divided by what you
pay. But again how to quantify in terms of money
what you get. This is highly subjective and varies
widely.
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52.
Definition of Perceived Value :
• According to the concept of utility “Perceived
value” is defined as the consumer’s overall
assessment of the utility of a service based
on perceptions of what is received and what
is given.
• Customers will make a purchase decision on
the basis of perceived value, and not just to
minimise the money paid.
• The following gives an account of the break-
up of the “give and get” components of value
into manageable pieces that can be useful to
quantify value :
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53.
Four Meanings of Perceived Value
Value is low price :
Some consumers equate value with low price,
as for example :
• For dry cleaning : "Value is the lowest price"
• For carpet steam cleaning : "Value is price -
which one is on sale"
• For a fast-food restaurant : "When I can use
coupons, I feel that the service has a value"
• For airline travel : "Value is when airline
tickets are discounted"
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54.
Four Meanings of Perceived Value
Value is Whatever I Want in a Product or Service :
Some consumers emphasize the benefits they receive
from a service as the most important component of
value rather than focusing on money, as for example :
• For an MBA degree : "Value is the very best education
I can get"
• For medical service : "Value is high quality of
treatment"
• For a social job : "Value is what makes me look good
to my friends and family"
• For a rock or country music concert : "Value is the best
performance"
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55.
Four Meanings of Perceived Value
Value is the Quality I get for the Price I Pay :
Some consumers consider value as a trade-off
(balance) between the money they give and the
quality they receive, as for example :
• 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"
• For a computer services contract : "Value is the
same as quality. No-value is affordable quality"
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56.
Four Meanings of Perceived Value
Value is What I Get for What I Give :
Some consumers consider all the benefits they
receive as well as all what they sacrifice (in terms
of money, time, effort, etc.) when describing
value, as for example :
• For a housekeeping service : "Value is how many
rooms I can clean for what the price is"
• For a hairstylist : "Value is what I pay in cost and
time for the look I get"
• Foe executive education : "Value is getting a
good educational experience in the shortest time"
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57.
Incorporating Perceived Value
Into Service Pricing
• It’s the buyer’s perception of total value that
prompts the willingness to pay a particular price
for service. The most important thing the
company must do – often a difficult thing – is to
estimate the value to customers of the
company’s services.
• The value may be perceived differently by
different people which is a complex function of
rational (objective) and emotional (subjective)
reasons. The following steps will guide the
company to estimate value systematically :
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58.
Incorporating Perceived Value
Into Service Pricing
• Elicit customer definitions of value in their own
words and terms, allowing for the full range of
components.
• Help customers articulate their expressions of
value by identifying their value definition, key
abstract benefits sought, and abstract
dimensions of quality that are relevant to them.
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59.
Incorporating Perceived Value
Into Service Pricing
• Capture requirement information at the
concrete level – linking them with the key
benefits they indicate so that the definition
becomes actionable.
• Quantify the monetary and non-monetary value
to customers.
• Establish a price based on the value of the
service to customers.
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60.
Application :
• When the services are for the end consumer,
most often service providers will discover
that they can’t afford to give each individual
exactly the bundle of attributes he or she
values. They will, however attempt to find
one or more bundles that address segments
of the market.
• On the other hand, when services are sold to
businesses (or to end customers in case of
high end services), the company can
understand and deliver different bundles to
each customer.
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61.
VALUE STRATEGIES IN PRICING
OF SERVICES :
• On the basis of explanations and
discussions of the above section,
several pricing strategies can be
decided as follows :
• Satisfaction Based Pricing :
• Relationship Pricing :
• Efficiency Pricing :
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62.
Satisfaction Based Pricing :
• Service Guarantees
– Ex. : Domino’s Pizza offering Delivery Time
• Benefit driven pricing : Allowing customers to
derive the most benefit – A photocopier offering
his m/c and charging on the basis of no. of
copies.
• Flat rate pricing : Offering all at a flat rate
• Convinience pricing : Like home delivery of
Pizzas, Groceries, picking & droping for a
driving training session.
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63.
Satisfaction Based Pricing :
• Long Term Contracts
–Service providers often provide price
and non-price incentives to customers to
remain bound for a long term.
• Price Bundling
–Offering two or more services together
from the same providers
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64.
Efficiency Pricing :
• Based on :
–Cost Control,
–Waste Reduction,
–Increase in Productivity,
–Increase in Efficiency,
• And then transfering the benefit to
customers
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65.
ISSUES IN PRICING OF
SERVICES :
• Pricing is critical for any company doing
business for profit. It can make or mar a
business. There are several factors that
influence pricing – both internal and
external. These are given below :
• Costs of Production and Break-even
Analysis : By doing break-even analysis
the company can find out what are the
minimum level of sales required to break-
even.
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66.
ISSUES IN PRICING OF
SERVICES :
• Demand Levels : The company should
ascertain the demand levels, like current
demand, potential demand, fluctuations
in demand and the factors responsible
for it, customers’ spending patterns,
general economic trends, etc.
• Competitor Pricing : Firms should find
out the pricing done by the competitors
and the price sensitive areas.
Accordingly, pricing can be set.
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67.
ISSUES IN PRICING OF
SERVICES :
• Marketing Mix : The other elements of the marketing
mix have a positive influence on price, and the price
must be indicative of the value it promises to deliver.
In case of high price - high value offer, there should
be proper communication between the company and
customers.
• Regulatory Factors : Govt. policies, guidelines of
other regulatory bodies have direct impact on the
pricing situation. The company should adhere to the
relevant regulations. Ex., IRDA for insurance
companies, TRAI for mobile service providers, etc.
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68.
ISSUES IN PRICING OF
SERVICES :
• Positioning : Correct or accurate
positioning of services is also
important, and a matching price may
be charged. Customers should
perceive this rightly and are willing to
pay for the services.
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69.
End of Chapter
© Himansu S M / 30-08-2010
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