Pricing of Services
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Transcript of Pricing of Services
Pricing Services
Pricing being one factor received much less attention in service firms as these decisions are not approached in sophisticated manner.
Pricing is important as it has direct bearing on sales and profits of an organization.
So trade off is done between sales and profits and then the prices are decided.
While deciding about the price, firm should consider the following:
• Customer.• Marketing offer (extent of perishability).• Level of competition.• Legal framework.• Social and Technological environment.
Price ~ QualityPrice ~ Quality
• In the absence of communication from the company, price becomes the sole decisive factor in selection of a service.
• High risk services customers associate price with service assurance.
Pricing StrategyPricing Strategy : :
It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the competitive edge to capture the market.
• Penetration Pricing.• Skimming Pricing.• Value Pricing.• Loss Leader.• Psychological Pricing.• Going Rate.• Tender Pricing.• Cost Plus Pricing.
• Price Discrimination.• Destroyer Pricing.• Absorption Pricing.• Marginal Cost Pricing.• Contribution Pricing.• Target Pricing.• Influence of Elasticity.
Foundations of setting prices/ Foundations of setting prices/ Pricing StrategiesPricing Strategies
Penetration PricingPenetration Pricing• Price set to ‘penetrate the market’• ‘Low’ price to secure high volumes• Typical in mass market products – chocolate bars,
food stuffs, household goods, etc.• Suitable for products with long anticipated life
cycles• May be useful if launching into a new market
Market SkimmingMarket Skimming
• High price, Low volumes• Skim the profit from the market• Suitable for products that have short life cycles or
which will face competition at some point in the future (e.g. after a patent runs out)
• Examples include: Playstation, jewellery, digital technology, new DVDs, etc.
Value PricingValue Pricing• Price set in accordance with customer perceptions
about the value of the product/service.
• Value= Perceived benefits against perceived cost(Money, time & effort).
• Examples include: Airlines, Hotel industry, status products/exclusive products.
• Uncertainty reduction, relationship enhancement, Low-cost leadership and value perception management are distinct but related strategies for capturing and communicating value.
Loss LeaderLoss Leader• Goods/services deliberately sold below cost to
encourage sales elsewhere• Typical in supermarkets, e.g. at Christmas, selling
bottles of gin at £3 in the hope that people will be attracted to the store and buy other things
• Purchases of other items more than covers ‘loss’ on item sold
• e.g. ‘Free’ mobile phone when taking on contract package
Psychological PricingPsychological Pricing• Used to play on consumer perceptions• Classic example – Rs.99.99 instead of Rs.100!• Links with value pricing – high value goods priced
according to what consumers THINK should be the price
Going Rate (Price Going Rate (Price Leadership)Leadership)
• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market.
• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share.
• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets
Tender PricingTender Pricing• Many contracts awarded on a tender basis• Firm (or firms) submit their price for carrying out
the work• Purchaser then chooses which represents best
value• Mostly done in secret
Price DiscriminationPrice Discrimination
• Charging a different price for the same good/service in different markets
• Requires each market to be impenetrable• Requires different price elasticity of demand in
each market
Destroyer/Predatory PricingDestroyer/Predatory Pricing
• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants.
• Anti-competitive and illegal if it can be proved
Absorption/Full Cost PricingAbsorption/Full Cost Pricing
• Full Cost Pricing – attempting to set price to cover both fixed and variable costs.
• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production
Marginal Cost PricingMarginal Cost Pricing• Marginal cost – the cost of producing ONE extra or
ONE fewer item of production.
• MC pricing – allows flexibility • Particularly relevant in transport where fixed costs
may be relatively high.
• Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft
Marginal Cost PricingMarginal Cost Pricing• Aircraft flying from Bristol to
Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*
• Number of seats = 160, average price = £93.75
• MC of each passenger = 2000/160 = £12.50
• If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all!
• *All figures are estimates only
Contribution PricingContribution Pricing
• Contribution = Selling Price – Variable cost
• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs.
• Similar in principle to marginal cost pricing.
• Break-even analysis might be useful in such circumstances.
Target PricingTarget Pricing
• Setting price to ‘target’ a specified profit level.
• Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up.
• Mark-up = Profit/Cost x 100
Cost-Plus PricingCost-Plus Pricing
• Calculation of the average cost (AC) plus a mark up
• AC = Total Cost/Output
Influence of ElasticityInfluence of Elasticity
• Any pricing decision must be mindful of the impact of price elasticity
• The degree of price elasticity impacts on the level of sales and hence revenue
• Elasticity focuses on proportionate (percentage) changes
• PED = % Change in Quantity demanded/% Change in Price
Influence of ElasticityInfluence of Elasticity
• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall
in sales of something less than 5% • Revenue would rise• A 7% reduction in price would lead to a rise in
sales of something less than 7%• Revenue would fall
STEPS in designing the STEPS in designing the PRICING PRICING
STRATEGYSTRATEGY• Develop marketing strategy - perform
marketing analysis, segmentation, targeting, and positioning.
• Make marketing mix decisions - define the service, distribution, and promotional tactics.
• Estimate the demand curve - understand how quantity demanded varies with price.
• Calculate cost - fixed and variable costs associated with the service
STEPS in designing the STEPS in designing the PRICING PRICING
STRATEGYSTRATEGY
• Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc
• Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo)
• Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts
Pricing ObjectivesPricing Objectives
1. Survival.2. Profit maximization.3. Present Revenue maximization.4. Prestige.5. Product Quality leadership.
Objectives of Pricing in servicesObjectives of Pricing in services
• Revenue & Profit objective: Profit/Contribution maximization. Achieving specific target. Revenue maximization. Covering cost.
• Patronage and User Base-Related objectives: Create or build demand. Achieving full capacity utilization. Stimulate trial and adoption of service. Creating large user base.
Value based Pricing StrategiesValue based Pricing Strategies
ReferencesReferences• http://books.google.co.in/books?id=fT1SVOGU7-
oC&pg=PA538&lpg=PA538&dq=cost+based+pricing+examples+in+service+industry&source=bl&ots=ufX5OM5cRY&sig=1W3U8-_Lv4E0SSUV9JEpaCj5OsY&hl=en&sa=X&ei=_nXfUta8NsmQrQe4-4EQ&ved=0CGAQ6AEwBw#v=onepage&q=cost%20based%20pricing%20examples%20in%20service%20industry&f=false
• http://www.pricingleadership.com/why-cost-based-pricing-sucks/
You don’t sell through price. You sell the price.