SM Pricing of Services by an MBA IV 718891811

8/2/2019 SM Pricing of Services by an MBA IV 718891811

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In most services, prices are traditionally driven by financial andaccounting perspective, i.e. cost plus pricing method.

Many services use value-based and competitive pricing methods.

Deciding on prices fro a service is more complex as it does not wn rs ; w r s r r s, s s r: r s=

manufacturing and distribution costs.

Most services involve time and effort costs for customers:services that reduce time costs ( by offering fast service) andeffort costs ( by automation) create greater value for customersw, who then are willing to pay more.

Customers find it difficult to understand service prices: e.g.-insurance, banking services, etc.


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Objectives of setting prices

Cover the costs Revenue and profit

Maximise market share

Build a user base: membership costs for a club


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Competition

Price

Customer Costs


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Cost based pricing: marketers decide price on the basis oflabour costs and infrastructure costs. Fixed costs ratio to

variable costs is higher in case of services than in case ofmanufactured products

ct v ty ase cost ng: a set o act v t es s com ne t atcomprise of the processes needed to create and deliverservices. Costs are associated with each of these activities .Costs vary as per service level provided (first class versus

economy); performing services at different location ( localcalls cost less than international calls) or servicing specificcustomers ( senior citizens and students pay less for sometransportation services)


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Services price should be high enough to recover fullcosts of producing and marketing these services. Someservices have high fixed costs including expensive

-. .

vehicles ( airlines; parcel delivery services);telecommunications network; railroads, etc.

Some service providers focus on variables costs by

being priced on a per-use; per transaction; per-call;per-minute basis.


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Competition based pricing Service firms can price higher than competitors when:i. Non-price related costs of using competing alternatives

are highii. Personal relationships are important

. w c ng cos s are giv. Time and location preferences catered to by the serviceprovider

Competing on price can lead to poor revenues: Indian

telecom sector has the lowest ARPU in the worldCost leadership: low priced services appeal to customers :however customers must not equate a low price toquality.


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Value based pricing

Customers are willing to pay what they feel a service isworth.

Marketers need to understand how customers perceive.

Value means different things to different customers:

i. Value is low price

ii. Value is whatever I want in a productiii. Value is the quality I get for the price I pay

iv. Value is what I get for what I give.


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Perceived value pricing

Value is subjective-not all customers have the expertiseto judge service quality and value received.

This is especially in the case of credence services.

ect ve commun cat on an persona exp anat onsare needed to help customers understadn the valuethey receive. E.g.: schools that explain why they chargethe fees they do.


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Non monetary costs: Time costs; effort costs; psychological costs; sensory costs;

search costs

Strategies to minimize non-monetary costs:

i. Desi nin operations to reduce time costs

ii. Reducing psychological costs by educating customersiii. Decreasing sensory costs by providing a better

atmosphere; more comfortable seating; curtailingoffensive smells (hospital; toilet in a restaurant)

iv. Offering services electronically instead of havingcustomers make the effort to come to the service facility (internet banking).


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Pricing issues1. How much should be charged for the service

i. Price bundling or separate prices for separate services elements?ii. Price sensitivityiii. Competitioniv. Psychological pricing?

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vi. By location/time?:flexible pricing.vii. By type of customer; discriminatory pricing.2. What should be the basis of pricing3. Who should collect the payment4. Where should the payment be made5. How should the payment be made6. How should the prices be communicated ( there was a time, when

advertising prices for professional services was considered unacceptable).

SM Pricing of Services by an MBA IV 718891811

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