The Pricing of Services

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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning

is a trademark used herein under license.

ALL RIGHTS RESERVED.

Chapter7

The Pricing of Services


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THE ART OF PRICING Pricing policy is the last stronghold of

medievalism in modern management

[Pricing] is still largely intuitive and even

mystical in the sense that the intuition is

often the province of the big boss (Dean,1947).


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THE ART OF PRICING Pricing is approached in Britain like

Russian roulette--to be indulged in mainly

by those contemplating suicide (Chief

Executive, 1981).


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Figure 7.1 Buyers Perception of Value

Source: Philip Kotler,Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.

Product value

Service value

Personnel value

Image Value

Monetary cost

Time cost

Energy cost

Psychic cost

Buyers perceptionof value

Totalcustomer

value

Total

customer

cost


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DEMAND

CONSIDERATIONS

Demand tends to be inelastic

Cross price and income elasticities need to

be examined

Price discrimination is a viable alternative


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FACTORS INFLUENCING

CONSUMER PRICE SENSITIVITY Perceived-substitutes

Unique value

Switching costs

Comparison effect

Price-quality effect

Expenditure effect

End-benefit effect

Shared-cost effect

Fairness effect

Inventory effect


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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.


PRICE SENSITIVITY FACTORS Perceived Substitute Effect

few search attributes

providers often lack resources and marketing

expertise

limited product mix


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PRICE SENSITIVITY FACTORS Switching Costs

higher levels of perceived risk

uncertainty involved in changing providers

consequences associated with a bad outcome


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PRICE SENSITIVITY FACTORS Difficult Comparison Effect

high number of experience attributes

inherent heterogeneity


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PRICE SENSITIVITY FACTORS Price-Quality Effect

price acts as a quality indicator when

consumers:

believe that quality differs among providers

believe that low quality imposes greaterconsequences

lack other sources of objective information


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PRICE SENSITIVITY FACTORS Expenditure Effect

amount of expenditure relative to consumer

household income.


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PRICE SENSITIVITY FACTORS End-benefit Effect

the more price sensitive consumers are to the

cost of the end-benefit, the more sensitive they

will be to purchases that contribute to the end-

benefit. Price bundling adds value to the consumers end-

benefit.


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PRICE SENSITIVITY FACTORS Shared-cost Effect

consumer price sensitivity decreases as the

shared-costs with third parties increase.


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PRICE SENSITIVITY FACTORS Fairness Effect

fairness is typically assessed by comparing theprice to:

previous prices paid for similar services

prices paid for similar services under similar

circumstances the benefit gained

assessing service fairness is difficult


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PRICE SENSITIVITY FACTORS Inventory Effect

consumers are able to protect themselves from

future price increases by building inventories.


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PRICE SENSITIVITY

(CONCLUSIONS)

Consumers of professional services tend tobe less price sensitive.

Need to identify perceptions of keysensitivity factors across service industries

Key factors may be useful for

differentiation purposes Providers may reinforce or alter beliefs

pertaining to key factors.


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CRITERIA FOR EFFECTIVE

PRICE DISCRIMINATION

Different groups of consumers must havedifferent responses to price.

Different segments must be identifiable, and a

mechanism must exist to price them

differently.

Individuals in one segment who have paid alow price should not be able to pass those

savings on to other segments.


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CRITERIA FOR EFFECTIVE

PRICE DISCRIMINATION

The segment should be large enough to makeit worthwhile.

Costs should not exceed the incrementalrevenues obtained.

Customers should not be confused.


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COST

CONSIDERATIONS

Price is sometimes not know until after the service

has been produced Cost-oriented pricing is more difficult

activity-based costing breaks down the organizationinto a set of activities, and activities into tasks, whichconvert materials, labor, and technology into outputs.

High fixed cost to variable cost ratio

Economies of scale tend to be limited


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CUSTOMER

CONSIDERATIONS

Price tends to be one of the few search clues

available. More likely to use price as a quality cue

The relationship between price and informationmay be U-shaped.

Consumers are less certain about reservationprices


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COMPETITIVE

CONSIDERATIONS

Comparing prices is more difficult

Self-service is a viable alternative


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PRODUCT

CONSIDERATIONS

Many different names for price

Consumers are less able to stockpile by

taking advantage of discount prices

Product-line pricing is more difficult

Less likely to use odd-pricing

Price discounting tends to be less common


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EMERGING SERVICE PRICING

STRATEGIES

Satisfaction-based pricing

primary goal is to reduce the amount of

perceived risk.benefit-driven pricing--charges customers for

services actually used as opposed to overall

membership fees.

flat-rate pricing--customer pays a fixed price and

the provider assumes the risk of price increases

and overruns.


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EMERGING SERVICE PRICING

STRATEGIES

Relationship Pricing

primary objective is to enhance the firms

relationship with its targeted consumers.

long-term contracts--offers price and nonprice

incentives for dealing with the same provider over a

number of years.

pricing bundling--marketing two or more services as

a single package for a single price.


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ALL RIGHTS RESERVED

SERVICES PRICING:

FINAL THOUGHTS

The price should:

Be easy for customers to understand

Represent value to the customer

Encourage customer retention and facilitate the

customers relationship with the providing firm

Reinforce customer trust Reduce customer uncertainty

The Pricing of Services

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