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Marketing of services
Unit-2
Services Marketing Mix: Augmented
Marketing Mix
Traditional marketing mix: one of the most basic concepts in marketing
is the marketing mix, defined as the elements an organization controls that
can be used to satisfy or communicate with customers. The traditional
marketing mix is composed of 4 P’s: product, price, place (distribution), and
promotion. These elements appear as core decision variables in any
marketing text or marketing plan. The notion of mix implies that all of the
variables are interrelated and depend on each other to some extent. For
service industries, it was observed that the traditional marketing mix was
inadequate because of three main reasons:

1. The first reason was that the original marketing mix was developed for
manufacturing industries, which implies that the services offered by
service companies ought to be changed to a more product like manner
so that the existing marketing tools can be applied. This was
practically difficult.

2. The second reason was that the marketing practitioners in the service
sector found that the marketing mix does not address their needs.
They observed that the services have certain basic characteristics
which, in turn, have marketing implications.

3. The third reason was that since services are basically different in
comparison to physical products, the marketing models and concepts
have, therefore, to be developed in direction of the service sector.

The above 3 criticism suggests that a revised framework for service

marketing mix is required and dimensions of each of the mix elements
should be redefined. The marketing mix has extended beyond the 4 Ps
for marketing of services. These additional Ps are added to meet the
marketing challenges posed by the characteristics of services.

Booms & Bitner suggest a “7P” marketing mix model arising out of
above three observations
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1. Product: service is an intangible product. It consists of a bundle of

features & benefits that have relevance to a specific target market.
As such, there is a high level of flexibility and opportunity to be
innovative in designing a product offer.

2. Price: the pricing decision is a critical component in services too, as

this component of the marketing mix alone determines the revenue
of the firm. Consumer sensitivity to price would be higher in
services than in goods. Pricing is complex in services where unit
costs needed to calculate prices may be difficult to determine, and
where customer frequently uses price as a cue to quality. Though
basic methods of pricing are the same as in goods, the pricing
strategies for services basically depends upon value perceptions of
various groups of people that are targeted by the organization.

3. Promotion: traditionally promotion is thought of as involving

decisions related to sales, advertising, sales promotions, and
publicity. In services these factors are also important, but because
services are produced and consumed simultaneously, service
delivery people (such as clerks, ticket takers, nurse, and phone
personnel) are involved in real-time promotion of the service even if
their jobs are typically defined in terms of the operational function
they perform. Consumers co-produce in services. The quality of
services will not only depend upon the performance of the service
provider but also on the performance of the service consumers. It is
the responsibility of the service organizations to educate and, if
necessary, train customers so as to make them prepared to use the
services efficiently. A well designed promotional programme is of
immense importance to organizations to inform, persuade, and train
customers to better their experiences.

4. Place: services are intangible as well as inseperable. These two

characteristics do not allow a service firm to follow the same
channel options available for goods marketing. Due to the
intangible character of service, traditional wholesalers and retailers
cannot be used. As services cannot be stored and cannot be
separated from producers, retailing cannot be an independent
activity in services marketing. Production, distribution &
consumption are simultaneous activities in services. Direct selling is
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one of the lowest cost approaches a service provider can opt, but
there are other channels of distribution which can also be opted
such as, agents and brokers, franchisers and electronic channels,
that are used for distribution services.

5. People or internal marketing: all human actors who play a part

in service delivery and thus influence the buyer’s perceptions;
namely, the personnel, the customer and other customers in the
service environment. Employees represent he organization to the
customers therefore they play an important role in the marketing
operations of a service organization. Employees are the first internal
market for the organization. The basic objective of internal
marketing is to develop motivated and customer conscious
employees. Service is a performance which cannot be separated
from the people. If the people don’t meet customer’s expectations,
then neither does the service. Investing in people quality in a
service business means investing in product quality. Internal
marketing paves the way for external marketing of services. There
are 7 essentials of internal marketing:

i) Compete for talent market share.

ii) Offer a vision that brings purpose and meaning to the workplace.

iii) Equip people with the skills and knowledge to perform their
service roles excellently.

iv) Bring people together to benefit from the fruits of team play.

v) Leverage the freedom factor.

vi) Nurture achievement through measurement and rewards.

vii) Base job-product design decisions on research.

6. Physical evidence: the environment in which the service is

delivered and where the firm and customer interact, and any
tangible components that facilitate performance or communication
of the service. The physical evidence of service includes all of the
tangible representations of the service such as brochures,
letterhead, business cards, report formats, signage, and equipment.
In some cases it includes the physical facility where the service is
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offered- the ‘servicescape’- for example, the retail bank branch

facility. In other cases, such as telecommunication services, the
physical facility may be irrelevant. In this case other tangibles such
as billing statements and appearance of the repair truck may be
important indicators of quality. Especially when consumers have
little on which to judge the actual quality of service they will rely on
these cues, just as they rely on the cues provided by the people and
the service process. Physical evidence cues provide excellent
opportunities for the firm to send consistent and strong messages
regarding the organization’s purpose, the intended market
segments, and the nature of services.

7. Process: the actual procedures, mechanisms, and flow of activities

by which the service is delivered- the service delivery and operating
system. Process is a functional activity that assures service
availability and quality. In simple terms, the management of
process is to manage service encounters (the interaction between
service employees and customers, customers and service
environment, systems and other facilities) effectively. The actual
delivery steps the customer experiences, or the operational flow of
the service, also give customers evidence on which to judge the
service. Some services were very complex, requiring the customer
to follow a complicated and extensive series of actions to complete
the process. Highly bureaucratized services frequently follow this
pattern, and the logic of the steps involved often escapes the
customer. Another distinguishing characteristic of the process that
can provide evidence to the customer is whether the service follows
a production-line/standardized approach or whether the process is
an empowered/customized one. None of these characteristics of the
service is inherently better or worse than another. Rather, this point
is that these process characteristics are another form of evidence
used by the consumer to judge service.

DEVELOPING THE SERVICE PRODUCT/INTANGIBLE PRODUCT &

SERVICE PRODUCT PLANNING

SERVICE PRODUCT: Service is an intangible product. It cannot be

photographed, touched, verified and tried out. A service product is a bundle
of features and customer benefits.
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According to a study; the dominant and most reliable predictors of success

for new introductions relate to product/service characteristics (product
meeting customer needs, product advantage over competing products,
technological sophistication). Strategy characteristics (dedicated human
resources to support the initiative, dedicated R&D focused on the new
product initiative), process characteristics (marketing, predevelopment,
technological and launch proficiencies), and marketplace characteristics
(market potential).

Challenges of Service Design:

Because services cannot be touched, examined, or tried out, people

frequently resort to words I their efforts t describe them. Lynn Shostack, has
pointed out 4 risks of attempting to describe services in words alone. These
risks are:

1. Oversimplification: “to say that ‘portfolio management’ means

‘buying and selling stocks’ is like describing the space shuttle as
‘something that flies’. Some people will picture a bird, some helicopter,
some an angel”. Words are simply inadequate to describe a whole
complex service system.

2. Incompleteness: in describing services, people (employees,

managers, customers) tend to omit details or elements of the service
with which they are not familiar.

3. Subjectivity: any one person describing a service in words will be

biased by personal experiences and degree of exposure to the service.
There is a natural (and mistaken) tendency to assume that because all
people have gone to a fast-food restaurant, they all understand what
that service is. Persons working in different functional areas of the
same service organization (a marketing person, an operations person,
a finance person) are likely to describe the service very differently as
well, biased by their own functional blinders.

4. Biased interpretation: no 2 people will define ‘responsiveness’,

‘quick’ or ‘flexible’ in exactly the same way. For e.g.; a supervisor or
manager may suggest to a front-line service employee that the
employee should try to be more flexible or responsive in providing
service to the customer. Unless flexibility is further defined, the
employee is likely to interpret the word differently from the manager.
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All of these risks become very apparent in the new service

development process, when organizations may be attempting to
design services never before experienced by customers.

Product levels: Customer Value Hierarchy

Fig: Five Product Lines

In the planning its

market offering, the
marketer needs to
address 5 product
levels. Each level
adds more customer
value, and 5
constitute a
customer value
hierarchy.

• Core Benefit:
the service or benefit the customer is really buying. Ahotel guest
is buying “rest and sleep”.

• Basic Product: At the second level, the marketer must turn the
core benefit into basic product. Thus, a hotel room includes a
bed, bathroom, towels, desk, dresser, and closet.

• Expected Product: a set of attributes and conditions buyers

normally expect when they purchase this product. Hotel guests
expect a clean bed, fresh towels, working lamps, and a relative
degree of quite.

• Augmented Product: this level exceeds customer

expectations. In developed countries, brand positioning and
competition take place at this level. In developing and emerging
markets such as India and Brazil, however, competition takes
place mostly at the expected product level.
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• Potential Product: this level encompasses all the possible

augmentations and transformations the product or offering might
undergo in the future. Here is where companies search for new
ways to satisfy customers and distinguish their offering.

Differentiation arises and competition increasingly occurs on the

basis of product augmentation, which also leads the marketer to
look at the user’s total consumption system: the way user performs
the tasks of getting and using products and related services. Each
augmentation adds cost, however, and augmented benefits soon
become expected benefits.

Basic Service Package

A service product is a package of series of service elements executed in
proper order in keeping with the needs and wants of the consumer
satisfaction. The concept of basic service package (BSP) helps to understand
the service product comprehensively. There are 3 elements in BSP. They are:

1. Core service: it is the reason for being in the market.

2. Facilitating Service (and goods): are those services without which

core service cannot be performed. Facilitating services and/ or
facilitating goods make it possible for customers to use a core service.

3. Supporting services (and goods): Supporting services do not

facilitate the consumption or use of a core service, but increase the
value of the service offering.

As far as the core service and facilitating services are concerned,

there will not be much scope for a competitive edge. But in case
of supporting services a high level of differentiation is possible,
and as such, the firm can enjoy a competitive edge by being up
to date, innovative, fast, bold, and flexible.
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Fig: 2 BSP- Basic service

Product

Flower of Service:

Christopher lovelock developed the flower of service, which indicates the

core service surrounded by a cluster of supplementary services. The
flower consisting of 8 petals; 4 of them are facilitating supplementary
services and the other 4 are enhancing supplementary services. The
facilitating supplementary services include information, order taking,
billing and payment whereas consultation, hospitality, caretaking and
exceptions are enhancing supplementary services.
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Fig3: Flower of Service

Service Product Mix:

A service product mix is the set of services offered for sale by a company. The
service mix of a company can be assessed in terms of:

• Width: it refers to the no. of different service lines, the company offers.

• Depth: it refers to the total no. of variants offered in each service line

• Length: it refers to the total no. of service items in the mix.

• Consistency: of a service product mix refers to how closely the service lines
are related in consumer perception, distribution channels and so on.

The service product mix can be expanded in 4 ways:

• Service firms can add new service lines

• They can expand each service line

• They can add more variants to each service

• They can have more service line consistency.

Service Life Cycle:

Marketers believe that every service product that takes birth will die after some time, though there is no universal
possible lifetime, like human beings, for any service. Marketers also believe that the life of a service product will pass
through different stages. There are 4 identified stages in the life of a service. They are:

(To identify the stages in the life cycle, companies use two parameters. They are sales and profit)

1. Introduction: companies will have pioneer advantage, if the service introduced is really innovative. The
initial expenses of promoting the brand would be very high and the focus of promotion is to create
awareness and knowledge of the service to the target customers. The sales will increase slowly. Service
firms generally do not expect profits at this stage. Service firms make efforts to minimize the time period of
the introductory stage.

2. Growth: service firms start yielding good results at this stage. Sales grow at a faster rate and the
promotional focus would be on persuasion of target customers. Word- of – mouth communication plays a
significant role in image building. As there is less requirement of promotional expenditure and a high
turnover of the company, this stage provides profits to the company. The profit curve goes upwards and
reaches its peak during the period. The end of the period indicates declining growth rate in sales and
increased intensity of competition. Profit starts declining at the end of the period. Service firms hard to
stretch this period to the longest possible.
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3. Maturity: this stage of the service life is marked by stabilization in turnover and tendency of profit curve.
Competition will be severe and the firms need to invest heavily to face competitive threats in the areas of
service modernization and sales promotion. The increased expenses on these areas reduce the profit
margin and as a result, the profit curve will experience a downward slide. Sales reach their peak with the
beginning of the period and then slowly slide down. The end of the period is marked by an increased rate of
decline in sales and the profit curve reaches its lowest level. Service firms try to extend the maturity period
of the service as it could generate some profit to the organization.

4. Decline: During this stage, the sales curve slides down at a faster rate, profits evaporate and soon the
service becomes a loss generating one. As soon as the service product reaches this stage, service firms
seriously consider dropping the service product.

The life of a service is becoming shorter and shorter. Most service firms try to terminate the service
packages in the fastest possible timeframe to introduce a new service in its place. The software industry is
the best example for indicating this style. The concern of the firms now is to maximize the benefits from a
new product in the shortest possible time rather than to visualize or to work on strategies for a n extended
life.

Stage I Stage II Stage III Stage IV

introduction Growth Maturity Decline

sales

Sales /
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profit

profit

Life period

New service Development:

Research suggests that products that are designed and introduced via steps in a
structured planning framework have a greater likelihood of ultimate success than
those not developed within a framework. The fact that services are intangible
makes it even more important for new service development system to have 4 basic
characteristics, that is:

1. It must be objective, not subjective.

2. It must be precise, not vague.

3. It must be fact driven, not opinion driven.

4. It must be methodological not philosophical.

Often new services are introduced on the basis of managers’ and employees’
subjective opinion about what the services should be and whether they will
succeed, rather than on objective designs incorporating data about customer
perceptions, market needs, and feasibility.

A new service design process may be imprecise in defining the nature of the
service concept because the people involved believe either that intangible
processes cannot be defined precisely or that “everyone knows what we
mean”. Neither of these explanations or defenses for imprecision is
justifiable.

Types of New Services:

As we build the new service development processes, remember that not all new services are “new” to the
same degree. The types of new service options can run the gamut from major innovations to minor style
changes:

• Major innovations are new services for markets as yet undefined. Past examples include the first
broadcast television services and now 3G and computers.
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• Start –Up business consist of new services for a market that is already served by existing
products that meet same generic needs. Service examples include the creation of health
maintenance organizations to provide an alternative form of health care delivery, online banking
for financial transactions.

• New services for the currently served market represent attempts to offer existing customers of
the organization a service not previously available from the company (although it may be
available from other companies. For e.g. airlines offering fax, phone, and internet service during
flights.

• Service Improvements represent perhaps the most common type of service innovation. Changes
in features of services that are already offered might involve faster execution of an existing
service process, extended hours of service, or augmentations such as added amenities in a hotel
room. ICICI opens till 8 p.m.

• Service line extensions represents augmentations of the existing service line such as a restaurant
adding new menu items, an airline offering new routes, an university adding new courses or
degrees.

• Style changes represent the most modest service innovations, although they are often highly
visible and can have significant effects on customer perceptions, emotions, and attitudes.
Changing the color scheme of a restaurant, revising the logo for an organization, website
redesign, or painting aircraft a different color all represent style change. These do not
fundamentally change the service, only its appearance.

Stages in new service development:

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Front-end
Planning

Implementation

Many of the steps given above can be found very similar to those of new product development process for
manufactured goods. Because of the inherent characteristics of services, however the development
process for new services requires adaptations.

An underlying assumption of new product development process models is that new product ideas can be
dropped at any stage of the process if they do not satisfy the criteria for success at that particular stage.
The checkpoints are showed in the form of Stop signals that precede critical stages of the development
process. The checkpoints specify requirements that a new service must meet before it can proceed to the
next stage of development.
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New service product development is rarely a completely linear process. Many companies are finding that
to speed up new service development, some steps can be worked on simultaneously, and in some
instances a step may even be skipped. The overlapping of steps and simultaneous development of various
pieces of the new service/product development process has been referred to as “flexible product
development”.

The front end is called “fuzzy” because of its relative abstractness, which is even more apparent with
services than with manufactured products.

The two steps involved in new service development are:

1. Front-end Planning:

A. Business Strategy Development - It is assumed that organisation will have an overall strategic
vision and mission. Clearly a first step in new service development is to review that vision and
mission. If these are not clear, the overall strategic direction of the organisation must be
determined and agreed on. The new services strategy and specific new service ideas must fit
within the larger strategic picture of the organistion.

B. New Service Strategy Development – A product portfolio strategy and a defined organizational
structure for new product or service development are critical-and are the foundations –for
success. The types of new services that will be appropriate will depend on the organisation’s
goals, vision, capabilities, and growth plans. By defining a new service strategy (possibly in
terms of markets, types of services, time horizon for development, profit criteria, or other
relevant factors), the organization will be in a better position to begin generating specific ideas.

Markets

Current New Offering

Customers Customers s
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Existing
Services

New Services

The above framework allows an organization to identify possible directions for growth and can be helpful
as a catalyst for creative ideas. The framework may also later serve as a n initial idea screen if, for
example, the organization chooses to focus its growth efforts on one or two of the four cells in the matrix.
The matrix suggests that companies can develop a growth strategy around current customers or for new
customers, and can focus on current offerings or new service offerings.

C. Idea Generation- the ideas generated at this phase can be passed through the new service
strategy screen described in the preceding step. Many methods and avenues are available for
searching out new service ideas. Formal brainstorming, solicitation of ideas from employees and
customers, lead user research and learning about competitors’ offerings are some of the most
common approaches. Observing customers and how they use the firm ‘s products and services
can also generate creative ideas for new innovations. Sometimes referred to as empathic design,
observation is particularly effective in situations where customers may not be able to recognize
or verbalize their needs. This mechanism might include a formal new service development
department or function with responsibility for generating new ideas, suggestion boxes for
employees and customers, new service development teams that meet regularly, surveys and
focus groups with customers and employees, or formal competitive analysis to identify new
services.

D. Service Concept Development and Evaluation- Once an idea surfaces that is regarded as a
good fit with both the basic business and the new service strategies, it is ready for initial
development. Drawing pictures and describing an intangible service in concrete terms are
difficult. It is therefore important that agreement be reached at this stage on exactly what the
concept is. By involving multiple parties in sharpening the concept definition, it often becomes
apparent that individual views of the concept are not the same. How this description would
translate into an actual service and that there were a variety of ways the concept could be
developed. Only through multiple iterations of the service- and raising of hundreds of issues,
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large and small- was an agreement finally reached on the discount brokerage concept. After clear
definition of the concept, it is important to produce a description of the service that represents its
specific features and characteristics and then to determine initial customer and employee
responses to the concept. The service design document would describe the problem addressed by
the service, discuss the reasons for offering the new service itemizes the service process and its
benefits, and provide a rationale for purchasing the service. The roles of customers and
employees in the delivery process would also be described. The new service concept would then
be evaluated by asking employees and customers whether they understand the idea of the
proposed service, whether they are favorable to the concept, and whether they feel it satisfies an
unmet need.

E. Business Analysis- Demand analysis, revenue projections, cost analysis and operational
feasibility are assessed at this stage. This stage will also involve preliminary assumptions about
the costs of hiring and training personnel, delivery and feasibility screen to determine whether
the new service idea meets the minimum requirements.

2. Implementation

A. Service Development and testing- in the development of new tangible products, this stage
involves construction of product prototypes and testing for consumer acceptance. This stage of
service development should involve all who have a stake in the new service: customers and
contact employees as well as functional representatives from marketing, operations, and human
resources. During this phase, the concept is refined to the point where a detailed service
blueprint representing the implementation plan for the service can be produced. The blueprint is
likely to evolve over a series of iterations on the basis of input from all parties listed. A final step
is for each area involved in rendering the service to translate the final blueprint into specific
implementation plans for its part of the service delivery process. Because service development,
design, and delivery are so intricately intertwined, all parties involved in any aspect of the new
service must work together at this stage to delineate the details of the new service idea to fail.

B. Market Testing- it is stage of the development process that a tangible product might be test
marketed in a limited no. of trading areas to determine marketplace acceptance of the product
as well as other marketing mix variables such as promotion, pricing, and distribution systems.
Again, the standard approach for a new manufactured product is typically not possible for a
new service due to its inherent characteristics. Because new service offerings are often
intertwined with the delivery system for existing services, it is difficult to test new services in
isolation. There are alternative ways of testing the response to marketing mix variables,
however. The new service might be offered to employees of the organization and their families
for a time to assess- their responses to variations in the marketing mix. Or the organization
might decide to test variations in pricing and promotion in less realistic contexts by presenting
customers with hypothetical mixes and getting their responses in terms of intentions to try the
service under varying circumstances. Pilot run the service to be sure that the operational details
are functioning smoothly. Frequently this purpose is overlooked and the actual market
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introduction may be first test of whether service system functions as planned. By this point,
mistakes in design are harder to correct.

C. Commercialization- at this stage, the service goes live and its introduction to the marketplace.
This stage has two primary objectives. The first is to build and maintain acceptance of the new
service among large numbers of service delivery personnel who will be responsible day to day
for service quality. The second objective is to monitor all aspects of the service during
introduction and through the complete service cycle. If the customer needs six months to
experience the entire service, then careful monitoring must be maintained through at least six
months.

D. Post introduction Evaluation- the information gathered during commercialization of the service
can be reviewed and changes made to the delivery process, staffing, or marketing mix variables
on the basis of actual market response to the offering.

Pricing of Services-

Price is the medium for exchange of value between a buyer and seller. It is
an influencing factor in consumer decision-making, related to a purchase.
Whatever be the product, whether it is a good or a service, whether high
priced or low priced, whether the customer has a high ability to purchase or
belongs to middle or low income group, the influence of price in a purchase
decision cannot be overemphasized. Service organizations should have
strategies for arriving at pricing decisions. In services marketing mix, price is
the only “p” that generates inflow to the company.

There are 3 key ways service prices are different for consumers:

1. Customer Knowledge of service prices: A reference price is a price

point in memory for a good or a service, and can consist of the price
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last paid, the price most frequently paid, or the average of all prices
customers have paid for similar offerings.

a) Service heterogeneity limits knowledge: because services are

intangible and are not created on a factory assembly line, service
firms have great flexibility in the configurations of services they
offer. Firms can conceivably offer an infinite variety of combinations
and permutations, leading to complex and complicated pricing
structures. As an example, consider how difficult it is to get
comparable price quotes when buying life insurance. Only an expert
customer, one who knows enough about insurance to completely
specify the options across providers, is likely to find prices that are
directly comparable.

b) Providers are unwilling to estimate prices: Another reason

customers lack accurate reference prices for services is that many
providers are unable or unwilling to estimate prices in advance.
Consider most medical or legal services. Rarely are legal or medical
service providers willing –or even able- to estimate a price in
advance. The fundamental reason in many cases is that they do not
know themselves what the services will involve until they have fully
examined the patient or the client’s situation or until the process of
service delivery (such as an operation in a hospital or a trial)
unfolds.

c) Individual customer needs vary: Another factor that results in the

inaccuracy of reference prices is that individual customer needs
vary. Some hairstylists’ service prices vary across customers on the
basis of length of hair, type of haircut, and whether a conditioning
treatment and style are included.

d) Price information is overwhelming in services: Still another reason

customers lack accurate reference prices for services is that
customers feel overwhelmed with the information they need to
gather. With most goods, retail stores display the products by
category to allow customers to compare and contrast the prices of
different brands and sizes. Rarely is there a similar display of
services in a single outlet. If customers want to compare prices,
they must drive to or call individual outlets.
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e) Prices are not visible: in many services, particularly financial

services, most customers know about only the rate of return and
not the costs they pay in the form of fund and insurance fees.

2. The role of non-monetary costs: monetary price is not the only

sacrifice consumers make to obtain products and services. Demand,
therefore, is not just a function of monetary price but is influenced by
other costs as well. Nonmonetary costs represent other sources of
sacrifice perceived by consumers when buying and using service.
$ = Time or effort or psychological costs
a) Time costs: Most services require direct participation of the
consumer and thus consume real time: time waiting as well as time
when the customer interacts with the service provider. Customers
will trade money for time savings. Customers who purchase lawn
care, housekeeping, and other services often do so because the
value of their time is higher than the value of money. Service
providers cannot completely control the number of customers or the
length of time it will take for each customer to be served, customers
are likely to expend time waiting to receive the service.

b) Search Costs: Search costs- the effort invested to identify and select
among services you desire- are also higher for services than for
physical goods. Prices of services are rarely displayed on shelves of
service establishments for customers to examine as they shop, so
these prices are often known only when a customer has decided to
experience the service. And also each service establishment
typically offers only one “brand” of a service, so a customer must
initiate contact with several different companies to get information
across sellers.

c) Convenience costs: there are also convenience (or perhaps more

accurately inconvenience) costs of services. If customers have to
travel to a service, they incur a cost, and the cost becomes greater
when travel is difficult, as it is for elderly persons. Further, if service
hours do not coincide with the customers’ available time, they must
arrange their schedules to correspond to the company’s schedule.
And if consumers have to expend effort and time to prepare to
receive a service they make additional sacrifices.
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d) Psychological costs: Fear of not understanding (insurance), fear of

rejection (bank loans), fear of uncertainty (including fear of high
cost)- all of these constitute psychological costs that customers
experience as sacrifices when purchasing and using services. All
change, even positive change, brings about psychological costs that
consumers factor into the purchase of services. For example: when
banks introduced ATMs.

3. Price as an indicator of Service Quality: buyers are likely to use

price as an indicator of both service costs and service quality- price at
once an attraction variable and a repellant. In situations such as when
quality is hard to detect or when quality or price varies a great deal
within a class of services, consumers may believe that price is the best
indicator of quality.

Approaches to pricing services

Cost- based Pricing: in cost- based pricing, a company determines

expenses from raw materials and labor, adds amounts or percentages for
overhead and profits, and thereby arrives at the price. This method is widely
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used by industries such as utilities, contracting, wholesaling, and advertising.

The basic formula for cost-based pricing is:

Price = Direct costs + Overhead costs + Profit

margin

Direct costs involve materials and labor that are associated with the service,
overhead costs are a share of fixed costs, and the profit margin is a
percentage of full costs (direct – overhead).

Problems in cost-based pricing of services:

1. The unit in which a service is purchased is not defined in services.

2. Costs are difficult to trace or calculate in services businesses,

particularly where multiple services are provided by the firm.

3. A major component of cost is employee time rather than materials,

and the value of people’s time, particularly nonprofessional time, is not
easy to calculate or estimate.

4. Actual service costs may under represent the value of the service to
the customer.

Cost-based Pricing Strategies:

1. Cost - plus pricing: is a commonly used approach in which component

costs are calculated and a markup added. In product pricing this
approach is quite simple; in service industries, however, it is complicated
because tracking and identification of costs are difficult. The approach is
typically used in industries where cost must be estimated in advance,
such as construction, and advertising. A contingency amount – to cover
the possibility that costs may be higher than estimated- is also stated
because in large projects specifications can change as the service is
provided.

2. Fee for service: is the pricing strategy used by professionals: it represents

the cost of the time involved in providing the service. Consultants,
psychologists, accountants, and lawyers, among other professionals,
charge for their services on an hourly basis.

Competition- based pricing:

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This approach focuses on the prices charged by other firms in the same
industry or market. Competition- based pricing does not always imply
charging the identical rate others charge but rather using others’ prices as
an anchor for the firm’s price. This approach is used predominantly in 2
situations:

1) When services are standard across providers, such as in the dry cleaning
industry, and

2) In oligopolies where there are a few large service providers, such as in the
airline or rental car industry.

Problems:

1. Small firms may charge too little to be viable.

2. Heterogeneity of services limits comparability.

3. Prices may not reflect customer value.

Strategies:

1. Price signaling; occurs in markets with a high concentration of sellers.

In this type of market, any price offered by one company will be
matched by competitors to avoid giving a low- cost seller a distinct
advantage. In airline industry when any competitor drops the price of
routes, others match the lowered price almost immediately.

2. Going-rate pricing: involves charging the most prevalent price in the

market. Rental car pricing is an illustration of this technique (and also
an illustration of price signaling, because the rental car market is
dominant by a small number of large companies).

Demand-based Pricing:

The third major approach to pricing, demand based pricing, involves setting
prices consistent with customer perceptions of value: prices are based on
what customers will pay for the services provided.

Problems:

1. Monetary price must be adjusted to reflect the value of nonmonetary

costs.
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2. Information on service costs is less available to customers; hence price

may not be a central factor.

Four meanings of perceived value: one of the most appropriate ways that
companies price their service is basing the price on the perceived value of
the service to the customers. Among the questions a service marketer needs
to ask are the followings- what do consumer means by value? How can we
quantify perceived value in dollars so that we can set appropriate prices for
our services? Is the meaning of value similar across consumers and services?
How can value perceptions be influenced? To fully understand demand –
based pricing approaches, we must fully understand what value means to
customers.

Customers define value in 4 ways:

1. Value is low price: some consumers equate value with low price,
indicating that what they have to give up in terms of money is most
salient in their perceptions of value, a typified in these representative
comments from customers: for dry cleaning: “value means the lowest
price”

For carpet cleaning: “value is price- which one is on sale.”

Pricing Strategies:

• Discounting: service providers offer discounts or price cuts to

communicate to price- sensitive buyers that they are receiving value.
Colleges are now providing many forms of discounting to attract
students.

• Odd pricing: this is the practice of pricing services just below the exact
dollar amount to make buyers perceive that they are getting a lower
price.$2.98 rather than $3.00

• Synchro- pricing: it is the use of price to manage demand for a service

by using customer sensitivity to prices. Certain services, such as tax
preparation, passenger transportation, long-distance telephone, hotels,
and theaters have demand that fluctuates over time as well as
constrained supply at peak times.

• Penetration pricing: penetration pricing is a strategy in which new

services are introduced at low price to stimulate trial and widespread
use. The strategy is appropriate when 1) sales volume of the service is
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very sensitive to price, even in the early stages of introduction;2)it is

possible to achieve economies in unit costs by operating at large
volumes; 3) a service faces threats of strong potential competition very
soon after introduction; and 4) form of pricing can lead to problems
when companies then select a “regular” increased price. Care must be
taken not to penetrate with so low a price that customers feel the
regular price is outside the range of acceptable prices.

2. Value is everything I want in a service: rather than focusing on

the money given up, some consumers emphasize the benefits they
receive from a service or product as the most important component of
value. In this value definition, price is far less important than the
quality or features that match what the consumer wants. In the
telephone industry, for example, business customers strongly value
the reliability of the systems, and are very willing to pay for the safety
and confidentiality of the telephone lines.

Pricing Strategies:

• Prestige pricing: this is a special form of demand-based pricing

by service marketers who offer high-quality or status services. In
prestige pricing the demand may actually increase as price
increases because they are given special preference in seating or
accommodations and the costlier services has more value in
reflecting quality or prestige.

• Skimming pricing: this is a strategy in which new services are

introduced at high prices with large promotional expenditures. In
this situation many customers are more concerned about
obtaining the service than about the cost of the service, allowing
service providers to skim the customers most willing to pay the
highest price.

3. Value is the quality I get for the price I Pay: other consumers see
value as a trade-off between the money they give up and the quality
they receive. For a hotel for vacation; “value is the price and quality
second”. For a hotel for a business travel: “value is the lowest price for
a quality brand.
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• Value pricing: this widely used term has come to mean “giving
more for less”. In current usage it involves assembling a bundle
of services that are desirable to a wide group- of customers and
then pricing them lower than they would cost alone.

• Market segmentation Pricing: a service marketer charges

different prices to groups of customers for what are perceived to
be different quality levels of service, even though there may not
be corresponding differences in the costs of providing the service
to each of these groups. This pricing is based on the premise that
different segments show different price elasticities of demand
and desire different quality levels.

4. Value is what I get for what I give: Finally, some consumers

consider all the benefits they receive as well as all sacrifice
components (money, time, effort) when describing value.

For housekeeping service: “value is how many rooms I can get cleaned
for what the price is”.

• Price framing: because many customers do not possess accurate

reference prices for services, services marketers are more likely
than product marketers to organize the price information for
customers so they know how to view it. Customers naturally look
for price anchors, as well as familiar services against which to
judge focal services. If they accept the anchors, they view the
price and service package favorably.

• Price bundling: some services are consumed more effectively in

conjunction with other services; other services accompany the
products they support (such as extended service warranties,
training and expedited delivery). When customers find value in a
package of services that are interrelated, price bundling is an
appropriate strategy. Bundling, which means pricing and selling
services as a group rather than individually, has benefits to both
customers and service companies? Customers find that bundling
simplifies their purchase and payment, and companies find that
the approach stimulates demand for the firm’s service line,
thereby achieving cost economies for the operations as a whole
while increasing net contributions. Bundling also allows the
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customer to pay less than in purchasing each of the services

individually, which contributes to perceptions of value.

• Complementary pricing: this pricing includes three related

strategies- captive pricing, two- part pricing, and loss leadership.
Services that are highly interrelated can be leveraged by using
one of these forms of pricing. In captive pricing the firm offers a
base service or product and then provides the supplies or
peripheral services needed to continue using the service. In this
situation the company could off-load some part of the price for
basic service to the peripherals. With service firms, this strategy
is often called two- part pricing because the service price is
broken into a fixed fee plus variable usage fees (also found in
telephone services, health clubs, etc.) loss leadership is the term
typically used in retail stores when providers place a familiar
service on special largely to draw the customer to the store and
then reveal other levels of service available at higher prices.

• Results-based pricing: in service industries in which outcome is

very important but uncertainty is high, the most relevant aspect
of value is the result of the service. In personal injury law suits,
for example, clients value the settlement they receive at the
conclusion of the service. From tax accountants, clients’ value
cost savings. From trade schools, students most value getting a
job upon graduation. In these and other situations, an
appropriate value- based pricing strategy is to price on the basis
of results or outcome of the service.
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Fig: Summary of Service Pricing Strategies for four Customer

definitions of value