PRICING OF SERVICES

What Makes Service Pricing Strategy Different (and Difficult)?

No ownership of services--hard for firms to calculate financial costs of creating an intangible performance Variability of inputs and outputs--how can firms define a unit of service and establish basis for pricing? Many services hard for customers to evaluate--what are they getting in return for their money? Importance of time factor--same service may have more value to customers when delivered faster Price is key signal of quality

Why Pricing of Services is Critical?

Customer knowledge of service price a reference price is a price point in memory for a good or a service High degree of variability often exists across providers of services not every physician defines a checkup the same way Providers are unwilling to estimate prices in advance legal service providers; fundamental reason being they do not know themselves what the service will involve until the process of service delivery unfolds

Individual customer needs vary your haircut fro the same stylist may cost you differently

Comparison of prices becomes difficult unlike goods where the product range is displayed for comparison like to compare dry cleaning prices, customer must drive to or call individual outlets
Price invisibility particularly in financial services, most customers know about only the rate of return and not the costs they pay in form of fund and insurance fees

Role of Non-monetary Costs

Demand is not just a function of monetary price but is influenced by other costs as well. Like:
Time cost since most services require direct participation of the

consumer and thus their real time

Search costs - the effort invested to identify and select among

services you desire since prices for services are rarely displayed in shelves an each service establishment offers only one brand of service (except brokers & agents)
Convenience costs like customers have to travel to the

service, if service hours do not coincide with customers available time fear of rejection (bank loan), fear of results (surgery)

Psychological costs fear of not understanding (education),

Price as an Indicator of Service Quality

Customers prefer cues like company reputation, level of advertising to access the quality In other situations when quality is hard to detect or price varies a great deal within a class of services, consumers may believe that price is the best indicator of quality In case of high risk services like medical treatment, customer looks price as a surrogate for quality Thus in addition to cover the cost and match competitors price, prices must be set with care to convey the appropriate service quality
Too low prices- inaccurate inferences Too high prices- difficult to match in service delivery

The Pricing Tripod

Pricing Strategy

Competition

Costs

Value to customer

The Pricing Tripod

The tripod explains the foundation underlying the pricing strategy The cost that a firm needs to recover usually impose a minimum price, or floor, for a specific service offering Customers perceived value of the offering sets a ceiling on the price The price charged by competitors determines where, within the floor-to-ceiling range, the price can be set

Cost -Based Pricing

Price = Direct costs + Overhead costs + Profit Margin Challenges:

Costs are difficult to trace as cost based pricing involves

defining the units in which a service is purchased Thus services are sold in terms of input units (like hours) rather units of measured output Labor is more difficult to price than material Actual service costs mat misrepresent the value of the service to the customer Used in industries in which cost can be estimated in advance like, advertising, construction

Competition-Based Pricing

Monitor competitors pricing strategy (especially if service lacks differentiation like dry cleaning and its an oligopoly like airline) Challenges:
Small firms may charge too and not make margins high enough

to remain in business Heterogeneity of services across and within providers makes it difficult to compare

Value/ Demand-Based Pricing

Relate price to value perceived by customer i.e. prices are based on what customers will pay for the services provided Challenges:
Monetary price must be adjusted to reflected the value of non-monetary costs Information on service costs may be less available to customers, making monetary price not as salient indicator to quality


1.

Value has 4 meanings: Value is low price equate value with low price like, a carpet on sale
Value is everything I want in a service emphasize the benefits rather price like, best education for a MBA

2.

3.

Value is the quality I get for the price I pay trade off between the money they give up and the quality they receive like, for a business travel, lowest price for a quality brand
Value is all that I get for all that I give consider all benefits and sacrifice components (money, time, effort)

4.