Service Pricing and the

Financial and Economic effect of Service

Dominic Laffy
Week 11
week commencing 19/11/12

Dominic Laffy
MKT6B2 Services Marketing

Learning Outcomes
be able to articulate key ways that pricing of
services differs from pricing of goods from both a
company and customer perspective.
be able to demonstrate what value means to
customers and the role price plays in value.
be able to critically discuss the key service drivers
of overall service quality, customer retention and
profitability
be able to describe the role of strategy maps in
implementing the balanced performance
scorecard.

Dominic Laffy
MKT6B2 Services Marketing

Differences between customer evaluation

of pricing for services and goods
1. Customers often have inaccurate or limited
reference prices for services
2. Price is a key signal of quality in services
3. Monetary price is not the only price relevant to
service customers

Source: adapted from Services Marketing Zeithaml V.A. et al 5th Edition p512

Dominic Laffy
MKT6B2 Services Marketing

How much do the following cost in London?

1.
2.
3.
4.
5.
6.
7.
8.
9.

Dental check-up
General medical check-up
Legal help with a Drunk Drive charge
Dental braces
Rental of a DVD for one night
One hour of house cleaning
A double room at the Hilton (midweek)
A haircut
Oil and filter change on car

Source: adapted from Services Marketing Zeithaml V.A. et al 5th Edition p513 Exhibit 17.1

____
____
____
____
____
____
____
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Dominic Laffy
MKT6B2 Services Marketing

Customer knowledge of Service prices

Service variability limits knowledge
The potential complexity of options complicates pricing

Providers are unwilling/unable to estimate prices

E.g. doctor cannot say how much until full diagnosis

Individual customer needs vary

Collection of Price Information is overwhelming
Need to get prices from all potential providers which
can be a big task. Reference prices can be of limited
used

Prices are not visible

For instance in selling financial services, customers
know rate of return but not fees
Source: adapted from Services Marketing Zeithaml V.A. et al 5th Edition Table p512-516

Dominic Laffy
MKT6B2 Services Marketing

The role on non-monetary costs

Time costs
E.g. waiting time, interaction time

Search costs
The effort to identify and select among services often
higher than for physical goods

Convenience costs
Psychological costs
E.g. fear on not understanding (Insurance), fear of
rejection (bank loans), fear of outcomes (surgery)

Source: adapted from Services Marketing Zeithaml V.A. et al 5th Edition Table p516-517

Dominic Laffy
MKT6B2 Services Marketing

Reducing non-monetary costs

A company may be able to increase monetary price
by reducing time and other non-monetary costs
Customers/segments may be willing to pay more to
avoid the other costs
If time or other costs are pivotal for a given service,
the companys advertising can emphasise these
savings rather than monetary ones

Dominic Laffy
MKT6B2 Services Marketing

Three Basic Marketing Price Structures and

Challenges Associated with Their Use for Services
Challenges:

Challenges:

Co
m
ba peti
se tio
d n-

1. Small firms may charge

too little to be viable.
2. Heterogeneity of services
limits comparability.
3. Prices may not reflect
customer value.

Co
st

-b

as
ed

1. Costs difficult to trace.

2. Labour is more difficult
to price than materials.
3. Costs may not equal
the value that customers
perceive the services are
worth.

sed
a
b
d
n
Dema

Challenges:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs.
2. Information on service costs is less available to
customers; hence, price may not be a central factor.
Source: adapted from Services Marketing Zeithaml V.A. et al 5th Edition p 519 Fig17.1

Dominic Laffy
MKT6B2 Services Marketing

Four Customer Definitions of Value

Value is low price.

Value is everything
I want in a service.

Value is the
quality I get for
the price I pay.

Value is all that

I get for all
that I give.

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 525 Fig17.2

Dominic Laffy
MKT6B2 Services Marketing

Pricing Strategies When the Customer

Defines Value as Low Price

Value is low price.

Discounting

Odd pricing
Synchro-pricing
Penetration pricing

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 529 Fig17.3

Dominic Laffy
MKT6B2 Services Marketing

Pricing Strategies When the Customer Defines

Value as Everything Wanted in a Service

Value is everything
I want in a service.
Prestige pricing
Skimming pricing

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 532 Fig17.4

Dominic Laffy
MKT6B2 Services Marketing

Pricing Strategies When the Customer

Defines Value as Quality for the Price Paid

Value is the quality I

get for the price I
pay.
Value pricing
Market
segmentation
pricing

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 533 Fig17.5

Dominic Laffy
MKT6B2 Services Marketing

Pricing Strategies When the Customer Defines

Value as All That Is Received for All That Is Given

Value is all that I get

for all that I give.

Price framing
Price bundling
Complementary pricing
Results-based pricing

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 534 Fig17.6

Dominic Laffy
MKT6B2 Services Marketing

Summary of Service Pricing Strategies for

Four Customer Definitions of Value
Value is everything
I want in a service.

Value is low price.

Discounting
Odd pricing
Synchro-pricing
Penetration pricing

Prestige pricing
Skimming pricing

Value is the quality

I get for the price I pay.
Value pricing
Market segmentation
pricing

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 537 Fig17.7

Value is all that I get

for all that I give.

Price framing
Price bundling
Complementary pricing
Results-based pricing

Dominic Laffy
MKT6B2 Services Marketing

The Direct Relationship between

Service and Profits

Service

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 545 Fig18.1

Profits

Dominic Laffy
MKT6B2 Services Marketing

Exercises
1. Which approach to pricing (cost-based, competitionbased or demand based) is the most fair to
customers? Why?
2. It is possible to use all 3 pricing approaches
simultaneously? If yes, describe a service priced this
way
3. For what consumer services do you have reference
prices? What makes these services different from
others for which you lack reference prices?
4. Describe the non-monetary costs involved in

Getting a car-loan, belonging to a health club, having

allergies diagnosed and treated, attending an executive
education class and getting braces

Dominic Laffy
MKT6B2 Services Marketing

Exercises
List 5 services for which you have no reference
price. Imagine you are the service provider for 2
of these, and develop appropriate pricing
strategies for them
Which value definitions do you believe customers will
have, and what type of strategies would be appropriate
given those definitions

Find 3 price lists for services (e.g. restaurant

menu, price list from dry cleaner or hair stylist
etc.)
Identify the pricing base and strategy used in each of
them. How effective is each

Dominic Laffy
MKT6B2 Services Marketing

Offensive Marketing Effects of

Service on Profits

Profits
Service

Market
share
Reputation

Sales

Price
premium

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 548 Fig18.2

Dominic Laffy
MKT6B2 Services Marketing

Defensive Marketing Effects of

Service on Profit

Lower
costs

Service

Customer
retention

Volume of
purchases
Price
premium
Word of
mouth

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 549 Fig18.3

Margins

Profits

Dominic Laffy
MKT6B2 Services Marketing

Perceptions of Service,
Behavioral Intentions, and Profits
Lower
costs

Customer
Retention

Service

Behavioral
Intentions

Volume of
purchases

Margins

Price
premium
Word of
mouth

Profits

Sales

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 554 Fig18.5

Dominic Laffy
MKT6B2 Services Marketing

The Key Drivers of Service Quality,

Customer Retention, and Profits
Service
Attributes

Service
Encounters
Service
encounter

Service
encounter
Service
Quality

Behavioral
Intentions

Customer
Retention

Profits

Service
encounter

Service
encounter

Source: Services Marketing Zeithaml V.A. et al 5th Edition p 558 Fig18.6

Dominic Laffy
MKT6B2 Services Marketing

Service Quality Spells Profits

Lower
costs

Defensive
Marketing

Volume of
purchases

Margins

Price
premium

Service

Customer
Retention

Word of
mouth

Profits

Market
share

Offensive
Marketing

Sales
Reputation
Price
premium

Source: Services Marketing Zeithaml V.A. et al 4th Edition p 559 Fig18.7

Dominic Laffy
MKT6B2 Services Marketing

Sample Measurements for the

Balanced Scorecard
Financial Measures

Customer
Perspective
Service perceptions
Service expectations
Perceived value
Behavioral intentions:
% Loyalty
% Intent to Switch
# Customer Referrals
# Cross Sales
# of Defections

Price Premium
Volume increases
Value of customer
referrals
Value of cross sales
Long-term value of
customer

Innovation and
Learning Perspective
Number of new products
Return on innovation
Employee skills
Time to market
Time spent talking to
customers

Operational
Perspective
Right first time (% hits)
Right on time (% hits)
Responsiveness (% on time)
Transaction time (hours, days)
Throughput time
Reduction in waste
Process quality

Source: Adapted from: R.S. Kaplan and D.P. Norton, The Balanced ScorecardMeasures That Drive Performance, Harvard Business Review, January-February
1992.

Referred to in Services Marketing Zeithaml V.A. et al 5th Edition p 559 Fig18.7

Dominic Laffy
MKT6B2 Services Marketing

Strategy Map - Thorntons

Source : Strategy Maps Kaplan, R.S. & Norton, D.P, Harvard Business School Press, p101
Dominic Laffy
MKT6B2 Services Marketing

Creating a flow of logic fast food example

New hires
Education
Work experience

Supervision
Support
Fairness

Empowerment
Accountability

Selection
Selection&&
Staffing
Staffing

Employee
Employee
Satisfaction
Satisfaction

Customer
Customer
Satisfaction
Satisfaction

Quality
Shopping Experience
Timeliness

Buying
Buying
Behaviour
Behaviour

Frequency
Retention
Referral

Sustained
Sustained
Profitability
Profitability

Each Outlet
Over Time
Better than
Competition

Shareholder
Shareholder
Value
Value

Growth
Earnings
Free Cash Flow

EmployeeEmployeeAdded
AddedValue
Value

Source : adapted from Coming Up Short on nonfinancial performance measurement

Ittner C.D. & Larcker, D.F. Harvard Business Review, Nov 2003, p93
Referred to in Services Marketing Zeithaml V.A. et al 5th Edition p 565 Fig18.7

Dominic Laffy
MKT6B2 Services Marketing