The Pricing TripodCost-Based Pricing: Traditional vs. Activity-Based Costing
Traditional Costing ApproachLabour and infrastructure costs are considered ﬁxed costsService ﬁrms have higher ratio of ﬁxed to variable costs found inmanufacturingCost reduction decisions often cut these costs which leads toreduced service levels and unhappy customersActivity-Based Costing (ABC)Sets of delivery activities and related costsFirms can pinpoint proﬁtability of different services, channels,etc.
When customers don't see a difference between competitiveofferings, they choose the cheapestPrice competition is reduced when...Non-price related costs of using competing alternatives are highPersonal relationships matterSwitching costs are highTime and location speciﬁcity reduce choice
Value-Based Pricing - Understanding Net Value
Value exchange will not take place unless customer sees positivenet value in transactionNet Value = Perceived Beneﬁts to Customer (Gross Value) - AllPerceived Outlays (Money, Time, Effort)Monetary price is not only perceived outlay in purchasing, using aserviceWhen looking at competing services, customers are mainlycomparing relative net values
Reduce Related Monetary and Non-Monetary Costs
Incremental Financial Outlays