Three Basic Price Structures and Difficulties Associated with Usage for Services

PROBLEMS:
1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value

PROBLEMS:
1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value

PROBLEMS:
1. Monetary price must be adjusted to reflect the value of non-monetary costs 2. Information on service costs less available to customers, hence price may not be a central factor

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