Service Marketing TARUN KUMAR

19001703062

Explain three basic marketing pricing structures and associated

challenges in case of services. Also explain pricing strategies
when customer define value as low price, value as everything
wanted in services, value as quality for the price paid and value
as all that is received for all that is given.
In this short guide we approach the three major and most common
pricing strategies:

1. Cost-Based Pricing.
2. Value-Based Pricing.
3. Competition-Based Pricing.

 
Cost-based pricing
What about costs?

Cost-based pricing uses production costs as its basis for pricing and, to
this base cost, a profit level must be added in order to come up with the
product price.Cost-based pricing companies use their costs to find a
price floor and a price ceiling. The floor and the ceiling are the minimum
and maximum prices for a specific product or service – the price range.
If it happens that the competitive price is under the price floor,
companies normally price at the floor or try to lower their costs to lower
the floor.

“The moment you make a mistake in pricing, you’re eating into your rep
utation or your profits.”– Katharine Paine

The ideal thing to do, though, would be setting a price in between the
floor and the ceiling. Many companies mass-producing goods such as
textiles, food and building materials use this pricing technique.Sounds
easy, right? This traditional method ensures simple calculations, total
profit for the business and it also accounts for unknowns. Nevertheless,
this sort of technique comes with disadvantages too.Cost-based pricing
is considered to be a broken model by many marketing experts:
knowing costs is vital to get to understand your company’s profitability,
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but problems come when you solely base your price on costs.In fact,
cost-based pricing takes into account neither prices affected by
customer demand nor performance of competitors. It is true that if a
product is in short supply, customers may be willing to pay more for it,
but – on the other hand – if demand is low, they will be expecting a
discount. Concerning competition, cost-based pricing is definitely not
the right technique for you if you are in a very competitive business
segment because competitors would probably end up entering the
market with lower prices.

Value-based pricing
What your customers think

Value-based pricing, also known as customer-based pricing, is a pricing

concept which is defined as follows:  Value-based pricing is the setting
of a product’s price based on the benefits it provides to consumers.  In
other words, it is about finding the price that your customers are willing
to pay.

Pricing is actually pretty simple…Customers will not pay literally a penn
y more than the true value of the product.”– Ron Johnson

Customers change their buying habits according to product price, so

you need to find out about your target customers, their perspective on
the product and their reactions towards several prices or even price
changes.The questions you need to ask yourself when thinking about
your target customer are:

 “Does the customer identify price with quality?”

 “Does the customer consider my product is worth the money they
pay for it?”
 “What does the customer care more about: the price or the
prestige?”
 “What is the customer prepared to pay for the product?”
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Companies using value-based pricing consider the value of their

product and their customers’ perceptions of value as the key to pricing,
instead of production costs. They determine how much money or value
their product will generate for the customer – a value which translates
into benefits such as increased efficiency, happiness or stability. By
using this type of pricing technique, you may aim at using price to
support product image, increase product sales and create product
bundles in order to reduce inventory or to attract customers.This pricing
technique should be applied by focusing on a single segment,
comparing your product with the next best alternative, getting to know
what makes your product unique and understanding how much that
differentiation is worth.As you can see, value-based pricing comes with
lots of advantages when it is applied in the right way. Be careful,
though! By using this strategy you may end up ignoring product costs
and forgetting about your competitors.

Competition-based pricing
What are competitors doing?

Competition-based pricing, also known as competitive pricing, consists

in setting the price of a product based on what the competition is
charging. This pricing method is normally used by businesses selling
similar products, since services can vary from business to business,
while the attributes of a product remain similar.In highly competitive
markets, consumers judge products with similar features by the prices
that rival businesses charge for them. Consequently, competitors may
need to price their products lower or risk losing potential sales.

“Global competition is about winners and losers.”– David Korten

Competitive pricing tends to be implemented when a product’s price has

reached stability. This happens when a product has been on the market
for a long time and there are many alternatives to it. Therefore, it is really
important for competition-based pricing companies to understand what
they are selling, as well as the type of rivals they are competing with and
how they operate in the marketplace.One of the greatest advantages of
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this pricing technique is that you focus on your industry and your
competitors, and that makes it possible for companies to keep an eye on
existing and emerging competition. The more you know about your
rivals and what they are doing, the better you can decide how to manage
your business.What is more, it is not just the price you are comparing,
but also the products themselves. If your product has a unique or
innovative feature and, consequently, a greater value, you may be able
to increase your price.Nevertheless, it is important for companies to
keep their production costs in mind, as well as managing the time they
spend monitoring competitors and the prices set by them. With the
expansion of eCommerce and Big Data, this last monitoring factor can
be seen as a downside if it is not carried out properly.