Pricing of Services

7/25/2019 BBA 305 Services Marketing

Lecture Outline

• Introduction
• Service pricing process
• Price structures
• Pricing strategies- based on value definition
• Service vs goods pricing
• Types of pricing strategies

7/25/2019 BBA 305 Services Marketing

 Introduction
• Pricing a service can be trickier than pricing a product, which
tends to be led by unit cost. Getting it right means valuing your
time and expertise, and accurately weighing up customer
perceptions, as Afsheen Latif discover
• There are many reasons why you might want to review your
service prices - perhaps you have earned more qualifications or an
official accreditation; maybe your overheads have increased, or
you want to fund expansion of your business. Whichever it is, plan
carefully before you settle on a new price for your offering.

7/25/2019 BBA 305 Services Marketing

Service Pricing Process
1. Identifying the benefits
2. Research your market
3. Calculate your costs
4. Gather feedback on your prices
5. Set a price

7/25/2019 BBA 305 Services Marketing

 1. Identify the benefits

You should start by identifying the benefits your service offers to customers, and
attribute a value to each of those benefits.

7/25/2019 BBA 305 Services Marketing

 2. Research your market

• The next step is to conduct some simple market research. You

might look online or in your local directory to find out who
you are competing with, what they offer and for how much.
• If you find that your current or projected prices are higher
than that charged by your competitors, you risk losing custom
to your rivals. This does not mean you should slash your
prices, however - set them too low and customers might think
that your service is inferior.

7/25/2019 BBA 305 Services Marketing

3. Calculate your costs
• You then need to understand what it costs you to provide your
service to customers. Calculate your direct and indirect costs
when supplying your services, including labour, training costs,
overheads and additionals such as marketing. You will need to
decide to what extent these costs should be reflected in your
pricing.
• There are two basic pricing models to work from: cost-plus
pricing, which involves adding a mark-up to your break-even
costs; and value-based pricing, which takes into account the
value of your service to your customers.
• A value-based price reflects what a customer is willing to pay.
You might have built up loyal custom, offer a higher quality
7
service or be perceived to be better than your rivals.

7/25/2019 BBA 305 Services Marketing

4. Gather feedback on your prices
• To get a sense of the market value of the service you provide,
ask your customers what they are willing to pay, and why.
Who provides the best service in your area? What do
customers expect for their money? How much do they value
qualifications and experience?
• Get feedback on your own service standards, too, to see how
you compare with the market.

The best time to gather feedback on your service is

immediately after you've provided it, while it is fresh in
peoples' minds. A good, simple questionnaire works well. It is
also possible to carry out simple surveys online. Customers
may be more inclined to respond in an honest and open way
to an online survey due to the anonymity it offers. 8

7/25/2019 BBA 305 Services Marketing

5. Set a price
• Once you have assessed the value of your offer, you can put a price
on it. You are likely to find, however, that customers will tolerate a
price rise driven by inflation or interest rates, but not if it seems to
come out of the blue.
• Consider whether it's worth offering extra value at the time of a
price increase, so customers don't feel like they are being conned.
You could also consider trialling your price changes to see how they
are received.
• You should aim to review your pricing every six months. That way
you can keep on top of market changes and amend prices to reflect
your costs and changes within your marketplace. This will help avoid
the situation where you are faced with having to make massive price
hikes because your prices haven't been reviewed for ages.
It's also important to have some kind of pricing plan and strategy, 9
and your pricing should be consistent with this.

7/25/2019 BBA 305 Services Marketing

 What Do Customers Know about the Prices of
Services?

Pet Sitter?
Wedding
Advisor?

Nutritionist? Braces?

10

7/25/2019 BBA 305 Services Marketing

Customers Will Trade Money for Other
Service Costs

= or or

Time Effort Psychic Costs

11

7/25/2019 BBA 305 Services Marketing

 Three Basic Price Structures and
Difficulties Associated with Usage for Services

PROBLEMS:
PROBLEMS: 1. Costs difficult to trace
1. Small firms may charge too 2. Labor more difficult to
little to be viable price than materials
2. Heterogeneity of services 3.Costs may not equal
limits comparability value
3. Prices may not
reflect customer
value

PROBLEMS:
1. Monetary price must be adjusted to reflect 12
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor

7/25/2019 BBA 305 Services Marketing

 Four Customer Definitions of Value

“Value is Everything
“Value is Low Price”
I Want in a Service”

“Value is the “Value is All that

Quality I Get for I Get for All
the Price I Pay” that I Give”
13

7/25/2019 BBA 305 Services Marketing

 Pricing Strategies – based of value
definition
1. When the Customer Defines Value as Low Price

“Value is Low Price”

 Discounting
 Odd Pricing
 Synchro-pricing
 Penetration Pricing

14

7/25/2019 BBA 305 Services Marketing

 2. When the Customer Defines Value as
Everything Wanted in a Service

“Value is Everything
I Want in a Service”

 Prestige Pricing
 Skimming Pricing

15

7/25/2019 BBA 305 Services Marketing

 3. 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

16

7/25/2019 BBA 305 Services Marketing

 4. 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
17

7/25/2019 BBA 305 Services Marketing

 Summary of Service Pricing Strategies
for Four Customer Definitions of Value

“Value is Low Price” “Value is Everything

I Want in a Service”
 Discounting
 Prestige Pricing
 Odd Pricing
 Skimming Pricing
 Synchro-pricing
 Penetration Pricing

“Value is the Quality “Value is All that

I Get for the Price I Pay” I Get for All that I
Give”
 Value Pricing  Price Framing
 Market Segmentation  Price Bundling
Pricing  Complementary 15
18
Pricing
 Results-based Pricing

7/25/2019 BBA 305 Services Marketing

 Difference between pricing for Services & Goods

• Limited or inaccurate reference point of

service

• Monetary price is only one of the prices

(Time cost, Search cost, Convenience cost)
• Price is a good indicator of quality of
Service

19

7/25/2019 BBA 305 Services Marketing

 Pricing Strategy
It is a strategic tool that organizations use to differentiate their
products from competitors and thereby gain the competitive edge
to capture the market

STEPS in designing the PRICING STRATEGY

Develop marketing strategy - perform marketing analysis,

segmentation, targeting, and positioning.
Make marketing mix decisions - define the service, distribution,
and promotional tactics.
Estimate the demand curve - understand how quantity demanded
varies with price.
Calculate cost - fixed and variable costs associated with the service
Understand environmental factors - evaluate likely competitor
actions, understand legal constraints, etc
Set pricing objectives - for example, profit maximization, revenue
maximization, or price stabilization (status quo)
Determine pricing - using information collected in the above steps, 20
select a pricing method, develop the pricing structure, and define
discounts

7/25/2019 BBA 305 Services Marketing

1. Cost Based Pricing
• Price = Direct Cost + Overhead Cost + Margin

• Direct Cost = Material + labour used to produce the

service

• Overhead costs are apart from the fixed cost

Used in Services like Advertising , Contracting , 21

etc.

7/25/2019 BBA 305 Services Marketing

2. Establishing the Cost of Service
• In complex product lines – like retail
banking products, Activity Based
Costing is used to determine the
price.

• Cost is not related to value, which is

determined by the market and
22
customer acceptance.

7/25/2019 BBA 305 Services Marketing

3. Fee for Service
• Cost of the time involved in
providing the service.

• Eg. Professional services where

charges are per hour like
consultants, lawyers psychologists
etc. 23

7/25/2019 BBA 305 Services Marketing

4. Competition Based pricing
• This approach is based on using the competitors’
price as the point of reference
Eg: Fitness clubs, Driving classes, Computer classes etc.
• When services are standard across providers.
• In oligopolies where there are few large service providers :
Airlines
• Price signaling
• Going-rate Pricing

24

7/25/2019 BBA 305 Services Marketing

 5. Price Signaling
• Found in markets where there are a number of competitors.
If any one company offers a lower cost advantage others
immediately match the price. Eg. Airlines.
• In this type of pricing strategy the charges offered are the
ones that are prevalent in the market for the same type of
service. Eg.Tourist bus services, Car hires etc.

25

7/25/2019 BBA 305 Services Marketing

6. Demand Based pricing
• Unlike in cost based and competition based
pricing, demand based pricing is customer
focused and not company or market focused.
• This type of pricing is fixed keeping in mind what
the customers are likely to pay for the perceived
value offered by the service.
• For the determination of demand based pricing
non monetary costs also have to be considered,
as these contribute to the perception of value.
26

7/25/2019 BBA 305 Services Marketing

 Pricing Strategies - Exercise

Place pricing strategies onto

the correct section of the
matrix :
• Wall-Mart launch a new
range of own-label soups.
• A cable TV provider moves
into a new area and needs to
achieve a market share.
• Holiday Inns try to fill hotels
during winter weekends.
• Kingfisher launching funliners
• Burger King introduces new
range of value meals.
• CunardCruise launched two
new crew ships
27

July 5, 2018 Service Marketing MS 217 32

7/25/2019 BBA 305 Services Marketing

 28

7/25/2019 BBA 305 Services Marketing