SESSION-32

Pricing of Services

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 The Art of Pricing

• Pricing policy is the last stronghold of

medievalism in modern management…[Pricing]
is still largely intuitive and even mystical in the
sense that the intuition is often the province of
the big boss (Dean, 1947)
• Pricing is approached in Britain like Russian
roulette—to be indulged in mainly by those
contemplating suicide (Chief Executive, 1981)

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Buyer’s Perception of Value

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Unique Differences Associated with
Service Prices

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Cost Considerations

• Service pricing is often not finalized until after provision

– Consumers may not know the exact amount they will be charged
until after the service is performed
• Cost-oriented pricing is more difficult for services
– Cost of goods sold is either a small or nonexistent portion of total
cost
– Labor needs are challenging to forecast accurately in many
service settings
• Many services are typically characterized by a high fixed-
to variable-cost ratio
• Service economies of scale tend to be limited

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Demand Considerations

• Demand for services tends to be more

inelastic
• Cross-price elasticity considerations need
to be examined
• Price discrimination is a viable practice to
manage demand and supply challenges

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Factors Influencing Customer’s Price
Sensitivity

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Criteria for an Effective Price
Segmentation Strategy
1. Different groups of consumers must have different responses to
price
2. The different segments must be identifiable, and a mechanism must
exist to price them differently
3. No opportunity should exist for people in one segment who have
paid a low price to sell their tickets to those in other segments
4. The segment should be large enough to make the exercise
worthwhile
5. The cost of running the price segmentation strategy should not
exceed the incremental revenues obtained
6. The customers should not be confused by the use of different prices

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Customer Considerations

• Price tends to be one of the few cues

available to consumers during prepurchase
• Service customers are more likely to use
price as a cue to quality
• Service consumers tend to be less certain
about reservation prices

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Competitive Considerations

• Comparing prices of competitors is more

difficult for service customers
• Self-service is a viable competitive
alternative

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Profit Considerations

• Price bundling makes the determination

of individual prices in the bundle of
services more complicated
• Price bundling is more effective in a service
context

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Product Considerations

• Compared to the goods sector, there tends to be many

different names for price in the service sector
• Consumers are less able to stockpile by taking advantage
of discount prices
• Product-line pricing tends to be more complicated
– For example, beginner, intermediate, and expert level options for
sports equipment are generally prices at different price points to
reflect the different levels of buyer and seller expertise

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Legal Considerations

• The opportunity for illegal pricing practices

to go undetected is greater for services
than goods
– To consumers, the issue is one of fairness and
dual entitlement

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Satisfaction-Based, Relationship, and Efficiency
Pricing Strategies

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Satisfaction-Based Pricing

• The primary goal is to reduce the amount of perceived

risk associated with the service purchase and appeal to
target markets that value certainty
– Service guarantees are quickly becoming a popular way of
attracting customers
– Benefit-driven pricing: a pricing strategy that charges customers
for services actually used as opposed to overall “membership”
fees
– Flat-rate pricing: a pricing strategy in which the customer pays a
fixed price and the provider assumes the risk of price increases
and overruns

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Relationship Pricing

• The primary objective is to enhance and expand

the firm’s relationship with its targeted consumers
– Long-term contracts: offer prospective customers
incentives for dealing with same provider over a
number of years
– Price bundling: the practice of marketing two or more
services in a single package at a single price
– Mixed bundling: price-bundling technique that allows
consumers to either buy Service A and Service B
together or purchase one service separately

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Efficiency Pricing

• The primary objective is to appeal to

economically minded consumers who are
looking for the best price
– Example: Southwest Airlines

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Adaptive Pricing

• The idea is to vary product attributes to appeal to a

variety of customers and their ideas of value
• Common adaptive-pricing strategies include:
– Altering the product size
– Utilizing new distribution channels (online versus brick and
mortar)
– Requiring purchase minimums
– Price versioning (“good,” “better,” and “best” quality)
– A la carte pricing (unbundled offerings)
– Promotional pricing (two-for-one deals)

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner
 Some Final Thoughts
on Pricing Services
• The price should:
– Be easy for consumers to understand
– Represent value to the customer
– Encourage customer retention and facilitate
the customer’s relationship with the providing
firm
– Reinforce customer trust
– Reduce customer uncertainty

*Slides are based on content of Services Marketing -K.D.Hoffman & J.E.G.Bateson and Services Marketing by V.A.Zeitmal & M.J.Bitner