Slide 05

Services Marketing

Pricing Services
Pricing in service

The pricing of services is complicated!

Different terms to describe the service prices

(e.g. tuition, fees, commission, interest & service
charge, premiums, tolls etc.).

Consumers may feel service pricing risky and

unethical!

Objectives for Establishing Prices

• Revenue and Profit Objectives
Gain Profit
Cover Costs
• Patronage and User Base-Related Objectives
Build Demand
Develop a User Base
• Strategy-Related Objectives
Support Positioning Strategy
Support Competitive Strategy
Pricing Strategy Foundations

Pricing Strategies
Cost-Based Pricing

Determining the financial costs of creating a

process or intangible real-time performance
for a customer is much harder than it is to
identify the labor, materials, machine time,
storage, and shipping costs associated with
producing and distributing a physical good.

Many service organizations have a much higher

ratio of fixed costs to variable costs than is
typically found in manufacturing firms.
Pricing Strategies
Cost-Based Pricing

Determining the financial costs of creating a

process or intangible real-time performance
for a customer is much harder than it is to
identify the labor, materials, machine time,
storage, and shipping costs associated with
producing and distributing a physical good.

Many service organizations have a much higher

ratio of fixed costs to variable costs than is
typically found in manufacturing firms.

Pricing Strategies
Cost-Based Pricing

• Establishing the Costs of Providing Service

• Activity-Based Costing (ABC)

- ABC links resources needed to perform an activity.

- A set of activities that comprises the processes

needed to create and deliver a particular service is
then combined.

- Resource expenses are linked to the variety and

complexity of services produced and not just on
physical volume.
Pricing Strategies
Cost-Based Pricing

• Pricing Implications of Cost Analysis

To make a profit, a firm must set its price high

enough to recover the full costs of producing
and marketing the service and add a sufficient
margin to yield the desired profit at the
predicted sales volume.

Pricing Strategies
Cost-Based Pricing

• Fixed costs (e.g. rent, depreciation, utilities, taxes, insurance,

salaries and wages for managers and long-term employees,
security, and interest payments)

• Variable costs (e.g. economic costs associated with serving an

additional customer)

• Semi-variable costs (e.g. adding an extra flight or hiring a

part-time employee on busy weekends).

• Contribution (difference between the variable cost of selling

an extra unit of service and the money received from the
buyer of that service).
Pricing Strategies
Value-Based Pricing

Marketers need to understand how

customers perceive service value in order to
set an appropriate price.

Value can be interpreted in different way!

• Value is a low price

• Value is whatever I want in a product
• Value is the quality I get for the price I pay
• Value is what I get for what I give

Pricing Strategies
Value-Based Pricing

• Managing the Perception of Value

The invisibility of back-stage facilities and

labor makes it hard for customers to see
what they’re getting for their money.

To manage the perception of value,

effective communications and even
personal explanations are needed to help
customers understand the value they
receive.
Pricing Strategies
Value-Based Pricing

• Reducing Related Monetary and Non-

monetary Costs

To customer’s price charged by a supplier is

only part of the costs involved in buying
and using a service. There are other costs of
service:

- related monetary, and

- non-monetary costs

Pricing Strategies
Value-Based Pricing

• Reducing Related Monetary and Non-

monetary Costs

To customer’s price charged by a supplier is

only part of the costs involved in buying and
using a service. There are other costs of
service:

- related monetary, and

- non-monetary costs
Pricing Strategies
Value-Based Pricing

• Reducing Related Monetary and Non-

monetary Costs

Related Monetary Costs:

Financial costs in searching for, purchasing,

and using the service, above and beyond
the purchase price paid to the supplier.

Pricing Strategies
Value-Based Pricing

• Reducing Related Monetary and Non-

monetary Costs

Non-monetary Costs:
- Time costs
- Physical costs
- Psychological costs (mental effort, perceived risk
and anxiety, cognitive dissonance, feelings of
inadequacy and fear).
- Sensory costs (unpleasant sensations affecting
any of the five senses, e.g. noise, unpleasant
smells, drafts, excessive heat or cold).
Pricing Strategies
Value-Based Pricing
• Reducing Related Monetary
and Non-monetary Costs
A firm can create competitive
advantage by minimizing those
non-monetary and related
monetary costs, and thereby
increase consumer value.
• Working with operations experts to reduce the
time required.
• Minimizing unwanted psychological costs (e.g.
eliminating or redesigning unpleasant or
inconvenient procedures, educating customers
on what to expect, and retraining staff)
• Eliminating or minimizing unwanted physical
effort.
• Decreasing unpleasant sensory costs (e.g.
creating attractive visual environments,
reducing noise, installing comfortable furniture
and equipment, and curtailing offensive smells).
• Suggesting ways in which to reduce associated
monetary costs (e.g. discount, online/mail
delivery).

Depending on the customer’s priorities, non-monetary costs

may be as important, or even more, than the price charged
by the service provider.
Pricing Strategies
Competition-based Pricing

When customers see little or no

difference between competing offerings,
they may just choose what they perceive
to be the cheapest.

• Price leadership

Pricing Strategies
Competition-based Pricing

Price Competition Intensifiers:

• Increasing number of competitors.

• Increasing number of substituting offers.
• Wider distribution of competitor and/or
substitution offers.
• An increasing surplus capacity in the
industry.
Pricing Strategies
Competition-based Pricing

Price Competition Inhibitors:

• Non-price related costs of using

competing alternatives are high

• Personal relationships matter

• Switching costs are high

• Services are often time and location

specific

Class Practice:

From the customer perspective, what serves to

define value in the following services: (a) a hair
salon, (b) a legal firm specializing in business.
Putting service pricing into practice

Service pricing is multi-faceted.

Critical considerations:

Putting service pricing into practice

Service pricing is multi-faceted.

Critical considerations:
Putting service pricing into practice
Service pricing is multi-faceted.

Critical considerations:

Putting service pricing into practice

Service pricing is multi-faceted.

Critical considerations:
Putting service pricing into practice
Service pricing is multi-faceted.

Critical considerations:

Thank you