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What Makes Service Pricing Strategy Different (and Difficult)?
• No ownership of services--hard for firms to calculate financial costs of creating an intangible performance • Variability of inputs and outputs--how can firms define a “unit of service” and establish basis for pricing? • Many services hard for customers to evaluate--what are they getting in return for their money? • Importance of time factor--same service may have more value to customers when delivered faster • Price is key signal of quality
Three Basic Price Structures and Difficulties Associated with Usage for Services
1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value
1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value
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
fundamental reason being they do not know themselves what the service will involve until the process of service delivery unfolds .Why Pricing of Services is Critical? • Customer knowledge of service price – a reference price is a price point in memory for a good or a service • High degree of variability often exists across providers of services – not every physician defines a checkup the same way • Providers are unwilling to estimate prices in advance – legal service providers.
customer must drive to or call individual outlets • Price invisibility – particularly in financial services. most customers know about only the rate of return and not the costs they pay in form of fund and insurance fees .• Individual customer needs vary – your haircut fro the same stylist may cost you differently • Comparison of prices becomes difficult unlike goods where the product range is displayed for comparison – like to compare dry cleaning prices.
if service hours do not coincide with customer’s available time – Psychological costs – fear of not understanding (education). fear of results (surgery) . fear of rejection (bank loan). Like: – Time cost since most services require direct participation of the consumer and thus their real time – Search costs .the effort invested to identify and select among services you desire since prices for services are rarely displayed in shelves an each service establishment offers only one brand of service (except brokers & agents) – Convenience costs – like customers have to travel to the service.Role of Non-monetary Costs • Demand is not just a function of monetary price but is influenced by other costs as well.
Price as an Indicator of Service Quality • Customers prefer cues like company reputation. level of advertising to access the quality • In other situations when quality is hard to detect or price varies a great deal within a class of services. prices must be set with care to convey the appropriate service quality – Too low prices. consumers may believe that price is the best indicator of quality • In case of high risk services like medical treatment.difficult to match in service delivery .inaccurate inferences – Too high prices. customer looks price as a surrogate for quality • Thus in addition to cover the cost and match competitors price.
The Pricing Tripod Pricing Strategy Competition Costs Value to customer .
or floor. the price can be set . within the floor-to-ceiling range. for a specific service offering • Customer’s perceived value of the offering sets a ceiling on the price • The price charged by competitors determines where.The Pricing Tripod • The tripod explains the foundation underlying the pricing strategy • The cost that a firm needs to recover usually impose a minimum price.
advertising.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. 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 .
making monetary price not as salient indicator to quality . prices are based on what customers will pay for the services provided Challenges: Monetary price must be adjusted to reflected the value of nonmonetary costs Information on service costs may be less available to customers.Value/ Demand-Based Pricing Relate price to value perceived by customer i.e.
3. 1. time. a carpet on sale Value is everything I want in a service – emphasize the benefits rather price like. effort) 4. . for a business travel. best education for a MBA 2. Value has 4 meanings: Value is low price – equate value with low price like. Value is the quality I get for the price I pay – trade off between the money they give up and the quality they receive like. lowest price for a quality brand Value is all that I get for all that I give – consider all benefits and sacrifice components (money.
Four Customer Definitions of Value “Value is Low Price” “Value is Everything I Want in a Service” “Value is the Quality I Get for the Price I Pay” “Value is All that I Get for All that I Give” .
Price Has Many Names • • • • Rent Tuition Fare Monthly payment • • • • Fee Dues Interest Donation .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Survival • Maximize current profits • Maximize market share – Penetration strategy • Market skimming – Skimming strategy • Product quality leaders • Partial cost recovery .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Understand factors that affect price sensitivity • Estimate demand curves • Understand price elasticity of demand – Elasticity – Inelasticty .
or exclusiveness • Buyers cannot store the product . prestige.Marketing Strategies Conditions Under Which Consumers are Less Price Sensitive: • Product is more distinctive • Buyers are less aware of substitutes • Buyers cannot easily compare quality of substitutes • The expenditure is a lower part of buyer’s total income • The expenditure is small compared to the total cost • Part of the cost is borne by another party • The product is used with assets previously bought • The product is assumed to have more quality.
Marketing Strategies Conditions Under Which Demand is Less Elastic: • There are few or no substitutes • Buyers do not readily notice the higher price • Buyers are slow to change their buying habits and search for lower prices • Buyers think higher prices are justified .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Types of costs and levels of production must be considered • Accumulated production leads to cost reduction via the experience curve • Differentiated marketing offers create different cost levels .
Setting the Price • Key Pricing Terms: – Fixed costs: do not vary directly with changes in level of production – Variable costs: vary with production – Total costs: sum of fixed and variable costs a given level of production – Average cost: cost per unit at a given level of production .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Firms must analyze the competition with respect to: – Costs – Prices – Possible price reactions • Pricing decisions are also influenced by quality of offering relative to competition .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Price-setting begins with the three “C’s” • Select method: – – – – – – – Markup pricing Target-return pricing Perceived-value pricing Value pricing Going-rate pricing Auction-type pricing Group pricing .
Setting the Price Pricing Procedure • • • • • • Select pricing objective Determine demand Estimate costs Analyze competition Select pricing method Select final price • Requires consideration of additional factors: – Psychological pricing – Gain-and-risk-sharing pricing – Influence of other marketing mix variables – Company pricing policies – Impact of price on other parties .
Adapting the Price • Geographical Pricing – Barter – Compensation deal – Buyback arrangement – Offset .
Adapting the Price Price Discounts and Allowances: • Cash discounts • Quantity discounts • Trade-in allowances • Functional discounts • Seasonal discounts • Promotion allowances .
Adapting the Price Promotional Pricing Tactics: • Loss-leader pricing • Special-event pricing • Cash rebates • Low-interest financing • Longer payment terms • Warranties and service contracts • Psychological discounting .
Adapting the Price Discriminatory Pricing Tactics: • Customer segment • Channel pricing pricing • Location pricing • Product-form • Time pricing pricing • Image pricing .
Adapting the Price • Price discrimination works when: – Market segments show different intensities of demand – Consumers in lower-price segments can not resell to higher-price segments – Competitors can not undersell the firm in higherprice segments – Cost of segmenting and policing the market does not exceed extra revenue .
Adapting the Price Product-Mix Pricing Tactics: • Product-line pricing • Two-part pricing • Optional-feature • By-product pricing pricing • Product-bundle • Captive-product pricing pricing .
reduce perceived quality – Introduce an economy model . selectively prune customers – Raise price and perceived quality – Partially cut price and raise quality – Fully cut price. maintain perceived quality – Maintain price.Initiating and Responding to Price Changes • Strategic Options Include: – Maintain price and perceived quality.
Initiating and Responding to Price Changes Key Considerations • • • • Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes • Circumstances leading to price cuts: – Excess plant capacity – Declining market share – Attempt to dominate the market via lower costs • Price cutting traps: – Price/quality perceptions – Low prices don’t create market loyalty – Competition may match or beat price cuts .
Initiating and Responding to Price Changes Key Considerations • • • • Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes • Circumstances leading to price increases: – Cost inflation – Overdemand • Methods of dealing with overdemand: – – – – Delayed quotation pricing Escalator clauses Unbundling Reduction of discounts .
Initiating and Responding to Price Changes Key Considerations • • • • Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes • Firms must monitor both customer and competitor reactions • Competitor reactions are common when: – Few firms offer the product – The product is homogeneous – Buyers are highly informed .
Initiating and Responding to Price Changes Key Considerations • • • • Initiating price cuts Initiating price increases Reactions to price changes Responding to competitor’s price changes • The degree of product homogeneity affects how firms respond to price cuts initiated by the competition • Market leaders can respond to aggressive price cutting by smaller competitors in several ways .
add value • Increase price. improve quality • Launch a low-price fighter line Reduce price .Initiating and Responding to Price Changes Market Leader Responses to Competitor Initiated Price Cuts: • Maintain price and profit margin • Maintain price.