Hapter: He Ricing of Ervices

Chapter 7
The Pricing of Services
COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning is a trademark used herein under license.
ALL RIGHTS RESERVED.

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).

THE ART OF PRICING
Pricing is approached in Britain like

Russian roulette--to be indulged in mainly
by those contemplating suicide (Chief
Executive, 1981).

Figure 7.1 Buyers Perception of Value
Product value
Service value Total

customer
Personnel value value
Image Value
Buyers perception
of value
Monetary cost
Time cost Total

customer
Energy cost cost
Psychic cost
Source: Philip Kotler, Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.

DEMAND
CONSIDERATIONS
Demand tends to be inelastic

Cross price and income elasticities need to
be examined
Price discrimination is a viable alternative

FACTORS INFLUENCING
CONSUMER PRICE SENSITIVITY
Perceived-substitutes Expenditure effect
Unique value End-benefit effect
Switching costs Shared-cost effect
Comparison effect Fairness effect
Price-quality effect Inventory effect

PRICE SENSITIVITY FACTORS
Perceived Substitute Effect

few search attributes
providers often lack resources and marketing
expertise
limited product mix

Unique Value Effect

conveying uniqueness is difficult
provider may need to educate the market
uniqueness is often short-lived

Switching Costs
higher levels of perceived risk
uncertainty involved in changing providers
consequences associated with a bad outcome

Difficult Comparison Effect

high number of experience attributes
inherent heterogeneity

Price-Quality Effect
price acts as a quality indicator when
consumers:
believe that quality differs among providers
believe that low quality imposes greater
consequences
lack other sources of objective information

Expenditure Effect
amount of expenditure relative to consumer
household income.

End-benefit Effect
the more price sensitive consumers are to the
cost of the end-benefit, the more sensitive they
will be to purchases that contribute to the end-
benefit.
Price bundling adds value to the consumers end-
benefit.

Shared-cost Effect
consumer price sensitivity decreases as the
shared-costs with third parties increase.

Fairness Effect
fairness is typically assessed by comparing the
price to:
previous prices paid for similar services
prices paid for similar services under similar
circumstances
the benefit gained
assessing service fairness is difficult


Inventory Effect
consumers are able to protect themselves from
future price increases by building inventories.

PRICE SENSITIVITY
(CONCLUSIONS)
Consumers of professional services tend to

be less price sensitive.
Need to identify perceptions of key
sensitivity factors across service industries
Key factors may be useful for differentiation
purposes
Providers may reinforce or alter beliefs
pertaining to key factors.

DEMAND
CONSIDERATIONS
Price discrimination is a viable alternative

CRITERIA FOR EFFECTIVE
PRICE DISCRIMINATION
Different groups of consumers must have

different responses to price.
Different segments must be identifiable, and a
mechanism must exist to price them
differently.
Individuals in one segment who have paid a
low price should not be able to pass those
savings on to other segments.

CRITERIA FOR EFFECTIVE
PRICE DISCRIMINATION
The segment should be large enough to make

it worthwhile.
Costs should not exceed the incremental

revenues obtained.
Customers should not be confused.

COST
CONSIDERATIONS
Price is sometimes not know until after the service

has been produced
Cost-oriented pricing is more difficult
activity-based costing breaks down the organization
into a set of activities, and activities into tasks, which
convert materials, labor, and technology into outputs.
High fixed cost to variable cost ratio
Economies of scale tend to be limited

CUSTOMER
CONSIDERATIONS
Price tends to be one of the few search clues

available.
More likely to use price as a quality cue
The relationship between price and information
may be U-shaped.
Consumers are less certain about reservation
prices

COMPETITIVE
CONSIDERATIONS
Comparing prices is more difficult

Self-service is a viable alternative

PRODUCT
CONSIDERATIONS
Many different names for price

Consumers are less able to stockpile by
taking advantage of discount prices
Product-line pricing is more difficult
Less likely to use odd-pricing
Price discounting tends to be less common

LEGAL
CONSIDERATIONS
Opportunity exists to engage in ethical

misconduct and excessively charge
consumers for services.

EMERGING SERVICE PRICING
STRATEGIES
Satisfaction-based pricing
primary goal is to reduce the amount of
perceived risk.
benefit-driven pricing--charges customers for
services actually used as opposed to overall
membership fees.
flat-rate pricing--customer pays a fixed price and
the provider assumes the risk of price increases
and overruns.

STRATEGIES
Relationship Pricing
primary objective is to enhance the firms
relationship with its targeted consumers.
long-term contracts--offers price and nonprice
incentives for dealing with the same provider over a
number of years.
pricing bundling--marketing two or more services as
a single package for a single price.

STRATEGIES
Efficiency Pricing
primary objective is to appeal to economically-
minded consumers by delivering the best and
most cost-effective service for the price.
Cost-leader pricing

SERVICES PRICING:
FINAL THOUGHTS
The price should:

Be easy for customers to understand
Represent value to the customer
Encourage customer retention and facilitate the
customers relationship with the providing firm
Reinforce customer trust
Reduce customer uncertainty

Hapter: He Ricing of Ervices

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Chapter 7

The Pricing of Services

ALL RIGHTS RESERVED.

Pricing policy is the last stronghold of

ALL RIGHTS RESERVED.

Pricing is approached in Britain like

ALL RIGHTS RESERVED.

Service value Total

Time cost Total

ALL RIGHTS RESERVED.

Demand tends to be inelastic

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

Perceived Substitute Effect

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Unique Value Effect

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ALL RIGHTS RESERVED.

Difficult Comparison Effect

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ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

assessing service fairness is difficult

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

Consumers of professional services tend to

ALL RIGHTS RESERVED.

Price discrimination is a viable alternative

ALL RIGHTS RESERVED.

Different groups of consumers must have

ALL RIGHTS RESERVED.

The segment should be large enough to make

Costs should not exceed the incremental

Customers should not be confused.

ALL RIGHTS RESERVED.

Price is sometimes not know until after the service

ALL RIGHTS RESERVED.

Price tends to be one of the few search clues

ALL RIGHTS RESERVED.

Comparing prices is more difficult

ALL RIGHTS RESERVED.

Many different names for price

ALL RIGHTS RESERVED.

Opportunity exists to engage in ethical

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

ALL RIGHTS RESERVED.

The price should:

ALL RIGHTS RESERVED.

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