Pricing of Services

Submitted To: Submitted By:
MsVaishali Tarun Kumar

Lecturer, MBA Deptt. 01320803909
• Describe how consumers relate value
and price.
• Understand the special considerations
of service pricing as they relate to
demand, cost, customer, competitor,
profit, product and legal considerations.
• Discuss the circumstances under which
price segmentation is most effective.
• Explain satisfaction-based, relationship,
and efficiency approaches to pricing.
Opening Vignette: Pricing Woes
Continue for US Airlines
The airline
industry is
expected to
lose at least $2
billion in 2005.
Who will be left
in the end?
 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 Buyer’s Perception
of Value
Product value
Service value Total

customer
Personnel value value
Image Value
Buyer’s 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), 199, p. 37.
Demand Considerations
 Demand 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
Factors Influencing
Consumer Price Sensitivity
Perceived
Perceived
Substitutes
Substitutes
Inventory
InventoryEffect
Effect Unique
UniqueValue
Value
Fairness
FairnessEffect Switching
Effect SwitchingCosts
Costs
Price
Price sensitivity
sensitivity
decreases
decreases as
as
Shared-costs
Shared-costsEffect
Effect Comparison
ComparisonEffect
Effect
End-benefit
End-benefitEffect
Effect Price-Quality
Price-QualityEffect
Effect
Expenditure
ExpenditureEffect
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 consumer’s 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
1. Different groups of consumers must have
different responses to price.
2. Different segments must be identifiable,

and a mechanism must exist to price them
differently.
3. No opportunity should exist for individuals
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 it worthwhile.
5. Costs should not exceed the incremental

revenues obtained.
6. 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
 Consumers are less certain about

reservation prices
Competitive Considerations
 Comparing prices is more difficult
 Self-service is a viable alternative

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
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
 Home sellers have
three levels of service
(6, 7, or 8%)
Legal Considerations
 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
Emerging Service Pricing
Strategies
 Satisfaction-based pricing
 primary goal is to reduce the amount of perceived
risk
 service guarantees
 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 firm’s
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.
 Example: Southwest Airlines
Services Pricing: Final Thoughts
 The price should:

 Be easy for customers 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

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Submitted To: Submitted By:

MsVaishali Tarun Kumar

 Pricing is approached in Britain like Russian

Service value Total

Time cost Total

 Demand tends to be more inelastic

 Unique Value Effect

 Difficult Comparison Effect

2. Different segments must be identifiable,

4. The segment should be large enough to

5. Costs should not exceed the incremental

6. Customers should not be confused.

 Cost-oriented pricing is more difficult

 High fixed cost to variable cost ratio

 Price tends to be one of the few search clues

 More likely to use price as a quality cue

 Consumers are less certain about

 Comparing prices is more difficult

 Self-service is a viable alternative

 Price bundling is more

 Opportunity for illegal pricing practices to go

 To consumers, the issue is one of fairness and

 The price should:

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