Services Marketing - Pricing Services

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Services Marketing
Chapter – 9
Pricing Of Services
Introduction
Pricing or Price is the key element in the traditional marketing mix (the 4Ps) and also the enhanced marketing mix (the 7 Ps). This is the element which earns revenue. This is highly critical because this is the strategy which can make or mar the business.
The firms must make it both ways –the price must
(1) get profits for the firm, and
(2) give value to its customers.
Names of Service Pricing
Pricing for goods is easy and straight forward, while for services it is complicated, may be controlled by several authorities, varies with time, place, people, etc.
For goods the price has a single name “PRICE”, but for services it has several names like :
Names of Service Prices
What Makes Service Pricing Different?
No Ownership of Services
Higher Ratio of Fixed Costs to Variable Costs
Variability of Both Inputs and Outputs.
Many Services Are Hard to Evaluate

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Services Marketing - Pricing Services

  1. 1. Services Marketing Pricing Of Services By Himansu S M
  2. 2. Introduction • Pricing or Price is the key element in the traditional marketing mix (the 4Ps) and also the enhanced marketing mix (the 7 Ps). This is the element which earns revenue. This is highly critical because this is the strategy which can make or mar the business. • The firms must make it both ways –the price must • (1) get profits for the firm, and • (2) give value to its customers. 214/08/2013 Himansu S M
  3. 3. Names of Service Pricing • Pricing for goods is easy and straight forward, while for services it is complicated, may be controlled by several authorities, varies with time, place, people, etc. • For goods the price has a single name “PRICE”, but for services it has several names like : 314/08/2013 Himansu S M
  4. 4. Names of Service Prices Allowance Assessment Bribe Brokerage Commission Compensation Consideration Contribution Coupon Rate Cut Donation Dowry Expenses Fare Fees Honorarium Interest Package Premium Rate Recharge Remuneration Rent Retainer Fee Salary Service Charge Subscription Tariff Taxes Ticket Tip Token Toll Tuition Fee Wages etc. 414/08/2013 Himansu S M
  5. 5. WHAT MAKES SERVICE PRICING DIFFERENT? 1. No Ownership of Services 2. Higher Ratio of Fixed Costs to Variable Costs 3. Variability of Both Inputs and Outputs. 4. Many Services Are Hard to Evaluate 514/08/2013 Himansu S M
  6. 6. No Ownership of Services • It's usually harder for managers to calculate the financial costs involved in creating an intangible performance for a customer than it is to identify the labour, materials, machine time, storage, and shipping costs associated with producing a physical good. 614/08/2013 Himansu S M
  7. 7. Higher Ratio of Fixed Costs to Variable Costs • Because of the labour and infrastructure needed to create performances, many service organisations have a much higher ratio of fixed costs to variable costs than is found in manufacturing firms. Service businesses with high fixed costs 714/08/2013 Himansu S M
  8. 8. Higher Ratio of Fixed Costs to Variable Costs • an expensive physical facility (e.g., a hotel, a hospital, a university, or a theatre), or a fleet of vehicles (e.g., an airline, a bus company, or a trucking company), • or a network dependent on company- owned infrastructure (e.g., a telecommunications company, an Internet provider, a railroad, or a gas pipeline). • While the fixed costs may be high for such businesses, the variable costs for814/08/2013 Himansu S M
  9. 9. Variability of Both Inputs and Outputs. • It's not always easy to define a unit of service, raising questions as to what should be the basis for service pricing. • And seemingly similar units of service may not cost the same to produce, nor may they be of equal value to all customers. 914/08/2013 Himansu S M
  10. 10. Many Services Are Hard to Evaluate • The intangibility of service performances and the invisibility of the backstage facilities and labour make it harder for customers to know what they are getting for their money than when they purchase any physical goods. 1014/08/2013 Himansu S M
  11. 11. KEY CHARACTERISTICS OF PRICING IN SERVICES : The following are the different perceptions in the minds of customers regarding the price of a service : 1. Price Is A Measure Of Quality In Services : 2. Non-Monetary Costs and Prices : 1114/08/2013 Himansu S M
  12. 12. Price Is A Measure Of Quality In Services : • The price has a direct relationship with the quality. • It is the most prominent where the levels of the same types of service are differentiated by price like, air tickets, rail tickets. • It’s the least prominent between two service providers offering the same types of services in different times, at different places, for different people, with different contents. 1214/08/2013 Himansu S M
  13. 13. Price Is A Measure Of Quality In Services : • Thus on the whole, the customers take the pricing as a thumb rule or yardstick for quality and content of services. • Price is an attraction and a repellent simultaneously. Because in the absence of anything visible or tangible, the price is the only indicator. So pricing must be done 1314/08/2013 Himansu S M
  14. 14. Non-Monetary Costs and Prices : • More often, the customers incur several non-monetary costs while consuming a service. Thus demand is function of not only monetary price but also non-monetary prices. These can be the following : • Time costs • Search costs (Physical Costs) • Convenience costs (Sensory Costs) • Psychological costs 1414/08/2013 Himansu S M
  15. 15. Defining Total User Costs 1514/08/2013 Himansu S M
  16. 16. Time costs • Most services requires direct involvement of the consumers, which consumes real time, and this includes the waiting time too. Today virtually all services require spending of time to consume services. Assuming two services having same monetary price, but having say different waiting periods are different in total / overall pricing. 1614/08/2013 Himansu S M
  17. 17. Search costs (Physical Costs) • It’s the cost involved in finding out which service to go for. For goods it’s easy, just compare the benefits / features with the price tags. But for services, one needs to experience to know the details and generally no price tags of services are available. Another area of cost increase is the search for different brands in services. 1714/08/2013 Himansu S M
  18. 18. Convenience Costs/Sensory Costs • If the customer is inconvenienced to avail or consume any services, like travelling, putting an effort, rescheduling other activities, sacrificing some other activities or time, etc., then this is known as the convenience cost (or perhaps more accurately the cost of inconvenience). 1814/08/2013 Himansu S M
  19. 19. Psychological costs This is perhaps the most painful and frustrating experience or non-monetary costs, like fear of not understanding (insurance schemes), rejection (bank loans), uncertainty (high cost, servicing). Some customers are not comfortable going thro’ certain hassles of the service consumption process, like dropping cheques in drop boxes, paying thro’ internet by giving credit card numbers. 1914/08/2013 Himansu S M
  20. 20. Pricing Objectives • The pricing policy must be based on the firm’s objectives, policies, concerning revenues, profit, patronage, market share, market penetration, etc. • Survival • Present Profit Maximisation • Present Revenue Maximisation • Prestige • Product Quality Leadership 2014/08/2013 Himansu S M
  21. 21. Survival • When the firm is not doing well in terms of capacity, competition, change in consumers’ require- ments, this is the only objective. The firm covers whole of VC and a part of FC. This is short term objective. In the long run the firm must learn to add value to its services, or else, face extinction. 2114/08/2013 Himansu S M
  22. 22. Present profit maximisation • The firm sets a price that will maximise its current profit without changing the service attributes. They determine the market demand for alternative prices and choose the price where the return, cash flow or current profit is the maximum. This is a medium to short term measure. In the long run the firm may not do well. 2214/08/2013 Himansu S M
  23. 23. Present revenue maximisation • Some companies want to maximise their profit by increasing the market share by reducing the price or setting a low price. • They believe that this will lead to a higher sales volume, lower unit cost of production and a long term profit. 2314/08/2013 Himansu S M
  24. 24. Present revenue maximisation • The conditions favouring this situations are • (1) the market is highly price sensitive and a low price stimulates market growth, • (2) production and distribution cost fall with accumulated production experience, and • (3) low price discourages actual and potential competition. 2414/08/2013 Himansu S M
  25. 25. Prestige • Some companies like putting their services in the premium category by charging a high price, which they think creates an image of class / prestige in the customers’ view. Ex., Oberoi, Sheraton Hotels. 2514/08/2013 Himansu S M
  26. 26. Product quality leadership • Some firms like to maintain their position as a quality leader by having a higher price tag. The quality of service involves higher cost, which justifies the price. 2614/08/2013 Himansu S M
  27. 27. Revenue And Profit Objectives Seek Profit : • Make the largest possible contribution or profit. • Achieve a specific target level. • Maximise revenue from a fixed capacity by varying prices and target segments over time, typically using yield or revenue management systems. Cover Costs : • Cover fully allocated costs, including institutional overhead. • Cover costs of providing one particular service, excluding overhead. • Cover incremental costs of selling one extra unit or to one extra customer. 2714/08/2013 Himansu S M
  28. 28. Patronage and User Base- Related Objectives • Build Demand : • Maximise demand (when capacity is not a constraint), subject to achieving a certain minimum level of revenues. • Achieve full capacity utilisation, especially when high capacity utilisation adds to the value created for all customers (Ex. : Full House adds excitement to a theatre or cinema. 2814/08/2013 Himansu S M
  29. 29. Patronage and User Base- Related Objectives • Build a User Base : • Stimulate trial and adoption of a service. This is especially important for new services with high infra-structure costs and for membership-type services that generate significant revenues from their continued use after adoption (Ex. : Life Insurance Plans, Mobile phone service subscriptions). • Build market share and/or a large user base, especially if there are significant economies of scale that can lead to a competitive cost advantage (Ex. : If development or fixed costs are high). 2914/08/2013 Himansu S M
  30. 30. APPROACHES TO PRICING SERVICES : Having set the pricing objectives, the firm has to do the pricing proper. For the services the pricing can be done in the three major structures based on (1) cost, (2) demand (market or value), and (3) competition. The firm can adopt any one or more structure with an appropriate proportion in combination. They are : 3014/08/2013 Himansu S M
  31. 31. The Pricing Tripod 3114/08/2013 Himansu S M
  32. 32. Cost Based Pricing : • As the name suggests, the company finds out the costs – direct and indirect, profit margin, etc. and decides the price. We have the basic formula for cost as : • PRICE = FIXED (OVERHEAD OR INDIRECT) COSTS + VARIABLE (DIRECT) COST + PROFIT 3214/08/2013 Himansu S M
  33. 33. 1. Cost-Plus pricing • This is the simplest method of pricing – the total cost is ascertained and a mark-up added. It’s easier for goods, but not so for services. • But by past experience and knowledge of estimates, one can decide the cost, then mark-up, then a contingency amount which will make the price. 3314/08/2013 Himansu S M
  34. 34. 2. Fee for Services • This pricing strategy is adopted by most of the professionals. Their fees are based on the no. of hours they put in their effort. This system has a drawback too – • (1) the record keeping can’t be done accurately, • (2) for the same result an experienced and a novice may have the same fee, and if not then resentment takes place in the minds of customers. 3414/08/2013 Himansu S M
  35. 35. Market Oriented Pricing or Demand Based Pricing (Value Based Pricing) : • As the name suggests the pricing is based on the demand behaviour of the customers, i.e., setting prices consistent with customer perception of value – prices which customers will pay for the services rendered. Some are given below : 3514/08/2013 Himansu S M
  36. 36. 1. Market Skimming • Market skimming is offering high value or unique services by the service providers for a higher price. • This happens where there are no competitors, and later when competitors come in the prices may be reduced. 3614/08/2013 Himansu S M
  37. 37. 2. Penetration Pricing • This is to some extent the opposite of market skimming. The initial or introduction price is kept at a low level so that it helps in market penetration. Slowly the value offer increases and if the demand remains the prices can be enhanced. • This is appropriate in the following conditions, and care must be taken not to set at too low a price, lest the normal enhancement will look unacceptable : 3714/08/2013 Himansu S M
  38. 38. 2. Penetration Pricing –Sales volume of the services are sensitive to the price, –It is possible to achieve economies in unit costs by operating at large volumes, –A service which faces threats of strong potential competition, soon after introduction, –There are no class buyers willing to pay a higher price to avail the 3814/08/2013 Himansu S M
  39. 39. 3. Price Discrimination This is also known as differential pricing, which is applied more often. The major deciding factors are: • Place : For the customers who have a sensitivity to location, like cinema circles, different rows of concerts, etc. 3914/08/2013 Himansu S M
  40. 40. 3. Price Discrimination • Time : At different times of the day or any period, say peak and off-peak hours of internet surfing, telephone service, etc. • Quantity : For volume purchase, say for assurance for future purchases by the customers the company offers a lower price. By this the firm locks or ascertains the future business volume. • Incentives : This is usually given to the regular or more frequent users in the form of incentives, discounts, etc. 4014/08/2013 Himansu S M
  41. 41. 4. Discounts • Discounts, price cuts or mark- downs are very important and popular in the pricing of services and goods. • These are offered on some occasions, like festive seasons, to a specific category of customers, and may be in the lean seasons, etc. It attracts customers and the sales volume increases. 4114/08/2013 Himansu S M
  42. 42. Competition Based Pricing : This is another approach of pricing which relate to the pricing made by the competitors. That doesn’t always mean the prices to be the same as the competitors’. But the knowledge of their costs and pricing, and the customer expectations acts as a starting point. This is applied in mostly two situations – • (1) When the services are standard across the providers, • (2) in Oligopolies where there are a few large service providers. 4214/08/2013 Himansu S M
  43. 43. 1. Price Signalling • This phenomenon occurs when there is a high concentration of sellers in the market. Here the prices offered by one seller is matched by others to avoid any low-price advantage to any seller. • Ex., in airline industries or mobile phone service if any provider drops the fares or call rates others follow too. 4314/08/2013 Himansu S M
  44. 44. 2. Price Matching / Going rate pricing : This is adopted for playing safe in a mature market, by pricing at the same level, like taxi service, internet café, etc. 3. Price Bidding / Closed Bid Pricing : This strategy is mostly adopted by the construction, building, manufacturing services and involves sending biddings to the buyer, which4414/08/2013 Himansu S M
  45. 45. 4. Destroyer Pricing : • It is setting such a low price that it can’t be matched by any competitor, without loss. • This is mostly used for driving the competition from the market. • The firm adopting this strategy should be very careful in setting the price such that it doesn’t suffer loss, and also if the competitors are strong enough, the firm itself may be driven out of business. 4514/08/2013 Himansu S M
  46. 46. PROBLEMS ENCOUNTERED IN THESE PRICING SYSTEMS No Cost Based (Problems) Demand Based (Problems) Competition Based (Problems) 1. Costs are difficult to trace. Monetary price must be adjusted to reflect the value of non- monetary costs. Small firms may charge too little to be viable. 2. Labour is more difficult to price than materials. Information on service costs is less available to customers, hence price may not be a central factor. Heterogeneity of service limits comparability. 3. Costs may not equal value. Price may not effect customer value. 4614/08/2013 Himansu S M
  47. 47. Cost Based (Problems) : • The one special problem in cost based pricing is the unit in which a service is purchased, the unit price is a well defined idea, but is a vague concept in services. Hence most of the professional services are sold by not the output unit but the input unit, like consultancy services are priced by the no. of hours the professional have put in. • Costs are difficult to trace : Costs are difficult to trace or calculate in service business, particularly where multiple services are provided by the firm. 4714/08/2013 Himansu S M
  48. 48. Cost Based (Problems) : • Labour is more difficult to price than materials : A major component of cost is employee time rather than material cost, and value of people’s time particularly non-professional time, is not easy to calculate or estimate. • Costs may not equal value : Actual service costs may under-represent the value of the service to the customer. The same service given against different context/back drop has different value attached to it even though it needs same time and effort. 4814/08/2013 Himansu S M
  49. 49. Demand Based (Problems) : • In case of services the non-monetary costs and benefits must be factored into the calculation of perceived value to the customer. When services require inconvenience, time, search and psychological costs, the monetary price must be adjusted to compensate. • Information on service costs may be less available to customers, making monetary price not a large or salient factor in initial service selection. 4914/08/2013 Himansu S M
  50. 50. Competition Based Problems • Small firms may charge too little and are not able to make margins high enough to remain in business. • Heterogeneity of services across and within providers makes this approach complicated and limits comparability, where the service providers charge in wide variation. • Price may not effect customer value : Some experts say that such wide variation is difficult to compare across providers and may not effect customer value. 5014/08/2013 Himansu S M
  51. 51. INCORPORATING PERCEIVED VALUE INTO SERVICE PRICING • One of the most appropriate ways to price services is on the basis of the perceived value of the services in the minds of customers. • Now the important point is what is value in customers’ view ? And how to create value in the services so that customers like it. • In general “value” is what you get minus what you pay, or what you get divided by what you pay. But again how to quantify in terms of money what you get. This is highly subjective and varies widely. 5114/08/2013 Himansu S M
  52. 52. Definition of Perceived Value : • According to the concept of utility “Perceived value” is defined as the consumer’s overall assessment of the utility of a service based on perceptions of what is received and what is given. • Customers will make a purchase decision on the basis of perceived value, and not just to minimise the money paid. • The following gives an account of the break-up of the “give and get” components of value into manageable pieces that can be useful to quantify value : 5214/08/2013 Himansu S M
  53. 53. Four Meanings of Perceived Value Value is low price : Some consumers equate value with low price, as for example : • For dry cleaning : "Value is the lowest price" • For carpet steam cleaning : "Value is price - which one is on sale" • For a fast-food restaurant : "When I can use coupons, I feel that the service has a value" • For airline travel : "Value is when airline5314/08/2013 Himansu S M
  54. 54. Four Meanings of Perceived Value Value is Whatever I Want in a Product or Service : Some consumers emphasize the benefits they receive from a service as the most important component of value rather than focusing on money, as for example : • For an MBA degree : "Value is the very best education I can get" • For medical service : "Value is high quality of treatment" • For a social job : "Value is what makes me look good to my friends and family" • For a rock or country music concert : "Value is the best performance" 5414/08/2013 Himansu S M
  55. 55. Four Meanings of Perceived Value Value is the Quality I get for the Price I Pay : Some consumers consider value as a trade-off (balance) between the money they give and the quality they receive, as for example : • For a hotel for vacation : "Value is price first and quality second" • For a hotel for business travel : "Value is the lowest price for a quality brand" • For a computer services contract : "Value is the same as quality. No-value is affordable quality" 5514/08/2013 Himansu S M
  56. 56. Four Meanings of Perceived Value Value is What I Get for What I Give : Some consumers consider all the benefits they receive as well as all what they sacrifice (in terms of money, time, effort, etc.) when describing value, as for example : • For a housekeeping service : "Value is how many rooms I can clean for what the price is" • For a hairstylist : "Value is what I pay in cost and time for the look I get" • Foe executive education : "Value is getting a good educational experience in the shortest time" 5614/08/2013 Himansu S M
  57. 57. Incorporating Perceived Value Into Service Pricing • It’s the buyer’s perception of total value that prompts the willingness to pay a particular price for service. The most important thing the company must do – often a difficult thing – is to estimate the value to customers of the company’s services. • The value may be perceived differently by different people which is a complex function of rational (objective) and emotional (subjective) reasons. The following steps will guide the company to estimate value systematically : 5714/08/2013 Himansu S M
  58. 58. Incorporating Perceived Value Into Service Pricing • Elicit customer definitions of value in their own words and terms, allowing for the full range of components. • Help customers articulate their expressions of value by identifying their value definition, key abstract benefits sought, and abstract dimensions of quality that are relevant to them. 5814/08/2013 Himansu S M
  59. 59. Incorporating Perceived Value Into Service Pricing • Capture requirement information at the concrete level – linking them with the key benefits they indicate so that the definition becomes actionable. • Quantify the monetary and non-monetary value to customers. • Establish a price based on the value of the service to customers. 5914/08/2013 Himansu S M
  60. 60. Application : • When the services are for the end consumer, most often service providers will discover that they can’t afford to give each individual exactly the bundle of attributes he or she values. They will, however attempt to find one or more bundles that address segments of the market. • On the other hand, when services are sold to businesses (or to end customers in case of high end services), the company can understand and deliver different bundles to each customer. 6014/08/2013 Himansu S M
  61. 61. VALUE STRATEGIES IN PRICING OF SERVICES : • On the basis of explanations and discussions of the above section, several pricing strategies can be decided as follows : • Satisfaction Based Pricing : • Relationship Pricing : • Efficiency Pricing : 6114/08/2013 Himansu S M
  62. 62. Satisfaction Based Pricing : • Service Guarantees – Ex. : Domino’s Pizza offering Delivery Time • Benefit driven pricing : Allowing customers to derive the most benefit – A photocopier offering his m/c and charging on the basis of no. of copies. • Flat rate pricing : Offering all at a flat rate • Convinience pricing : Like home delivery of Pizzas, Groceries, picking & droping for a driving training session. 6214/08/2013 Himansu S M
  63. 63. Satisfaction Based Pricing : • Long Term Contracts –Service providers often provide price and non-price incentives to customers to remain bound for a long term. • Price Bundling –Offering two or more services together from the same providers 6314/08/2013 Himansu S M
  64. 64. Efficiency Pricing : • Based on : –Cost Control, –Waste Reduction, –Increase in Productivity, –Increase in Efficiency, • And then transfering the benefit to customers 6414/08/2013 Himansu S M
  65. 65. ISSUES IN PRICING OF SERVICES : • Pricing is critical for any company doing business for profit. It can make or mar a business. There are several factors that influence pricing – both internal and external. These are given below : • Costs of Production and Break-even Analysis : By doing break-even analysis the company can find out what are the minimum level of sales required to break-even. 6514/08/2013 Himansu S M
  66. 66. ISSUES IN PRICING OF SERVICES : • Demand Levels : The company should ascertain the demand levels, like current demand, potential demand, fluctuations in demand and the factors responsible for it, customers’ spending patterns, general economic trends, etc. • Competitor Pricing : Firms should find out the pricing done by the competitors and the price sensitive areas. Accordingly, pricing can be set. 6614/08/2013 Himansu S M
  67. 67. ISSUES IN PRICING OF SERVICES : • Marketing Mix : The other elements of the marketing mix have a positive influence on price, and the price must be indicative of the value it promises to deliver. In case of high price - high value offer, there should be proper communication between the company and customers. • Regulatory Factors : Govt. policies, guidelines of other regulatory bodies have direct impact on the pricing situation. The company should adhere to the relevant regulations. Ex., IRDA for insurance companies, TRAI for mobile service providers, etc. 6714/08/2013 Himansu S M
  68. 68. ISSUES IN PRICING OF SERVICES : • Positioning : Correct or accurate positioning of services is also important, and a matching price may be charged. Customers should perceive this rightly and are willing to pay for the services. 6814/08/2013 Himansu S M
  69. 69. End of Chapter © Himansu S M / 30-08-2010 6914/08/2013 Himansu S M

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