Chap 8: Setting a Price for the Service Rendered Price labels vary; You might pay: A commission to a stockbroker A membership fee to a fitness club A finance charge to a credit card company A premium to an insurance firm A fare for transportation Rent for housing A rate for telephone services
Why Do Service Prices Vary? Inseparability and perishability characteristics of services 1. Price is a function of supply and demand. Higher prices during peak demand. During slow demand prices are lowered to maximize capacity (hotel rooms, seats in movie theater, airline seats, etc)
Why Do Service Prices Vary? Service providers unwilling to estimate prices Ex: Provider may not know price until after the service is completed 3. Individual customer needs vary over time Ex: Life insurance (whole life vs. term), different deductibles, variations associated with customers (age, health risk, smoker vs. non-smoker, etc.)
Yield Management in Services Creative ways to maximize revenues and reduce costs per customer served The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities The inherent trade-off between price and demand makes yield management a difficult strategy for services marketer
Yield Management in Services Example: Hotels seek to fill their rooms because an empty room is an unproductive asset. When demand is low, the hotel may offer special discounts to attract more customers. When demand exceeds capacity, hotel may increase their prices, and focus on segments that are willing to pay higher amounts.
Pricing Objectives and Approaches Profit-oriented objectives stress generating high returns on the service’s investments in resources and labor Volume-oriented objectives stress processing large numbers of customers or their possessions
Pricing Objectivesand Approaches(cont’d) A cost-based approach focuses on the price floor: the minimum price that covers all costs of producing the service. Ex: Fee for service = cost of the time involved in producing the service
Pricing Objectivesand Approaches(cont’d) A customer-based approach focuses on the price ceiling: the maximum price customers are likely to pay. Price is consistent with customer perceptions of value. Ex: Monetary price is the most important determinant of value (price sensitive); Others are willing to pay a premium for luxury, status.
Pricing Objectivesand Approaches(cont’d) A competition-based approach establishes the service’s price in relation to the competition Ex: Cell phone providers compare competitors’ prices dollar for dollar; then determine total cost to customers (monetary and non-monetary); then come up with a better offer.
The RelationshipBetween Service Price and Value Value is an assessment of the benefits of a service versus the costs associated with it. Customers often use cost-benefit analysis to determine the value of a service offering. Perceived value can be raised by either increasing customer perceptions of benefits, lowering perceptions of costs, or both.
Price and Value: Role of Non-Monetary Costs Non-monetary costs: Time, Search, Convenience, Psychological Costs Customers will trade money for non-monetary costs incurred.
The Role of Nonmonetary Costs Time Cost: waiting time and service consumption. Ex: waiting time for car repair is high; pay more where waiting time is less? Search Cost: effort invested to identify and select among services you desire. Ex: making reservations for one hotel; cost of comparing prices is too high
The Role of Nonmonetary Costs Convenience Cost: effort expended to receive service; Ex: Choose bank closest to home even though other banks charge lower fees Psychological Cost: fear of not understanding; fear of uncertainty; Ex: Resistance of on-line payment, even though it saves time and money
The Role of Nonmonetary Costs Applications: A strategy of minimizing costs to increase customer value can create competitive advantage for the firm. Service firm can increase monetary price by reducing time and other costs Services that save time have monetary value for customers - lawn care; carpet cleaning
Which clinic would you patronize if you needed a chest x-ray? Clinic A Price $45 Located1 hour away Next available appointment is in 3 weeks Hours: Mon-Fri, 8 am-5pm Estimated wait in clinic: 2 hours Clinic B Price $85 Located 15 minutes away Next available appointment is in 1 week Hours: Mon-Fri, 8am-10pm Estimated wait: 30 to 45 minutes