PRICING OF SERVICES PRESENTED BY:- Manu Singh (69) Ravi (82) Rishab Singh Kohli (83) Ritu Sangwan (84) Surbhi Gupta (106) Prabhjot Singh (126) Piyush Sharma (128)
Pricing services is more difficult than pricing productsbecause we can often pinpoint the cost of making a physicalproduct but its more subjective to calculate the worth ofcounsel, staffs expertise, and the value of time. We can,however, use some of the same underlying pricing guidelinesto figure out the costs and operating expenses plus the targetprofit in setting the price for services.Service businesses can range from a sole proprietorshipconsultancy to mid-sized businesses with several hundredemployees, some of whom go out to customers and performanything from cleaning homes to providing informationtechnology expertise to large corporations.
Pricing StrategyIt is a strategic tool that organizations use to differentiate theirproducts from competitors and thereby gain the competitiveedge to capture the market.There are three main approaches a business takes to settingprice:# Cost-based pricing: price is determined by adding a profitelement on top of the cost of making the product.# Customer-based pricing: where prices are determined bywhat a firm believes customers will be prepared to pay# Competitor-based pricing: where competitor prices are themain influence on the price set.
What Makes Service Pricing Strategy Different ? 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
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; fundamental reason being they do not know themselves what the service will involve until the process of service delivery unfolds.
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, 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.
Role of Non-monetary CostsDemand is not just a function of monetary price but is influencedby other costs as well. 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, if service hours do not coincide with customer’s available time Psychological costs – fear of not understanding (education), fear of rejection (bank loan), fear of results (surgery)
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, consumers may believe that price is the best indicator of quality. In case of high risk services like medical treatment, customer looks price as a surrogate for quality. Thus in addition to cover the cost and match competitors price, prices must be set with care to convey the appropriate service quality : Too low prices- inaccurate inferences Too high prices- difficult to match in service delivery
What Price Should We Charge for Our Service? What costs do we have to recover? What prices are competitors charging? How sensitive are our customers to variations in price? What out-of-pocket expenditures and non-financial outlays do customers incur beyond the price of our service? Can we charge different prices at different times or to different customers?
Steps in designing the pricing strategy Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning. Make marketing mix decisions - define the service, distribution, and promotional tactics. Estimate the demand curve - understand how quantity demanded varies with price.
Calculate cost - fixed and variable costs associated with the service Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo). Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.
Establishing the Cost of Service In complex product lines – like retail banking products, Activity Based Costing is used to determine the price. Cost is not related to value, which is determined by the market and customer acceptance.
Fee for Service Cost of the time involved in providing the service. Eg. Professional services where charges are per hour like consultants, lawyers psychologists etc.
The Pricing Tripod Pricing Strategy CompetitionCosts Value to customer
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, or floor, 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, within the floor-to-ceiling range, the price can be set.
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, advertising, 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
Pricing Based Competition1. Pricing below competition :- Many vendors have been very successful using this pricing strategy. Since this strategy reduces the profit margin per sale, a firm needs to reduce its costs and: *Obtain the best prices possible for the merchandise; *Locate the business in and inexpensive location or facility; *Closely control inventory; *Design advertising to concentrate on "price specials“ *Offer no or limited services.2. Pricing Above The Competition :- This strategy is possible when price is not the customers greatest concern. Other considerations important enough for customers to justify paying higher prices include: *Service considerations: delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, helpful & friendly employees. *A convenient or exclusive location.
Value/ Demand-Based Pricing Relate price to value perceived by customer i.e. prices are based on what customers will pay for the services provided Challenges: Monetary price must be adjusted to reflected the value of non-monetary costs Information on service costs may be less available to customers, making monetary price not as salient indicator to quality
Four Customer Definitions of Value “Value is Everything“Value is Low Price” I Want in a Service” “Value is the “Value is All that Quality I Get for I Get for All the Price I Pay” that I Give”
Value has 4 meanings:1. Value is low price – equate value with low price like, a carpet on sale2. Value is everything I want in a service – emphasize the benefits rather price like, best education for a MBA3. 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, for a business travel, lowest price for a quality brand4. Value is all that I get for all that I give – consider all benefits and sacrifice components (money, time, effort)
Price Signaling Found in markets where there are a number of competitors. If any one company offers a lower cost advantage others immediately match the price. Eg. Airlines. In this type of pricing strategy the charges offered are the ones that are prevalent in the market for the same type of service. Eg. Tourist bus services, Car hires etc.
Price WarsPrice wars are frequent in industries where… Cost differentiation opportunities exists Capital is intensive and products are homogeneous.