article on service sector

1. 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)

2. Pricing services is more difficult than pricing products
because we can often pinpoint the cost of making a physical
product but it's more subjective to calculate the worth of
counsel, staff's expertise, and the value of time. We can,
however, use some of the same underlying pricing guidelines
to figure out the costs and operating expenses plus the target
profit in setting the price for services.
Service businesses can range from a sole proprietorship
consultancy to mid-sized businesses with several hundred
employees, some of whom go out to customers and perform
anything from cleaning homes to providing information
technology expertise to large corporations.

3. Pricing Strategy
It is a strategic tool that organizations use to differentiate their
products from competitors and thereby gain the competitive
edge to capture the market.
There are three main approaches a business takes to setting
price:
# Cost-based pricing: price is determined by adding a profit
element on top of the cost of making the product.
# Customer-based pricing: where prices are determined by
what a firm believes customers will be prepared to pay
# Competitor-based pricing: where competitor prices are the
main influence on the price set.

4. 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

5. 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.

6.  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.

7. Role of Non-monetary Costs
Demand is not just a function of monetary price but is influenced
by 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)

8. 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

9. 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?

10. 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.

11.  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.

12. 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.

13. 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.

14. The Pricing Tripod
Pricing Strategy
Competition
Costs Value to customer

15. 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.

16. 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

17. 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

18. Pricing Based Competition
1. 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 customer's 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.

19. 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

20. 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”

21. Value has 4 meanings:
1. Value is low price – equate value with low price like, a
carpet on sale
2. Value is everything I want in a service – emphasize the
benefits rather price like, best education for a MBA
3. 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
brand
4. Value is all that I get for all that I give – consider all
benefits and sacrifice components (money, time, effort)

22. 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.

23. Price Wars
Price wars are frequent in industries where…
 Cost differentiation opportunities exists
 Capital is intensive and products are
homogeneous.