This document discusses pricing strategies for services. It outlines three key differences in how consumers understand service prices compared to product prices. Namely, service prices are more difficult for customers to know due to variability, individual needs, and non-visible nature. The role of non-monetary costs like time and uncertainty are also examined. Various approaches to determining service prices are then reviewed, including cost-based pricing, competition-based pricing, and demand-based pricing oriented around customer perceptions of value. Specific pricing techniques within each approach are defined.

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Pricing of services: Pricing
approaches, Pricing Strategies
Services Marketing
Course Instructor: Sneha Sharma (PhD*, MBA, Dip T & D)

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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.

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Three Key Ways Service Prices are
Different for Consumers
• Customer Knowledge of service prices
– Service heterogeneity limits knowledge
– Providers are unwilling to estimate prices
• Medical, legal services
– Individual customer needs vary
• Hotel room , hair stylist
– Price information is overwhelming in services
– Prices are not visible

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The Role of Non Monetary Cost
Time Cost Search Cost
Convenience Cost
Psychological Cost
• Fear of not
understanding , fear
of uncertainty

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Price as an Indicator of Service Quality
Can price attract some
customers?

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Price as an Indicator of Service Quality
Infers Low Quality
Service
Infers High Quality
Service

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A Customer-Focused Approach to
The Pricing Process
Understand Customer Value
Determine Demand based on
Competition and Offering
Estimate Cost, Revenues and LTV
Establish a Pricing Structure and Level
Set Final Price

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Three Basic Price Structures and
Difficulties Associated with Usage for Services
PROBLEMS:
1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
PROBLEMS:
1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
PROBLEMS:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor

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Cost Based Pricing
• Price = Direct Cost + Overhead Cost + Margin
• Direct Cost = Material + labour used to produce the
service
• Overhead costs are apart from the fixed cost

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Cost Based Pricing Strategies
• Cost Plus Pricing
– Component cost + Mark Up
– Difficult in services as estimation of cost is difficult
• Fee for service
– Cost of the time involved in providing the service
• Consultants, psychologist, accountants

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Competition Based pricing
This approach is based on using the competitors’ price
as the point of reference
• Eg: Fitness clubs, Driving classes, Computer classes etc.
It is used in two situations
• When services are standard across providers.
• In oligopolies where there are few large service providers : Airlines

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Examples of Competition Based
Pricing in Service Industries
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.
Going Rate Pricing:
• Charging the most prevalent price in the market

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Demand Based pricing
• Unlike in cost based and competition based pricing,
demand based pricing is customer focused and not
company or market focused.
– This type of pricing is fixed keeping in mind what the
customers are likely to pay for the perceived value offered
by the service.
– For the determination of demand based pricing non
monetary costs also have to be considered, as these
contribute to the perception of value.

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Four Customer Definitions of Value
“Value is Low Price” “Value is Everything
I Want in a Service”
“Value is the
Quality I Get for
the Price I Pay”
“Value is All that
I Get for All
that I Give”

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Value is low price
Discounting
Odd pricing
• ( Rs 99,199,299
Synchro-pricing
• Place Differential
• Time Differential
• Quantity Differential
Penetration pricing

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Value is what I want in a service
Prestige pricing
• Offering high quality services
Skimming pricing
• New services introduced at higher price

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Value is the quality I get for that price
Value pricing
• This approach is used where external factors such
as recession or increased competition force
companies to provide 'value' products and services
to retain sales.
Market segmentation pricing
• Service versions
• Client category

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Value is what I get for what I give
Price bundling
• Mixed Bundling
• Mixed Leader Bundling
• Mixed Joint Bundling
Complementary pricing:
• Captive pricing
• two part pricing
• Loss leadership pricing.
Result based pricing
• Contingency pricing (lawyers)