This document discusses pricing strategies for services. It identifies four ways customers can define value: low price, getting everything wanted, quality for the price paid, and all received for all given. The document then outlines pricing strategies companies can use for each customer definition of value, such as discounting for low price, prestige pricing for everything wanted, value pricing for quality/price, and bundling for all received/given. Overall, the key message is that pricing strategies for services should be tailored based on how a specific customer segment defines value.

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McGraw-Hill © 2000 The McGraw-Hill Companies
Chapter 16
PRICING OF SERVICES

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Objectives for Chapter 16:Objectives for Chapter 16:
Pricing of ServicesPricing of Services
• Discuss three major ways that service prices differ
from goods prices for customers
• Demonstrate what value means to customers and
the role that price plays in value
• Articulate the key ways that pricing of services
differs from pricing of goods
• Delineate strategies that companies use to price
services
• Give examples of pricing strategy in action

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Figure 16-2Figure 16-2
What Do Customers Know aboutWhat Do Customers Know about
the Prices of Services?the Prices of Services?
Pet Sitter?
Nutritionist?
Wedding
Advisor?
Braces?

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Figure 16-3Figure 16-3
Customers Will Trade Money forCustomers Will Trade Money for
Other Service CostsOther Service Costs
Effort
=
Time
or or
Psychic Costs

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Figure 16-4Figure 16-4
Three Basic Price Structures andThree Basic Price Structures and
Difficulties Associated with Usage forDifficulties Associated with Usage for
ServicesServices
Demand-Based
Cost-Based
Competition-
Based
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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Four Customer Definitions of ValueFour 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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Figure 16-6Figure 16-6
Pricing Strategies When thePricing Strategies When the
Customer Defines Value as Low PriceCustomer Defines Value as Low Price
“Value is Low Price”
Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing

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Figure 16-7Figure 16-7
Pricing Strategies When thePricing Strategies When the
Customer Defines Value asCustomer Defines Value as
Everything Wanted in a ServiceEverything Wanted in a Service
“Value is Everything
I Want in a Service”
Prestige Pricing
Skimming Pricing

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Figure 16-8Figure 16-8
Pricing Strategies When thePricing Strategies When the
Customer Defines Value asCustomer Defines Value as
Quality for the Price PaidQuality for the Price Paid
“Value is the Quality
I Get for the Price I Pay”
Value Pricing
Market Segmentation
Pricing

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Figure 16-9Figure 16-9
Pricing StrategiesPricing Strategies
When the Customer Defines Value asWhen the Customer Defines Value as
All that is Received for All that is GivenAll that is Received for All that is Given
“Value is All that
I Get for All
that I Give”
Price Framing
Price Bundling
Complementary Pricing
Results-based Pricing

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Figure 16-10Figure 16-10
Summary of Service Pricing StrategiesSummary of Service Pricing Strategies
for Four Customer Definitions of Valuefor 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”
Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing
Prestige Pricing
Skimming Pricing
Value Pricing
Market Segmentation
Pricing
Price Framing
Price Bundling
Complementary
Pricing
Results-based Pricing