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Methods of pricing services :
By: Rishith P
Introduction:
• Pricing the services is an immensely challenging task. The attributes
of services are very different as compared to manufactured
products.
• The attributes are : Intangibility, Inseparability, Perishability,
Heterogeneity which make the task complicated.
• Services also vary on the experience and credence attributes, which
create psychological costs such as anxiety, mental and physical
effort.
There may be numerous considerations for pricing services
• Revenue oriented – the concept of costs and profits may be
important.
• Capacity oriented – this is to meet the available supply
• Demand oriented – this is to maximize demand
• Pricing decisions can have a great impact on profitability, assuming
that the service, which is being delivered, meets the customer needs.
Pricing is one of the elements of the service mix and needs to
complement the other elements in the service mix.
• Demand plays an important role in an economist’s approach to
pricing. In certain cases, the pricing pattern may depend upon the
demand.
There may be numerous objectives, which a service firm may deploy
before choosing a pricing strategy:
• Maintenance of existing customers
• Attraction of new customers
• Cost coverage
• Creation of prestige for the firm
• Long term survival
• Service quality leadership
• Achievement of satisfactory profits
• Sales maximization
• Market development
• Achievement of satisfactory market share
• Determination of fair prices by customers
• Profit Maximization
• Sales stability in the market
Methods of pricing:
• Cost oriented pricing
• Competitor oriented pricing
• Marketing oriented pricing
Cost oriented strategy is an internally driven strategy.
Competitor oriented pricing is driven more by competitor
strategies.
Marketing oriented pricing focuses on the value that the customer
places on the service being driven.
Cost oriented pricing:
• This strategy aims to recover some of the costs incurred in offering
the services to the consumer. There are four methods:
1. Full cost pricing
2. Marginal cost pricing
3. Target return pricing
4. Contribution analysis
1.Full cost pricing
• This method prices the services after taking into account the fixed as
well as the variable costs(direct costs). The issue with this approach
is that it is not market driven. The sale may be determined by the
demand and the paying capacity of the market.
2.Marginal cost pricing
• This strategy aims at pricing the service in a manner that direct
costs can be recovered and the full costs may be recovered after a
certain period of time. The price is set below total and variable costs
so as to cover so as to cover marginal cost. This strategy is adopted
specially in the service sector, as they are perishable. When
occupancy levels in a hotel are low and when an aircraft is flying
with unoccupied seats, prices are lowered so that some costs may be
recovered, rather than losing the entire cost.
3.Target return pricing
• Here, the price is determined at the point that yields the firms target
rate of return on investment.
4.Contribution Analysis
• This is the deviation from the breakeven analysis where only the
direct costs of a product or service are taken into considerations.
Competitor oriented pricing
There are two forms, which service providers may adopt :
1. Going rate pricing
2. Competitive bidding
1.Going rate pricing
• In this scenario, the pricing is done as per the competition in the
market. However, marketers may like to use price differentials to
differentiate their service offering to the consumers. The prices may,
however, be similar to that of the competition.
▫ The pricing may be below that of competitors
▫ Pricing according to dominant price in the market - the leaders price that
is adopted by the rest of the companies
▫ The pricing may be above that of the competition
2.Competitive bidding
• In this particular case, the bid is offered to the lowest bidder.
Bidding is a complex task, especially in the case of large service
firms and contracts.
• The building of power plants, offering telecom services, and
privatization of railways etc are all complex cases where bidding is
used to allocate business. The most usual process is the drawing up
of a detailed specification for a purpose and putting the papers up
for tender.
• Many service firms also offer bidding prices on products. Fore
instance, India Times shopping invites bidding for airline tickets.
These may be to invite new price conscious consumers into the
ambit of the service provider.
Marketing oriented pricing
This strategy takes into account a much wider range of factors which
could influence marketing oriented pricing:
1. Marketing strategy
2. Price quality relationship
3. Product line pricing
4. Negotiating margins
5. Political factors
6. Costs
7. Effect on distributorsretailers
8. Competition
9. Explicability
10. Value to the customer
1.Marketing strategy
• The marketing strategy has a considerable influence on the pricing
strategy of the firm. The target market and its characteristics,
demand, positioning, strategy and nature of competition all have a
bearing on the marketing strategy.
• The service provider may opt for different pricing strategies. It may
be penetration pricing (low pricing) or may be skimming
strategy(charging premium).
EX : Internet services, if usage demand is decreasing in the network
size, the optimal policy is one of penetration in membership fee and
skimming in usage price.
2.Price quality relationship
• Consumers consider price as an indicator of quality.
• In this particular case, the pricing strategy for two alternate
technologies is competed. So, price comparisons are used as a basis
for helping consumers to make choices.
3.Product line pricing
• This pricing strategy offers different levels of services at different
prices. There may be different offerings to the consumer based on
differentials in the pricing.
• Differential pricing is a widespread strategy in a service sector. The
method is widely accepted in almost every sector of the economy.
• The basic concept of differential pricing involves charging different
prices to different consumer segments for the same service.
4.Negotiating margins
• In some firms, customers expect a price reduction. The price paid by
the customer is very different from the list price. The difference may
be on account of order size discounted, competitive discounts, or
fast case payment discounts.
5.Political factors
• When pricing policy acts against public interest, the government
may intervene
For example : The railways in India are not privatized and Govt
decides the pricing, which is not based on market factors.
6.Effect on distributors
• Distribution systems play a key role in certain service categories
such as travel and hotel reservations. Their margins must be
adequate for them to push the production. However online booking
directly with the service providers are changing the dynamics of
interaction with the distributor network.
7. Costs & 8.Competition
• This strategies are already discussed under cost oriented pricing &
competitor oriented pricing.
9.Explicability
• The service provider in this case should be able to explain the price
differentials on its service offerings.
10.Value to the customer
• This pricing strategies assesses the pricing decisions from a
consumers perspective. The target market, demand and economic
factors in a market, may influence the decision to price service.
• The second aspect that the consumer has become solution oriented.
They does not look at individual services but a combination of
services, which offers there convenience.
Thank you 

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Methods of pricing services

  • 1. Methods of pricing services : By: Rishith P
  • 2. Introduction: • Pricing the services is an immensely challenging task. The attributes of services are very different as compared to manufactured products. • The attributes are : Intangibility, Inseparability, Perishability, Heterogeneity which make the task complicated. • Services also vary on the experience and credence attributes, which create psychological costs such as anxiety, mental and physical effort.
  • 3. There may be numerous considerations for pricing services • Revenue oriented – the concept of costs and profits may be important. • Capacity oriented – this is to meet the available supply • Demand oriented – this is to maximize demand • Pricing decisions can have a great impact on profitability, assuming that the service, which is being delivered, meets the customer needs. Pricing is one of the elements of the service mix and needs to complement the other elements in the service mix. • Demand plays an important role in an economist’s approach to pricing. In certain cases, the pricing pattern may depend upon the demand.
  • 4. There may be numerous objectives, which a service firm may deploy before choosing a pricing strategy: • Maintenance of existing customers • Attraction of new customers • Cost coverage • Creation of prestige for the firm • Long term survival • Service quality leadership • Achievement of satisfactory profits • Sales maximization • Market development • Achievement of satisfactory market share • Determination of fair prices by customers • Profit Maximization • Sales stability in the market
  • 5. Methods of pricing: • Cost oriented pricing • Competitor oriented pricing • Marketing oriented pricing Cost oriented strategy is an internally driven strategy. Competitor oriented pricing is driven more by competitor strategies. Marketing oriented pricing focuses on the value that the customer places on the service being driven.
  • 6. Cost oriented pricing: • This strategy aims to recover some of the costs incurred in offering the services to the consumer. There are four methods: 1. Full cost pricing 2. Marginal cost pricing 3. Target return pricing 4. Contribution analysis
  • 7. 1.Full cost pricing • This method prices the services after taking into account the fixed as well as the variable costs(direct costs). The issue with this approach is that it is not market driven. The sale may be determined by the demand and the paying capacity of the market.
  • 8. 2.Marginal cost pricing • This strategy aims at pricing the service in a manner that direct costs can be recovered and the full costs may be recovered after a certain period of time. The price is set below total and variable costs so as to cover so as to cover marginal cost. This strategy is adopted specially in the service sector, as they are perishable. When occupancy levels in a hotel are low and when an aircraft is flying with unoccupied seats, prices are lowered so that some costs may be recovered, rather than losing the entire cost.
  • 9. 3.Target return pricing • Here, the price is determined at the point that yields the firms target rate of return on investment. 4.Contribution Analysis • This is the deviation from the breakeven analysis where only the direct costs of a product or service are taken into considerations.
  • 10. Competitor oriented pricing There are two forms, which service providers may adopt : 1. Going rate pricing 2. Competitive bidding
  • 11. 1.Going rate pricing • In this scenario, the pricing is done as per the competition in the market. However, marketers may like to use price differentials to differentiate their service offering to the consumers. The prices may, however, be similar to that of the competition. ▫ The pricing may be below that of competitors ▫ Pricing according to dominant price in the market - the leaders price that is adopted by the rest of the companies ▫ The pricing may be above that of the competition
  • 12. 2.Competitive bidding • In this particular case, the bid is offered to the lowest bidder. Bidding is a complex task, especially in the case of large service firms and contracts. • The building of power plants, offering telecom services, and privatization of railways etc are all complex cases where bidding is used to allocate business. The most usual process is the drawing up of a detailed specification for a purpose and putting the papers up for tender. • Many service firms also offer bidding prices on products. Fore instance, India Times shopping invites bidding for airline tickets. These may be to invite new price conscious consumers into the ambit of the service provider.
  • 13. Marketing oriented pricing This strategy takes into account a much wider range of factors which could influence marketing oriented pricing: 1. Marketing strategy 2. Price quality relationship 3. Product line pricing 4. Negotiating margins 5. Political factors 6. Costs 7. Effect on distributorsretailers 8. Competition 9. Explicability 10. Value to the customer
  • 14. 1.Marketing strategy • The marketing strategy has a considerable influence on the pricing strategy of the firm. The target market and its characteristics, demand, positioning, strategy and nature of competition all have a bearing on the marketing strategy. • The service provider may opt for different pricing strategies. It may be penetration pricing (low pricing) or may be skimming strategy(charging premium). EX : Internet services, if usage demand is decreasing in the network size, the optimal policy is one of penetration in membership fee and skimming in usage price.
  • 15. 2.Price quality relationship • Consumers consider price as an indicator of quality. • In this particular case, the pricing strategy for two alternate technologies is competed. So, price comparisons are used as a basis for helping consumers to make choices.
  • 16. 3.Product line pricing • This pricing strategy offers different levels of services at different prices. There may be different offerings to the consumer based on differentials in the pricing. • Differential pricing is a widespread strategy in a service sector. The method is widely accepted in almost every sector of the economy. • The basic concept of differential pricing involves charging different prices to different consumer segments for the same service.
  • 17. 4.Negotiating margins • In some firms, customers expect a price reduction. The price paid by the customer is very different from the list price. The difference may be on account of order size discounted, competitive discounts, or fast case payment discounts.
  • 18. 5.Political factors • When pricing policy acts against public interest, the government may intervene For example : The railways in India are not privatized and Govt decides the pricing, which is not based on market factors.
  • 19. 6.Effect on distributors • Distribution systems play a key role in certain service categories such as travel and hotel reservations. Their margins must be adequate for them to push the production. However online booking directly with the service providers are changing the dynamics of interaction with the distributor network. 7. Costs & 8.Competition • This strategies are already discussed under cost oriented pricing & competitor oriented pricing.
  • 20. 9.Explicability • The service provider in this case should be able to explain the price differentials on its service offerings. 10.Value to the customer • This pricing strategies assesses the pricing decisions from a consumers perspective. The target market, demand and economic factors in a market, may influence the decision to price service. • The second aspect that the consumer has become solution oriented. They does not look at individual services but a combination of services, which offers there convenience.