Pricing services presents unique challenges as services are intangible and costs are difficult to define. Three main approaches to pricing are cost-based using activity-based costing, competition-based by monitoring competitors, and value-based by relating price to customer perceived value. Customers consider both financial and non-financial costs in their perception of service value. Effective pricing strategies reduce uncertainty, build relationships through incentives, and convince customers quality is not tied to low price.

1. Pricing and Revenue
Management

2. What Makes Service Pricing Strategy
Different (and Difficult)?
• 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
• Delivery through physical or electronic channels--may create
differences in perceived value

3. Objectives of Pricing Strategies
• Revenue and profit objectives
– Seek profit
– Cover costs
• Patronage and user base-related
objectives
– Build demand
– Build a user base

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

5. Three Main Approaches to Pricing
• Cost-Based Pricing
– Set prices relative to financial costs (problem: defining
costs)
• Competition-Based Pricing
– Monitor competitors’ pricing strategy (especially if service
lacks differentiation)
– Who is the price leader? (one firm sets the pace)
• Value-Based
– Relate price to value perceived by customer

6. Activity-Based Costing: Relating Activities to the
Resources They Consume
• Managers need to see costs as an integral part of a firm’s effort to create value
for customers
• When looking at prices, customers care about value to themselves, not what
production costs the firm
• Traditional cost accounting emphasizes expense categories, with arbitrary
allocation of overheads
• ABC management systems examine activities needed to create and deliver
service (do they add value?)
• Must link resource expenses to:
– variety of products produced
– complexity of products
– demands made by individual customers

7. Perceived
Benefits
Time
e
Effort
Net Value = (Benefits – Outlays)
Perceived
Outlays

8. Enhancing Gross Value
• Pricing Strategies to Reduce Uncertainty
– service guarantees
– benefit-driven (pricing that aspect of service that creates value)
– flat rate (quoting a fixed price in advance)
• Relationship Pricing
– non-price incentives
– discounts for volume purchases
– discounts for purchasing multiple services
• Low-cost Leadership
– Convince customers not to equate price with quality
– Must keep economic costs low to ensure profitability at low price

9. Paying for Service:
The Customer’s Perspective
Customer “expenditures” on service comprise both financial and non-financial
outlays
• Financial costs:
– price of purchasing service
– expenses associated with search, purchase activity, usage
• Time expenditures
• Physical effort (e.g., fatigue, discomfort)
• Psychological burdens (mental effort, negative feelings)
• Negative sensory burdens (unpleasant sensations affecting any of the five
senses)

10. Determining the Total Costs of a Service
to the Consumer
Price
Related Monetary
Costs
Time Costs
Physical Costs
Psychological Costs
Sensory Costs
Necessary follow-
up
Problem
solving
Operating Costs
Incidental Expenses
Purchase and
Use Costs
Search Costs
After Costs