UNIT-5 Pricing strategies for services Syllabus Service pricing Establishing monetary pricing objectives.

s. Foundations of pricing objectives Pricing and demand Putting service pricing strategies into practice.
Service Pricing: How should you set fees or prices for your service business? Procedures depend upon the business, but the same three elements must be considered for every service business: 1. Labor and material costs 2. Overhead 3. Profit These factors must be considered not only during startup but also during growth. Labor and Materials: Labor costs are wages and benefits you pay to employees and/or subcontractors who perform, supervise, or manage your service business. If you as the owner are involved in a job, then include the cost of your labor in the total labor charge. The cost of your labor will be quite significant during startup, when most new business owners pour lots of time and energy into their businesses. Labor costs are usually expressed as an hourly rate. Check in your library's reference room for government publications giving national and state salary ranges for different occupations. The editors of trade publications also might have similar information. Current rates are often cited in classified newspaper ads or available from your local chamber of commerce. Labor can also be subcontracted--such workers are not on the payroll as employees. When labor is purchased for each job on a contract basis, the full cost is agreed upon in advance, which helps keep your costs fixed. The key is to carefully estimate the labor time it will take to accomplish each job on which you bid. Profit Profit is the amount of income earned after all costs for providing the service have been met. When calculating the price of a service, profit is applied in the same number as markup on the cost of a product. For instance, if your labor costs for a job are $210, and you plan to net 21 percent before taxes on your gross sales, you'll need to apply a profit factor of about 25 percent to your labor and overhead to achieve your goal. For example, say you have an operating costs' subtotal of $324 and you want a profit of $81, so you quote the customer a price of $405. If you compare the price of $405 with the cost of labor ($210) already estimated, you'll notice that one figure is more than double the other. Some contractors use this ratio as a basis for determining price:

They estimate their labor costs and then double that figure to arrive at a bid price. Pricing can be timeconsuming, especially if you don't have a knack for it. Some contractors seem to have a sixth sense when it comes to pricing and they "guesstimate" on what they need to quote to make a job profitable to them. If you're just starting out, you obviously won't have the skill of a seasoned pro. If your quote is too low, you'll either rob yourself of profits or be forced to lower the quality of your work to meet the price. If you estimate too high, you may lose a contract, especially if you're in a competitive bidding situation. Make it your business to learn how to estimate labor time accurately and how to calculate your overhead properly so that when you quote a price, you can be competitive, profitable, and successful as a service business.

Establishing monetary pricing objectives: In setting monetary objectives several factors in relation
to the overall marking strategy of the corporation should be considered

Factors in setting pricing objectives Planned market position: First is the planned market position for the service product .gitlow suggested that the price not only influences the market position but also significantly affects customers perceptual positioning .it is therefore important to keep market /customer position in mind while deciding on pricing strategy Stage of life cycle: Secondly ,the stage of the life cycle of the service product is important .for example ,at the introductory stage .if there is to competition and the demand is high you may opt for highly price to make maximum ganis in the short term .however in a similar situation but wit low prices to penetrate market Competitive situation Thirdly ,you have to study the competitive situation both form the point of inter brand and also from the point of view of the brand which provides the same need satisfaction .for example a private airlines is facing competition from the national airline and other provides faster trains on the same routes during convenient timings .therefore while pricing services ,competition should be understood in greater detail and depth Strategic role: Lastly you have to see what strategic role the pricing can play in your overall marketing strategy for example a hotel chain might offer a package of low price or discount that in the short run .it might be a losing proposition but in the long run this may give more customer satisfaction and thereby better utilization or services

Pricing Objectives 1) Profit maximization: I. To achieve a targeted return on investment Many service firms work on a target on sales or on its investment as an objective .thus if crossword they would appropriate add an amount called mark-up to its cost of the book II. To maximize profit Service firms require profit in order to enable them to pay dividend to its investors pay rent and other utility bills pay salaries and wages to its staff and also investment in new technologies and other expansion plans .but to maximize profits the service firm requires data on its segments possible sale in each segment at different prices as also estimates of fixed and variable costs 2) To increase sales volume A service firm pursues this pricing objective to grow rapidly and discourage new entrant competition .the goal is usually described as a percentage increase in volume sales over a certain period of years. 3) Status quo oriented objectives Prices are set only to maintain the firm previous position the modest passive of all pricing goals the firm really seeks avoid a price war A. Competition rendezvous B. Pricing stabilization

4) Society oriented objectives Centain service firms set price not for profit sales or beating the competition .their objective is social responsibility make losses but the objective is the general benefit of society at large .most metro railway ticket price ,public library memberships and postal services follow societal pricing goals 5) Survival In averse market situations ,the pricing objectives may involve foregoing desired levels of profit to ensure survival .intense competition changing consumer wants or critical cash condition will result in survival as objective .prices are cut to the extent it covers basic cost ,but this is only a short run objective 6) Maximize market share This objective may be significant to those service firms where it is necessary to achieve economies of large scale in distribution and promotion .in this process it gains competitive advantage and in turn realizes profitability

7) Patronage oriented objectives : Price may be used effectively to develop loyalty and relationship with customers many companies now prefer patronage building to profit maximization as a future oriented strategic option .companies can accrue multiple benefits through relationship building.

Sales volume

Profit max

Market share

Objectives

Oriented

Survival

Society

Foundations of pricing objectives: Price is a vital component of a marketing mix, also known as the "four Ps" of marketing. The other components are product, place and promotion, all of which constitute costs. Price, on the other hand, generates a return as it supports the other marketing-mix elements. Although supply and demand drive pricing decisions, they're not the only factors. Any number of pricing objectives may come into play, but four in particular apply to most businesses. Survival Prices are flexible. A company can lower them in order to increase sales enough to keep the business going. The company uses a survival-based price objective when it's willing to accept short-term losses for the sake of long-term viability. Profit Price has both direct and indirect effects on profit. The direct effect relates to whether the price covers the cost of producing the product. Price affects profit indirectly by influencing how many units sell. The number of products sold also influences profit through economies of scale -- the relative benefit of

selling more units. The primary profit-based objective of pricing is to maximize price for long-term profitability. Related Reading: New-Product Pricing Vs. Market-Penetration Pricing Sales Sales-oriented pricing objectives seek to boost volume or market share. A volume increase is measured against a company's own sales across specific time periods. A company's market share measures its sales against the sales of other companies in the industry. Volume and market share are independent of each other, as a change in one doesn't necessarily spur a change in the other. Status Quo A status quo price objective is a tactical goal that encourages competition on factors other than price. It focuses on maintaining market share, for example, but not increasing it, or matching a competitor's price rather than beating it. Status quo pricing can have a stabilizing effect on demand for a company's products.

Pricing and demand:

The demand for a product is the quantity that buyers will be willing to purchase at a given price. The supply of a good is the quantity that suppliers will be willing to bring to the market at given prices. The demand for air travel is in part determined by the prices charged. Over the last twenty years the price of traveling by air has fallen substantially (in real terms) and with rising incomes far more people are traveling abroad (and internally) than ever before. We can therefore say that the demand for air travel has risen. At the same time we can see that the demand for other forms of travel has fallen compared with previous centuries. For example, very few people today travel by horse drawn carriage, and much fewer people. Supply Chain: The supply of certain types of breakfast cereals by companies like Kellogg's has risen in recent years in response to growing demand. This demands a level of market research. This is particularly the case for healthy eating cereals such as variants of Special K. At the same time the supply of certain consumer durable products has fallen as they have been replaced by more sophisticated ones that better meet customer requirements. For example, the supply of typewriters and black and white televisions have fallen, because it is more sensible for suppliers to supply word processing computers, and colour television.

Demand, supply and price:

A rise in demand for a particular product or service tends to exert an upward pressure on price. However, if producers respond by supplying more to the market this may then go on to lead to a fall in price, because producers are able to benefit from large scale production. The following table illustrates some of the relationships between demand, supply and price: Prices of products and services are determined by the interaction of the forces of demand and supply.

Putting service pricing strategies into practice:

Discuss the seven questions marketers need to answer to design an effective service pricing strategy. Although the main decision in pricing usually is seen as how much to charge, there are other important decisions to be made. Table 6.3 summarizes the questions that service marketers need to ask themselves as they prepare to create and implement a well-thought-out pricing strategy. Lets look at each in turn.

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