Pricing

Donna J. Hill, Ph.D. Services Marketing Fall 2000

Objectives for Chapter 16: Pricing 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

Role of Pricing in Services

Forming

expectations. Making purchase decisions. Evaluating service quality. Controlling demand.

Figure 16-2

What Do Customers Know about the Prices of Services?

Pet Sitter?

Wedding Advisor?

Nutritionist?

Braces?

Reasons Why --- Customers Lack Accurate Reference Price

Service Heterogeneity Limits Knowledge Provider Unwillingness to Estimate Prices Individual Customer Needs Vary Price Information is Overwhelming in Services Prices Are Not Visible

Figure 16-3

Customers Will Trade Money for Other Service Costs --- The Role of Non-monetary Costs

=
Time

or Effort

or Psychic Costs

Cost Based Pricing

Price

= direct costs+ overhead costs+profit margin

direct = materials and labor overhead = share of fixed costs profit margin = percent of full costs

Examples and Problems

Cost-Plus

Pricing Fee for service PROBLEMS:

1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value

Cost Analysis
Serve

as a pricing floor Variable and fixed (examples) Labor costs

Competition Based Pricing

Focus

on what others charge Situations

Standard Oligopolies

Problems and Examples

PROBLEMS:

1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value

Examples
Price signaling Going Rate

Demand Based Pricing

Set

Prices Consistent with Customer Perceptions of Value

Value is low price Value is Whatever I Want in a Product or Service Value is the Quality I Get for the Price I Pay Value is What I Get for What I Pay

Examples of Demand Pricing--Value is Low Price

Four

Types

discounting odd pricing synchro-pricing

place time quantity incentives volume sensitive to price exonomies in unit costs strong potentional competiton no class of buyers willing to pay higher

penetration pricing

Examples of Demand Pricing--Value is Everything I Want

Prestige

Pricing Skimming Price

major improvements

Examples of Demand Pricing--Value as Quality for the Price Paid

is the Quality I Get for the Price I Pay

Value Pricing

Value

giving more for less Market Segmentation Pricing client category service version

Conditions for Market Segmentation Pricing

Segments must value service differently. Segments must be identifiable and profitable. Lower-paying segments cannot sell to higher-paying segments. Cost of implementation must not be higher than incremental revenue. Must not be confusing to current and future customers.

Time of usage. Time of reservation. Time of purchase. Location of consumption Target Market

Examples of Demand Pricing--- Value as

All 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 Multiple Use Discounts

Price Framing
Organize

price information

Price Bundling
Pure

bundling Mixed bundling Mixed leader bundling Mixed joint bundling

Complementary Pricing
Captive

Pricing Two Part Pricing Loss Leadership

Results-based Pricing
Contingency

Pricing Sealed Bid Contingency Pricing Money-Back Guarantees Commission

Multiple-Use Discounts
Duration Limited Limited Usage Limited Unlimited Example
Ten sessions in November for $20.00 $30.00 for April, no limit to number of sessions. Ten sessions for $20.00 10% discount to senior citizens.

Unlimited Limited Unlimited Unlimited

Meeting Objectives with Multiple-Use Discounts

Objectives Limited Usage Fixed Unlimited Duration Unlimited Usage Fixed Unlimited Duration

Gain new customers. Poor Fair Shift demand....... Excellent Poor Stimulate demand Excellent Poor Increase repeat purchase behavior.. O.K. Excellent

Poor Good Good O.K.

Good Poor Poor Good

Problems with Demand Pricing

PROBLEMS:

1. Monetary price must be adjusted to reflect the value of nonmonetary costs 2. Information on service costs less available to customers, hence price may not be a central factor

Price Increases
1. Wait for someone else to increase prices. 2. Communicate to customers why a price increase is necessary. 3. Make no acknowledgment of price increase. 4. Make price increase in small increments. 5. Modify service to justify price increase.