Pricing Services

Pricing being one factor received much less attention in service firms as these decisions are not approached in sophisticated manner. Pricing is important as it has direct bearing on sales and profits of an organization. So trade off is done between sales and profits and then the prices are decided.

While deciding about the price, firm should consider the following:

Customer. Marketing offer (extent of perishability). Level of competition. Legal framework. Social and Technological environment.

Price ~ Quality
In the absence of communication from the company, price becomes the sole decisive factor in selection of a service. High risk services customers associate price with service assurance.

Pricing Strategy :
It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the competitive edge to capture the market.

Approaches to Pricing Services

Cost- Based Pricing 1.Cost-plus Pricing

Market-Oriented Pricing/ DemandBased Pricing 1.Market Skimming 2.Penetration Pricing 3.Price Discrimination 4.Pricing to meet customer expectations 5.Discount & Sales

Competition-Based Pricing 1.Destroyer pricing 2.Price matching/Going rate pricing 3.Price bidding/Close bid pricing.

2.Contribution pricing
3.Working back method/ Expected return

Foundations of setting prices/ Pricing Strategies

Penetration Pricing. Skimming Pricing. Value Pricing. Loss Leader. Psychological Pricing. Going Rate. Tender Pricing. Cost Plus Pricing. Price Discrimination. Destroyer Pricing. Absorption Pricing. Marginal Cost Pricing. Contribution Pricing. Target Pricing. Influence of Elasticity.

Penetration Pricing
Price set to penetrate the market Low price to secure high volumes Typical in mass market products chocolate bars, food stuffs, household goods, etc. Suitable for products with long anticipated life cycles May be useful if launching into a new market

Market Skimming
High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Value Pricing
Price set in accordance with customer perceptions about the value of the product/service. Value= Perceived benefits cost(Money, time & effort). against perceived

Examples include: Airlines, Hotel industry, status products/exclusive products.

Uncertainty reduction, relationship enhancement, Low-cost leadership and value perception management are distinct but related strategies for capturing and communicating value.

Loss Leader
Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at 3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers loss on item sold e.g. Free mobile phone when taking on contract package

Psychological Pricing
Used to play on consumer perceptions Classic example Rs.99.99 instead of Rs.100! Links with value pricing high value goods priced according to what consumers THINK should be the price

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market.

May follow pricing leads of rivals especially where those rivals have a clear dominance of market share. Where competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets

Tender Pricing
Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret

Price Discrimination
Charging a different price for the same good/service in different markets Requires each market to be impenetrable Requires different price elasticity of demand in each market

Destroyer/Predatory Pricing
Deliberate price cutting or offer of free gifts/products to force rivals (normally smaller and weaker) out of business or prevent new entrants. Anti-competitive and illegal if it can be proved

Absorption/Full Cost Pricing

Full Cost Pricing attempting to set price to cover both fixed and variable costs. Absorption Cost Pricing Price set to absorb some of the fixed costs of production

Marginal Cost Pricing

Marginal cost the cost of producing ONE extra or ONE fewer item of production. MC pricing allows flexibility Particularly relevant in transport where fixed costs may be relatively high. Allows variable pricing structure e.g. on a flight from London to New York providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost Pricing

Aircraft flying from Bristol to Edinburgh Total Cost (including normal profit) = 15,000 of which 13,000 is fixed cost* Number of seats = 160, average price = 93.75 MC of each passenger = 2000/160 = 12.50 If flight not full, better to offer passengers chance of flying at 12.50 and fill the seat than not fill it at all! *All figures are estimates only

Contribution Pricing
Contribution = Selling Price Variable cost Prices set to ensure coverage of variable costs and a contribution to the fixed costs. Similar in principle to marginal cost pricing. Break-even analysis might be useful in such circumstances.

Target Pricing
Setting price to target a specified profit level. Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up. Mark-up = Profit/Cost x 100

Cost-Plus Pricing
Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output

Influence of Elasticity
Any pricing decision must be mindful of the impact of price elasticity The degree of price elasticity impacts on the level of sales and hence revenue Elasticity focuses on proportionate (percentage) changes PED = % Change in Quantity demanded/% Change in Price

Influence of Elasticity
Price Inelastic: % change in Q < % change in P e.g. a 5% increase in price would be met by a fall in sales of something less than 5% Revenue would rise A 7% reduction in price would lead to a rise in sales of something less than 7% Revenue would fall

STEPS in designing the PRICING STRATEGY

Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning. Make marketing mix decisions - define the service, distribution, and promotional tactics. Estimate the demand curve - understand how quantity demanded varies with price. Calculate cost - fixed and variable costs associated with the service

STEPS in designing the PRICING STRATEGY

Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo) Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts

Pricing Objectives
1. 2. 3. 4. 5. Survival. Profit maximization. Present Revenue maximization. Prestige. Product Quality leadership.

Objectives of Pricing in services

Revenue & Profit objective: Profit/Contribution maximization. Achieving specific target. Revenue maximization. Covering cost. Patronage and User Base-Related objectives:
Create or build demand. Achieving full capacity utilization. Stimulate trial and adoption of service. Creating large user base.

Value based Pricing Strategies

Satisfaction Based Pricing
Service guarantees Benefit driven pricing Flat rate pricing Convenience pricing Price Bundling Efficiency Pricing

Relationship Pricing
Long term contracts

Cost of Production and Break even analysis

Demand Levels

Regulatory Factors

Competitor Pricing

Positioning

Issues in Pricing of Services

Marketing Mix

References
http://books.google.co.in/books?id=fT1SVOGU7oC&pg=PA538&lpg=PA538&dq=cost+based+pricing+examples+in+service+industry &source=bl&ots=ufX5OM5cRY&sig=1W3U8_Lv4E0SSUV9JEpaCj5OsY&hl=en&sa=X&ei=_nXfUta8NsmQrQe44EQ&ved=0CGAQ6AEwBw#v=onepage&q=cost%20based%20pricing%20examples% 20in%20service%20industry&f=false http://www.pricingleadership.com/why-cost-based-pricing-sucks/

You dont sell through price. You sell the price.