PRICING OF SERVICES

Why Pricing of Services is different?

 Customer knowledge of service price – a reference

price is a price point in memory for a good or a service

 High degree of variability often exists across providers

of services – not every physician defines a checkup the
same way

 Providers are unwilling to estimate prices in advance –

legal service providers; fundamental reason being they
do not know themselves what the service will involve
until the process of service delivery unfolds
 Individual customer needs vary – your haircut fro the
same stylist may cost you differently

 Price invisibility – particularly in financial services,

most customers know about only the rate of return and
not the costs they pay in form of fund and insurance
fees
Role of Non-monetary Costs

 Demand is not just a function of monetary price but is

influenced by other costs as well. Like:

 Time cost since most services require direct participation of the

consumer and thus their real time

 Search costs - the effort invested to identify and select among

services you desire since prices for services are rarely displayed
in shelves an each service establishment offers only one brand
of service (except brokers & agents)

 Convenience costs – like customers have to travel to the

service, if service hours do not coincide with customer’s
available time

 Psychological costs – fear of not understanding (education),

fear of rejection (bank loan), fear of results (surgery)
Price as an Indicator of Service Quality

 Customers prefer cues like company reputation, level of

advertising to access the quality
 In other situations when quality is hard to detect or
price varies a great deal within a class of services,
consumers may believe that price is the best indicator of
quality
 In case of high risk services like medical treatment,
customer looks price as a surrogate for quality
 Thus in addition to cover the cost and match
competitors price, prices must be set with care to
convey the appropriate service quality
Price as an Indicator of Service Quality

Infers High Quality

Service

Infers Low Quality Service

APPROACHES TO PRICING
SERVICES
COST BASED PRICING

COMPETITION BASED PRICING

DEMAND BASED PRICING

Cost -Based Pricing

 Price = Direct costs + Overhead costs + Profit Margin

 Challenges:
 Costs are difficult to trace as cost based pricing involves
defining the units in which a service is purchased
 Thus services are sold in terms of input units (like hours) rather
units of measured output
 Labor is more difficult to price than material
 Used in industries in which cost can be estimated in advance
like, advertising, construction
Competition-Based Pricing

 Monitor competitors’ pricing strategy (especially if

service lacks differentiation like dry cleaning and its an
oligopoly like airline)

 Challenges:
 Small firms may charge too and not make margins high enough
to remain in business
 Heterogeneity of services across and within providers makes it
difficult to compare
Demand-Based Pricing

 Relate price to value perceived by customer i.e. prices

are based on what customers will pay for the services
provided

 Challenges:
 Monetary price must be adjusted to reflected the value of
non-monetary costs
 Information on service costs may be less available to
customers, making monetary price not as salient indicator
to quality
 Value has 4 meanings:
1. Value is low price – equate value with low price like, a
carpet on sale

2. Value is everything I want in a service – emphasize

the benefits rather price like, best education for a MBA

3. Value is the quality I get for the price I pay – trade off
between the money they give up and the quality they
receive like, for a business travel, lowest price for a
quality brand

4. Value is all that I get for all that I give – consider all
benefits and sacrifice components (money, time, effort)