4362ch8 Sp10

Copyright © Houghton Mifflin Company. All rights reserved. 8 | 1

Chap 8: Setting a Price for the Service Rendered

Price labels vary; You might pay:– A commission to a stockbroker– A membership fee to a fitness club– A finance charge to a credit card company– A premium to an insurance firm– A fare for transportation– Rent for housing– A rate for telephone services


Why Do Service Prices Vary?

Inseparability and perishability characteristics of services

1.Price is a function of supply and demand. Higher prices during peak demand.

During slow demand prices are lowered to maximize capacity (hotel rooms, seats in movie theater, airline seats, etc)


Why Do Service Prices Vary?

2. Service providers unwilling to estimate pricesEx: Provider may not know price until after the service is completed

3. Individual customer needs vary over timeEx: Life insurance (whole life vs. term), different deductibles, variations associated with customers (age, health risk, smoker vs. non-smoker, etc.)


Yield Management in Services

Creative ways to maximize revenues and reduce costs per customer served

• The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities

• The inherent trade-off between price and demand makes yield management a difficult strategy for services marketer


Yield Management in Services

Example:Hotels seek to fill their rooms because an

empty room is an unproductive asset. When demand is low, the hotel may offer special discounts to attract more customers. When demand exceeds capacity, hotel may increase their prices, and focus on segments that are willing to pay higher amounts.


Pricing Objectives and Approaches

Profit-oriented objectives stress generating high returns on the service’s investments in resources and labor

Volume-oriented objectives stress processing large numbers of customers or their possessions


Pricing Objectivesand Approaches (cont’d)



A cost-based approach focuses on the price floor: the minimum price that covers all costs of producing the service.

Ex: Fee for service = cost of the time involved in producing the service



A customer-based approach focuses on the price ceiling: the maximum price customers are likely to pay.

Price is consistent with customer perceptions of value.

Ex: Monetary price is the most important determinant of value (price sensitive); Others are willing to pay a premium for luxury, status.



A competition-based approach establishes the service’s price in relation to the competition

Ex: Cell phone providers compare competitors’ prices dollar for dollar; then determine total cost to customers (monetary and non-monetary); then come up with a better offer.


The RelationshipBetween Service Price and Value

Value is an assessment of the benefits of a service versus the costs associated with it.

Customers often use cost-benefit analysis to determine the value of a service offering.

Perceived value can be raised by either increasing customer perceptions of benefits, lowering perceptions of costs, or both.


Price and Value: Role of Non-Monetary Costs

Non-monetary costs: Time, Search, Convenience, Psychological Costs

Customers will trade money for non-monetary costs incurred.


The Role of Nonmonetary Costs

Time Cost: waiting time and service consumption.Ex: waiting time for car repair is high; pay more where waiting time is less?

Search Cost: effort invested to identify and select among services you desire.Ex: making reservations for one hotel; cost of comparing prices is too high



Convenience Cost: effort expended to receive service; Ex: Choose bank closest to home even though other banks charge lower fees

Psychological Cost: fear of not understanding; fear of uncertainty; Ex: Resistance of on-line payment, even though it saves time and money



Applications:A strategy of minimizing costs to increase

customer value can create competitive advantage for the firm.

Service firm can increase monetary price by reducing time and other costs

Services that save time have monetary value for customers - lawn care; carpet cleaning


Which clinic would you patronize if you needed a chest x-ray?

Clinic A• Price $45• Located1 hour away• Next available

appointment is in 3 weeks

• Hours: Mon-Fri, 8 am-5pm

• Estimated wait in clinic: 2 hours

Clinic B• Price $85• Located 15 minutes

away• Next available

appointment is in 1 week

• Hours: Mon-Fri, 8am-10pm

• Estimated wait: 30 to 45 minutes

Business

4362ch8 Sp10