Chapter 6 The Pricing of Services. Chapter Objectives Describe how consumers relate value and price. Understand the special considerations of service

Chapter 6The Pricing of Services

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Chapter Objectives

• Describe how consumers relate value and price.

• Understand the special considerations of service pricing as they relate to demand, cost, customer, competitor, profit, product and legal considerations.

• Discuss the circumstances under which price segmentation is most effective.

• Explain satisfaction-based, relationship, and efficiency approaches to pricing.

©2011 Cengage Learning. All rights reserved.

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Opening Vignette: Ticketmaster’s Pricing Policies

Ticketmaster’s stated goal is “to make your purchasing experience easy, efficient and equitable, so we can get you on your way to live events as quickly as possible.”

Ticketmaster’s pricing policy has raised the ire of fans and performs alike.


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The Art of Pricing

• Pricing policy is the last stronghold of medievalism in modern management… [Pricing] is still largely intuitive and even mystical in the sense that the intuition is often the province of the big boss (Dean, 1947).

• Pricing is approached in Britain like Russian roulette--to be indulged in mainly by those contemplating suicide (Chief Executive, 1981).


5Source: Philip Kotler, Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.

Product value

Service value

Personnel value

Image Value

Monetary cost

Time cost

Energy cost

Psychic cost

Buyer’s perceptionof value

Totalcustomer

value

Totalcustomer

value

Totalcustomer

cost

Figure 6.1 Buyer’s Perception of Value


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Special Considerations of Service Pricing

1. Cost2. Demand3. Customer4. Competitive5. Profit6. Product7. Legal


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Cost Considerations

• Price is sometimes not know until after the service has been produced

• Cost-oriented pricing is more difficult– activity-based costing breaks down the

organization into a set of activities, and activities into tasks, which convert materials, labor, and technology into outputs

• High fixed cost to variable cost ratio

• Economies of scale tend to be limited


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Demand Considerations

• Demand tends to be more inelastic• Cross price elasticity considerations

need to be examined• Price discrimination is a viable

practice to manage demand and supply challenges


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Price sensitivitydecreases as

Price sensitivitydecreases as

Inventory EffectInventory Effect Unique ValueUnique Value

Fairness EffectFairness Effect Switching CostsSwitching Costs

Price-Quality EffectPrice-Quality Effect

Shared-costs EffectShared-costs Effect Comparison EffectComparison Effect

End-benefit EffectEnd-benefit Effect

Expenditure EffectExpenditure Effect

PerceivedSubstitutes

PerceivedSubstitutes

10 Factors Influencing Consumer Price Sensitivity


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1. Perceived Substitute Effect– few search attributes– providers often lack resources and

marketing expertise– limited product mix

2. Unique Value Effect– conveying “uniqueness” is difficult– provider may need to educate the

market– uniqueness is often short-lived

Price Sensitivity Factors


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3. Switching Costs– higher levels of perceived risk– uncertainty involved in changing

providers– consequences associated with a bad

outcome

4. Difficult Comparison Effect– high number of experience attributes– inherent heterogeneity


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5. Price-Quality Effect– price acts as a quality indicator when

consumers:• believe that quality differs among

providers• believe that low quality imposes greater

consequences• lack other sources of objective

information

6. Expenditure Effect– amount of expenditure relative to

consumer household income



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7. End-benefit Effect– the more price sensitive consumers

are to the cost of the end-benefit, the more sensitive they will be to purchases that contribute to the end-benefit.

• Price bundling adds value to the consumer’s end-benefit

8. Shared-cost Effect– consumer price sensitivity decreases

as the shared-costs with third parties increase



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9. Fairness Effect– fairness is typically assessed by comparing

the price to:• previous prices paid for similar services• prices paid for similar services under similar

circumstances• the benefit gained

– assessing “service” fairness is difficult

10.Inventory Effect– consumers are able to protect themselves

from future price increases by building inventories



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6 Criteria for EffectivePrice Segmentation Strategy

1. Different groups of consumers must have different responses to price.

2. Different segments must be identifiable, and a mechanism must exist to price them differently.


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3. No opportunity should exist for individuals in one segment who have paid a low price to sell their tickets to those in other segments.

4. The segment should be large enough to make it worthwhile.

5. Costs should not exceed the incremental revenues obtained.

6. Customers should not be confused.

6 Criteria for EffectivePrice Segmentation Strategy


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Customer Considerations

• Price tends to be one of the few search clues available

• More likely to use price as a quality cue

• Consumers are less certain about reservation prices


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Competitive Considerations

• Comparing prices is more difficult

• Self-service is a viable alternative


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Profit Considerations


• Price bundling makes the determination of individual prices in the bundle of services more complicated

• Price bundling is more effective in a service context

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Product Considerations


• Many different names for price

• Consumers are less able to stockpile by taking advantage of discount prices

• Product-line pricing is more difficult

– Home sellers have three levels of service

(6, 7, or 8%)

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Legal Considerations

• Opportunity for illegal pricing practices to go undetected is greater for services than goods

• To consumers, the issue is one of fairness and dual entitlement


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Figure 6.4 Pricing Strategies

Pricing Strategy

Provides Value by Implemented

Satisfaction-based pricing

Recognizing and reducing customers’ perceptions of uncertainty, which the intangible nature of service magnifies

Service guaranteesBenefit-driven pricingFlat-rate pricing

Relationship pricing

Encouraging long-term relationships with the company that customers view as beneficial

Long-term contractsPrice bundling

Efficiency pricing

Sharing with customers the cost savings that the company has achieved by understanding, managing, and reducing the costs of providing the service

Cost-leader pricing


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Satisfaction-based pricing

• Primary goal is to reduce the amount of perceived risk– service guarantees– benefit-driven pricing: charges

customers for services actually used as opposed to overall membership fees

– flat-rate pricing: customer pays a fixed price and the provider assumes the risk of price increases and overruns


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Relationship Pricing

• Primary objective is to enhance the firm’s relationship with its targeted consumers.– long-term contracts: offers price and

nonprice incentives for dealing with the same provider over a number of years

– pricing bundling: marketing two or more services as a single package for a single price


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Efficiency Pricing


• Primary objective is to appeal to economically-minded consumers by delivering the best and most cost-effective service for the price.

– Cost-leader pricing• Southwest Airlines

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Services Pricing: Final Thoughts

• The price should: – Be easy for customers to understand– Represent value to the customer– Encourage customer retention and

facilitate the customer’s relationship with the providing firm

– Reinforce customer trust– Reduce customer uncertainty


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mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Copyright © 2011 Cengage Learning.


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Chapter 6 The Pricing of Services. Chapter Objectives Describe how consumers relate value and price. Understand the special considerations of service