Pricing

Donna J. Hill, Ph.D.

Services Marketing

Fall 2000

Objectives for Chapter 16:Objectives for Chapter 16:Pricing of ServicesPricing 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 16-2Figure 16-2

What Do Customers Know about What Do Customers Know about the Prices of Services?the Prices of Services?

Pet Sitter?

Nutritionist?

WeddingAdvisor?

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 16-3Figure 16-3

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

Non-monetary CostsNon-monetary Costs

Effort

=Time

or 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

– penetration pricing volume sensitive to price exonomies in unit costs strong potentional competiton no class of buyers willing to pay higher

Examples of Demand Pricing--- Value is Everything I Want

Prestige Pricing Skimming Price

– major improvements

Examples of Demand Pricing--- Value as Value as

Quality for the Price PaidQuality for the Price Paid

“Value is the Quality I Get for the Price I Pay”

Value Pricing • giving more for less

Market Segmentation Pricing • client category • service version

Conditions forMarket 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 consumptionTarget Market

Examples of Demand Pricing--- Value as Value as All that is Received for All that is GivenAll that is Received for All that is Given

“Value is All thatI 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 Usage Example

Limited Limited “Ten sessions in November for$20.00”

Limited Unlimited “$30.00 for April, no limit tonumber of sessions.”

Unlimited Limited “Ten sessions for $20.00”

Unlimited Unlimited “10% discount to seniorcitizens.”

Meeting Objectives with Multiple-Use Discounts

Limited Usage Unlimited Usage Fixed Unlimited Fixed Unlimited Objectives Duration Duration

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

Problems with Demand Pricing

PROBLEMS: 1. Monetary price must be

adjusted to reflect the value of non-monetary costs

2. Information on service costs less available to customers, hence price may not be a central factor

Price Increases1. 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.