Setting a Price for the Service Rendered. Copyright © Houghton Mifflin Company. All rights reserved.8 - 2 Price Labels (or Names) Vary You might pay:

Setting a Price for the Service Rendered

Copyright © Houghton Mifflin Company. All rights reserved. 8 - 2

Price Labels (or Names) 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?

• Perishability

• Yield management systems


Yield Management in Services

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



Pricing Objectives

• 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 Approaches

• Cost-based approach• focuses on the price floor: the minimum price

that covers all costs of producing the service.

• Customer-based approach• focuses on the price ceiling: the maximum

price customers are likely to pay.

• Competition-based approach• establishes the service’s price in relation to

the competition.


The Relationship Between Service Price and Value

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

• Cost-benefit analysis

• Price/demand elasticity


Basic Pricing Anchors

• Price floor - the marketer’s minimum• Costs and profits

• Price ceiling - the customer’s maximum• Perceived value vs. needs (necessity vs.

discretion)

• Price benchmarks - the competitors’ prices• Comparability indicators


Basic Pricing Decisions

• Levels and approach• Why? Market share, patronage or profit

• Bases• What basis? Hourly, flat fee,

contingency fee?

• Collection• How and when? Before, during, after


Calculating Service Costs

• Cost determinations

• Formula for calculating price


Expenses that are uniform per

unit of output within a

relevant time period

As volume increases, total

variable costs increase

Variable Costs are…


THERE ARE TWO CATEGORIES OF

VARIABLE COSTS

1.Cost of Goods Sold

2.Other Variable Costs


Covers materials, labor and factory overhead applied directly to production

Variable Costs – Cost of Goods Sold


Other Variable Costs

Expenses not directly tied to

production but vary directly

with volume

Examples include:

Sales commissions, discounts,

and delivery expenses


Expenses that do not fluctuate with output volume within a relevant time period

They become progressively smaller per unit of output as volume increases

No matter how large volume becomes, the absolute size of fixed costs remains unchanged

Fixed Costs


THERE ARE TWO CATEGORIES OF

FIXED COSTS

1.Programmed costs

2.Committed costs


Result from attempts to

generate sales volume

Examples include:

Advertising, sales promotion,

and sales salaries

Fixed Costs – Programmed Costs


Costs required to maintain the

organization

Examples include

nonmarketing expenditures,

such as:

rent, administrative cost, and

clerical salaries

Fixed Costs – Committed Costs


Relevant and

Sunk Costs


Future expenditures unique to the

decision alternatives under consideration.

Expected to occur in the future as a result of some marketing action

Differ among marketing alternatives being considered

In general, opportunity costs are considered relevant costs

Relevant Costs are…


The direct opposite of relevant costs.

Past expenditures for a given activity

Typically irrelevant in whole or in part to future decisions

Examples of sunk costs:

Past marketing research and development expenditures

Last year’s advertising expense

Sunk Costs are…


When marketing managers attempt to

incorporate sunk costs into future

decisions, they often fall prey to the Sunk

Cost Fallacy – that is, they attempt to

recoup spent dollars by spending even more

dollars in the future.

Example: Continuing to advertise a failing

product heavily in an attempt to recover

what has already been spent on it.

Sunk Cost Fallacy



P

TCNPFC

SCVC

price;

total costs;net profit;fixed costs;

shared costs;variable costs.

P = TC + NPwhere TC = FC + SC + VC

Cost Calculations in Pricing a Service


Price Bundling and Other Strategies

• Price bundling means linking several service offerings or features into one attractive price to give different customer segments a packaged service offering.



Pricing Considerations

• Positioning• price/quality relationship

• Portfolio mix• segments differ in price sensitivity

• Demand/capacity• demand management tool

• Membership• affinity benefits


Pricing Considerations

• Customization• higher priced tailored versions

• Price bundling• combination prices

• Participation• lower price for customer effort

Documents

Setting a Price for the Service Rendered. Copyright © Houghton Mifflin Company. All rights reserved.8 - 2 Price Labels (or Names) Vary You might pay: