Pricing of Services

What Makes Service Pricing Strategy Different (and Difficult)? No ownership - hard for firms to calculate financial costs of creating an intangible performance High ratio of fixed to variable costs - cost to serve one extra customer may be minimal (but must still recover fixed costs) Variability of inputs and outputs - how can firms define a “unit of service” and establish basis for pricing? Many services hard for customers to evaluate - what are they getting in return for their money? Importance of time factor - same service may have more value to customers when delivered faster Use of physical or electronic channels - may create differences in perceived value

What Do Customers Know about the Prices of Services? Pet Sitter? Wedding Advisor? Nutritionist? Braces?

Customers Will Trade Money for Other Service Costs = or or Psychic Costs Time Effort

Customer “expenditures” on service comprise both financial and non-financial outlays Financial costs: price of purchasing service expenses associated with search, purchase activity, usage Time expenditures Physical effort (e.g., fatigue, discomfort) Psychological burdens (mental effort, negative feelings) Negative sensory burdens (unpleasant sensations affecting any of the five senses)

Increasing Net Value by Reducing Non-financial Outlays Reduce time expenditures at each stage, especially waiting time Minimize unwanted psychological burdens Eliminate unwanted physical effort Decrease unpleasant sensory burdens

Net Value = (Benefits – Outlays) Effort Time e Perceived Benefits P e r c e i v e d Outlays

What Price Should We Charge for Our Service? What costs do we have to recover? What prices are competitors charging? How sensitive are our customers to variations in price? What out-of-pocket expenditures and non-financial outlays do customers incur beyond the price of our service? Can we charge different prices at different times or to different customers?

Alternative Pricing Objectives Revenue Oriented Profit seeking - maximize surplus or achieve target profit Cover costs fully allocated costs costs of providing a specific service incremental costs of one extra sale Operations Oriented (fill productive capacity) Vary prices to balance demand and supply at given times Patronage Oriented (understand demand factors) Maximize demand subject to achieving revenue goal Recognize different abilities to pay by segment Offer payment methods that increase chance of purchase

The Pricing Tripod Pricing Strategy Competition Costs Value to customer

Four Approaches to Pricing Cost-Based Pricing set prices relative to financial costs (problem: defining costs) Competition-Based Pricing monitor competitors’ pricing strategy (especially if service lacks differentiation) who is the price leader? (one firm sets the pace) Demand-Led Auctions Requests for Bids Value-Based relate price to value perceived by customer

Difficulties Associated with Basic Price Structures and Usage for Services Cost-based problems: 1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value Competition-based problems: 1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value Cost-Based Competition- Based Demand-Based Demand-based 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

Value Strategies for Service Pricing Pricing strategies to reduce uncertainty service guarantees benefit-driven (pricing that aspect of service that creates value) flat rate (quoting a fixed price in advance) Relationship pricing--incentives to patronize one supplier non-price incentives discounts for volume purchases discounts for purchasing multiple services Low-cost leadership Convince customers not to equate price with quality Must keep economic costs low to ensure profitability at low price

Four Customer Definitions of Value “Value is Everything I Want in a Service” “Value is Low Price” “Value is the Quality I Get for the Price I Pay” “Value is All that I Get for All that I Give”

When the Customer Defines Value as Low Price Pricing Strategies When the Customer Defines Value as Low Price “Value is Low Price” Discounting Odd Pricing Synchro-pricing Penetration Pricing

Pricing Strategies When the Customer Defines Value as Everything Wanted in a Service “Value is Everything I Want in a Service” Prestige Pricing Skimming Pricing

Pricing Strategies When the Customer Defines Value as Quality for the Price Paid “Value is the Quality I Get for the Price I Pay” Value Pricing Market Segmentation Pricing

Pricing Strategies When the Customer Defines Value as All that is Received for All that is Given “Value is All that I Get for All that I Give” Price Framing Price Bundling Complementary Pricing Results-based Pricing

I Get for the Price I Pay” I Get for All that I Give” Summary of Service Pricing Strategies for Four Customer Definitions of Value “Value is Everything I Want in a Service” “Value is Low Price” Discounting Odd Pricing Synchro-pricing Penetration Pricing Prestige Pricing Skimming Pricing “Value is the Quality I Get for the Price I Pay” “Value is All that I Get for All that I Give” Price Framing Price Bundling Complementary Pricing Results-based Pricing Value Pricing Market Segmentation Pricing

Pricing Issues: Putting Strategy into Practice What is the basis for pricing? How much to charge? Who should collect payment? Where should payment be made? When should payment be made? How should payment be made? How to communicate prices?

Ethical Concerns in Pricing Customers are vulnerable when service is hard to evaluate or they don’t observe work may pay for unnecessary work may pay for poorly executed work may be charged for work that wasn’t actually performed Many services have complex pricing schedules hard to understand difficult to calculate full costs in advance of service Unfairness and misrepresentation in price promotions misleading advertising hidden charge Too many rules and regulations customers feel constrained, exploited customers unfairly penalized when plans change