COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. C hapter 7 T he P ricing of S ervices

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. 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).

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. THE ART OF PRICING  Pricing is approached in Britain like Russian roulette--to be indulged in mainly by those contemplating suicide (Chief Executive, 1981).

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. Figure 7.1 Buyer’s Perception of Value Source: 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 perception of value Total customer value Total customer value Total customer cost

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. DEMAND CONSIDERATIONS  Demand tends to be inelastic  Cross price and income elasticities need to be examined  Price discrimination is a viable alternative

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. FACTORS INFLUENCING CONSUMER PRICE SENSITIVITY  Perceived-substitutes  Unique value  Switching costs  Comparison effect  Price-quality effect  Expenditure effect  End-benefit effect  Shared-cost effect  Fairness effect  Inventory effect

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Perceived Substitute Effect  few search attributes  providers often lack resources and marketing expertise  limited product mix

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Unique Value Effect  conveying “uniqueness” is difficult  provider may need to educate the market  uniqueness is often short-lived

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Switching Costs  higher levels of perceived risk  uncertainty involved in changing providers  consequences associated with a bad outcome

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Difficult Comparison Effect  high number of experience attributes  inherent heterogeneity

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  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

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Expenditure Effect  amount of expenditure relative to consumer household income.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  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.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Shared-cost Effect  consumer price sensitivity decreases as the shared-costs with third parties increase.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  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

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY FACTORS  Inventory Effect  consumers are able to protect themselves from future price increases by building inventories.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. PRICE SENSITIVITY (CONCLUSIONS)  Consumers of professional services tend to be less price sensitive.  Need to identify perceptions of key sensitivity factors across service industries  Key factors may be useful for differentiation purposes  Providers may reinforce or alter beliefs pertaining to key factors.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. DEMAND CONSIDERATIONS  Price discrimination is a viable alternative

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. CRITERIA FOR EFFECTIVE PRICE DISCRIMINATION  Different groups of consumers must have different responses to price.  Different segments must be identifiable, and a mechanism must exist to price them differently.  Individuals in one segment who have paid a low price should not be able to pass those savings on to other segments.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. CRITERIA FOR EFFECTIVE PRICE DISCRIMINATION  The segment should be large enough to make it worthwhile.  Costs should not exceed the incremental revenues obtained.  Customers should not be confused.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. 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

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. CUSTOMER CONSIDERATIONS  Price tends to be one of the few search clues available.  More likely to use price as a quality cue  The relationship between price and information may be U-shaped.  Consumers are less certain about reservation prices

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. COMPETITIVE CONSIDERATIONS  Comparing prices is more difficult  Self-service is a viable alternative

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. 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  Less likely to use odd-pricing  Price discounting tends to be less common

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. LEGAL CONSIDERATIONS  Opportunity exists to engage in ethical misconduct and excessively charge consumers for services.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. EMERGING SERVICE PRICING STRATEGIES  Satisfaction-based pricing  primary goal is to reduce the amount of perceived risk.  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.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. EMERGING SERVICE PRICING STRATEGIES  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.

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. EMERGING SERVICE PRICING STRATEGIES  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

COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning  is a trademark used herein under license. ALL RIGHTS RESERVED. 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