1. Pricing of
Services

2. 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

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

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

5. 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)

6. 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

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

8. 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?

9. 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

10. The Pricing Tripod Pricing Strategy Competition Costs Value to
customer

11. 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

12. 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

13. 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

14. 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”

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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?

21. 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