1. Setting a Price for the Service Rendered

2. 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

3. Copyright © Houghton Mifflin Company. All rights reserved.8 - 3 Why Do Service Prices Vary? Perishability Yield management systems

4. Copyright © Houghton Mifflin Company. All rights reserved.8 - 4 Yield Management in Services The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities.

5. Copyright © Houghton Mifflin Company. All rights reserved.8 - 5

6. Copyright © Houghton Mifflin Company. All rights reserved.8 - 6 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.

7. Copyright © Houghton Mifflin Company. All rights reserved.8 - 7

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

9. Copyright © Houghton Mifflin Company. All rights reserved.8 - 9 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

10. Copyright © Houghton Mifflin Company. All rights reserved.8 - 10 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

11. Copyright © Houghton Mifflin Company. All rights reserved.8 - 11 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

12. Copyright © Houghton Mifflin Company. All rights reserved.8 - 12 Calculating Service Costs Cost determinations Formula for calculating price

13. Copyright © Houghton Mifflin Company. All rights reserved.8 - 13 Expenses that are uniform per unit of output within a relevant time period As volume increases, total variable costs increase Variable Costs are…

14. Copyright © Houghton Mifflin Company. All rights reserved.8 - 14 THERE ARE TWO CATEGORIES OF VARIABLE COSTS 1.Cost of Goods Sold 2.Other Variable Costs

15. Copyright © Houghton Mifflin Company. All rights reserved.8 - 15  Covers materials, labor and factory overhead applied directly to production Variable Costs – Cost of Goods Sold

16. Copyright © Houghton Mifflin Company. All rights reserved.8 - 16 Other Variable Costs Expenses not directly tied to production but vary directly with volume Examples include:  Sales commissions, discounts, and delivery expenses

17. Copyright © Houghton Mifflin Company. All rights reserved.8 - 17 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

18. Copyright © Houghton Mifflin Company. All rights reserved.8 - 18 THERE ARE TWO CATEGORIES OF FIXED COSTS 1.Programmed costs 2.Committed costs

19. Copyright © Houghton Mifflin Company. All rights reserved.8 - 19 Result from attempts to generate sales volume Examples include:  Advertising, sales promotion, and sales salaries Fixed Costs – Programmed Costs

20. Copyright © Houghton Mifflin Company. All rights reserved.8 - 20 Costs required to maintain the organization Examples include nonmarketing expenditures, such as:  rent, administrative cost, and clerical salaries Fixed Costs – Committed Costs

21. Copyright © Houghton Mifflin Company. All rights reserved.8 - 21 Relevant and Sunk Costs

22. Copyright © Houghton Mifflin Company. All rights reserved.8 - 22 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…

23. Copyright © Houghton Mifflin Company. All rights reserved.8 - 23 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…

24. Copyright © Houghton Mifflin Company. All rights reserved.8 - 24 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

25. Copyright © Houghton Mifflin Company. All rights reserved.8 - 25

26. Copyright © Houghton Mifflin Company. All rights reserved.8 - 26 P TC NP FC SC VC price; total costs; net profit; fixed costs; shared costs; variable costs. P = TC + NP where TC = FC + SC + VC Cost Calculations in Pricing a Service

27. Copyright © Houghton Mifflin Company. All rights reserved.8 - 27 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.

28. Copyright © Houghton Mifflin Company. All rights reserved.8 - 28

29. Copyright © Houghton Mifflin Company. All rights reserved.8 - 29 Pricing Considerations Positioning price/quality relationship Portfolio mix segments differ in price sensitivity Demand/capacity demand management tool Membership affinity benefits

30. Copyright © Houghton Mifflin Company. All rights reserved.8 - 30 Pricing Considerations Customization higher priced tailored versions Price bundling combination prices Participation lower price for customer effort