1. 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

2. 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).

3. 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).

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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.

14. 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.

15. 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

16. 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.

17. 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.

18. 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

19. 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.

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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.

26. 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.

27. 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.

28. 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

29. 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