Pricing of services: Pricing approaches, Pricing Strategies

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Pricing of services: Pricing
approaches, Pricing Strategies
Services Marketing
Course Instructor: Sneha Sharma (PhD*, MBA, Dip T & D)

2. MBA 906
Pricing Strategy
It is a strategic tool that organizations
use to differentiate their products from
competitors and thereby gain the
competitive edge to capture the
market.

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Three Key Ways Service Prices are
Different for Consumers
• Customer Knowledge of service prices
– Service heterogeneity limits knowledge
– Providers are unwilling to estimate prices
• Medical, legal services
– Individual customer needs vary
• Hotel room , hair stylist
– Price information is overwhelming in services
– Prices are not visible

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The Role of Non Monetary Cost
Time Cost Search Cost
Convenience Cost
Psychological Cost
• Fear of not
understanding , fear
of uncertainty

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Price as an Indicator of Service Quality
Can price attract some
customers?

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Price as an Indicator of Service Quality
Infers Low Quality
Service
Infers High Quality
Service

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A Customer-Focused Approach to
The Pricing Process
Understand Customer Value
Determine Demand based on
Competition and Offering
Estimate Cost, Revenues and LTV
Establish a Pricing Structure and Level
Set Final Price

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

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Cost Based Pricing
• Price = Direct Cost + Overhead Cost + Margin
• Direct Cost = Material + labour used to produce the
service
• Overhead costs are apart from the fixed cost

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Cost Based Pricing Strategies
• Cost Plus Pricing
– Component cost + Mark Up
– Difficult in services as estimation of cost is difficult
• Fee for service
– Cost of the time involved in providing the service
• Consultants, psychologist, accountants

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Competition Based pricing
This approach is based on using the competitors’ price
as the point of reference
• Eg: Fitness clubs, Driving classes, Computer classes etc.
It is used in two situations
• When services are standard across providers.
• In oligopolies where there are few large service providers : Airlines

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Examples of Competition Based
Pricing in Service Industries
Price Signaling:
• Found in markets where there are a number of competitors.
• If any one company offers a lower cost advantage others immediately
match the price. Eg. Airlines
• In this type of pricing strategy the charges offered are the ones that are
prevalent in the market for the same type of service.
• Eg.Tourist bus services, Car hires etc.
Going Rate Pricing:
• Charging the most prevalent price in the market

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Demand Based pricing
• Unlike in cost based and competition based pricing,
demand based pricing is customer focused and not
company or market focused.
– This type of pricing is fixed keeping in mind what the
customers are likely to pay for the perceived value offered
by the service.
– For the determination of demand based pricing non
monetary costs also have to be considered, as these
contribute to the perception of value.

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

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Value is low price
Discounting
Odd pricing
• ( Rs 99,199,299
Synchro-pricing
• Place Differential
• Time Differential
• Quantity Differential
Penetration pricing

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Value is what I want in a service
Prestige pricing
• Offering high quality services
Skimming pricing
• New services introduced at higher price

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Value is the quality I get for that price
Value pricing
• This approach is used where external factors such
as recession or increased competition force
companies to provide 'value' products and services
to retain sales.
Market segmentation pricing
• Service versions
• Client category

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Value is what I get for what I give
Price bundling
• Mixed Bundling
• Mixed Leader Bundling
• Mixed Joint Bundling
Complementary pricing:
• Captive pricing
• two part pricing
• Loss leadership pricing.
Result based pricing
• Contingency pricing (lawyers)