sevice pricing

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Chapter Objectives

Describe how consumers relate valueand price.

Understand the special considerations

of service pricing as they relate todemand, cost, customer, competitor,

profit, product and legal considerations.

Discuss the circumstances under which

price segmentation is most effective.

Explain satisfaction-based, relationship,

and efficiency approaches to pricing.


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Opening Vignette: Pricing Woes

Continue for US Airlines

The airlineindustry is

expected tolose at least $2billion in 2005.

Who will be leftin the end?


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The Art of Pricing

Pricing policy is the last stronghold of

medievalism in modern management

[Pricing] is still largely intuitive and evenmystical in the sense that the intuition is

often the province of the big boss (Dean,

1947).


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Pricing is approached in Britain like

Russian roulette--to be indulged in mainly

by those contemplating suicide (ChiefExecutive, 1981).

The Art of Pricing


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Product value

Service value

Personnel value

Image Value

Monetary cost

Time cost

Energy cost

Psychic cost

Buyers perception

of value

Total

customer

value

Total

customer

value

Total

customer

cost

Figure 7.1 Buyers

Perception of Value


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Demand tends to be more inelastic

Cross price elasticity considerations

need to be examined

Price discrimination is a viable practice

to manage demand and supply

challenges

Demand Considerations


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Factors Influencing Consumer

Price Sensitivity

Price sensitivitydecreases as

Inventory Effect Unique Value

Fairness Effect Switching Costs

Price-Quality Effect

Shared-costs Effect Comparison Effect

End-benefit Effect

Expenditure Effect

PerceivedSubstitutes


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Perceived Substitute Effect

few search attributes

providers often lack resources and

marketing expertise limited product mix

Unique Value Effect

conveying uniqueness is difficult

provider may need to educate the market

uniqueness is often short-lived

Price Sensitivity Factors


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Switching Costs

higher levels of perceived risk

uncertainty involved in changing providers

consequences associated with a bad

outcome

Difficult Comparison Effect high number of experience attributes

inherent heterogeneity


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Price-Quality Effect

price acts as a quality indicator whenconsumers:

believe that quality differs among providers believe that low quality imposes greater

consequences

lack other sources of objective information

Expenditure Effect

amount of expenditure relative toconsumer household income



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End-benefit Effect

the more price sensitive consumers are tothe cost of the end-benefit, the more

sensitive they will be to purchases thatcontribute to the end-benefit.

Price bundling adds value to the consumersend-benefit

Shared-cost Effect

consumer price sensitivity decreases asthe shared-costs with third parties

increase



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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

Inventory Effect

consumers are able to protect themselves from

future price increases by building inventories



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Criteria for Effective

Price Discrimination

1. Different groups of consumers must

have different responses to price.

2. Different segments must be

identifiable, and a mechanism must

exist to price them differently.


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3. No opportunity should exist for individualsin one segment who have paid a low priceto sell their tickets to those in othersegments.

4. The segment should be large enough tomake it worthwhile.

5. Costs should not exceed the incrementalrevenues obtained.

6. Customers should not be confused.

Criteria for Effective

Price Discrimination


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Price is sometimes not know until after theservice has been produced

Cost-oriented pricing is more difficult activity-based costing breaks down the

organization into a set of activities, and activitiesinto tasks, which convert materials, labor, andtechnology into outputs

High fixed cost to variable cost ratio

Economies of scale tend to be limited

Cost Considerations


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Price tends to be one of the few search

clues available

More likely to use price as a quality cue

Consumers are less certain aboutreservation prices

Customer Considerations


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Comparing prices is more difficult

Self-service is a viable alternative

Competitive Considerations


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Price bundling makes

the determination of

individual prices in the

bundle of servicesmore complicated

Price bundling is moreeffective in a service

context

Profit Considerations


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Many different names

for price

Consumers are less

able to stockpile bytaking advantage of

discount prices

Product-line pricing is

more difficult Home sellers have

three levels of service

(6, 7, or 8%)

Product Considerations


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Opportunity for illegal pricing practices to

go undetected is greater for services than

goods

To consumers, the issue is one of fairness

and dual entitlement

Legal Considerations


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Satisfaction-based pricing

primary goal is to reduce the amount of

perceived risk

service guarantees

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

Emerging Service Pricing

Strategies


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Relationship Pricing

primary objective is to enhance the firms

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 moreservices as a single package for a single

price


Strategies


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Efficiency Pricing primary objective is to appeal to economically-

minded consumers by delivering the best and

most cost-effective service for the price.

Example: Southwest Airlines


Strategies


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The price should:

Be easy for customers to understand

Represent value to the customer

Encourage customer retention and facilitate

the customers relationship with the

providing firm

Reinforce customer trust Reduce customer uncertainty

Services Pricing: Final Thoughts

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