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Chapter 7
The Pricing of Services
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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 even
mystical in the sense that the intuition is
often the province of the big boss (Dean,
1947).
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THE ART OF PRICING

Pricing is approached in Britain like
Russian roulette--to be indulged in mainly
by those contemplating suicide (Chief
Executive, 1981).
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Figure 7.1 Buyer’s Perception of Value
Product value
Service value
Personnel value
Total
customer
value
Image Value
Buyer’s perception
of value
Monetary cost
Time cost
Energy cost
Total
customer
cost
Psychic cost
Source: Philip Kotler, Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.
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DEMAND
CONSIDERATIONS
Demand tends to be inelastic
 Cross price and income elasticities need to
be examined
 Price discrimination is a viable alternative

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FACTORS INFLUENCING
CONSUMER PRICE SENSITIVITY





Perceived-substitutes
Unique value
Switching costs
Comparison effect
Price-quality effect

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
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Expenditure effect
End-benefit effect
Shared-cost effect
Fairness effect
Inventory effect
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PRICE SENSITIVITY FACTORS

Perceived Substitute Effect
 few
search attributes
 providers often lack resources and marketing
expertise
 limited product mix
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PRICE SENSITIVITY FACTORS

Unique Value Effect
 conveying
“uniqueness” is difficult
 provider may need to educate the market
 uniqueness is often short-lived
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PRICE SENSITIVITY FACTORS

Switching Costs
 higher
levels of perceived risk
 uncertainty involved in changing providers
 consequences associated with a bad outcome
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PRICE SENSITIVITY FACTORS

Difficult Comparison Effect
 high
number of experience attributes
 inherent heterogeneity
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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

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PRICE SENSITIVITY FACTORS

Expenditure Effect
 amount
of expenditure relative to consumer
household income.
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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 endbenefit.

Price bundling adds value to the consumer’s endbenefit.
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PRICE SENSITIVITY FACTORS

Shared-cost Effect
 consumer
price sensitivity decreases as the
shared-costs with third parties increase.
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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
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PRICE SENSITIVITY FACTORS

Inventory Effect
 consumers
are able to protect themselves from
future price increases by building inventories.
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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.

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DEMAND
CONSIDERATIONS

Price discrimination is a viable alternative
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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.
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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.
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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
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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
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COMPETITIVE
CONSIDERATIONS
Comparing prices is more difficult
 Self-service is a viable alternative

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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

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LEGAL
CONSIDERATIONS

Opportunity exists to engage in ethical
misconduct and excessively charge
consumers for services.
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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.
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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.

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EMERGING SERVICE PRICING
STRATEGIES

Efficiency Pricing
 primary
objective is to appeal to economicallyminded consumers by delivering the best and
most cost-effective service for the price.

Cost-leader pricing
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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
COPYRIGHT ©2002 Thomson Learning, Inc. Thomson Learning is a trademark used herein under license.
ALL RIGHTS RESERVED.