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Chapter 6 The Pricing of Services
Chapter Objectives Describe how consumers relate value and price. Understand the special considerations of service pricing as they relate to demand, 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. ©2011 Cengage Learning. All rights reserved. 2
Opening Vignette: Ticketmasters Pricing Policies Ticketmasters stated goal is to make your purchasing experience easy, efficient and equitable, so we can get you on your way to live events as quickly as possible. Ticketmasters pricing policy has raised the ire of fans and performs alike. ©2011 Cengage Learning. All rights reserved. 3
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). Pricing is approached in Britain like Russian roulette--to be indulged in mainly by those contemplating suicide (Chief Executive, 1981). ©2011 Cengage Learning. All rights reserved. 4
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 Buyers perception of value Total customer value Total customer value Total customer cost Figure 6.1 Buyers Perception of Value ©2011 Cengage Learning. All rights reserved. 5
Special Considerations of Service Pricing 1.Cost 2.Demand 3.Customer 4.Competitive 5.Profit 6.Product 7.Legal ©2011 Cengage Learning. All rights reserved. 6
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 ©2011 Cengage Learning. All rights reserved. 7
Demand Considerations 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 ©2011 Cengage Learning. All rights reserved. 8
Price sensitivity decreases as Price sensitivity decreases as Inventory Effect Unique Value Fairness Effect Switching Costs Price-Quality Effect Shared-costs Effect Comparison Effect End-benefit Effect Expenditure Effect Perceived Substitutes Perceived Substitutes 10 Factors Influencing Consumer Price Sensitivity ©2011 Cengage Learning. All rights reserved. 9
1.Perceived Substitute Effect –few search attributes –providers often lack resources and marketing expertise –limited product mix 2.Unique Value Effect –conveying uniqueness is difficult –provider may need to educate the market –uniqueness is often short-lived Price Sensitivity Factors ©2011 Cengage Learning. All rights reserved. 10
Price Sensitivity Factors 3.Switching Costs –higher levels of perceived risk –uncertainty involved in changing providers –consequences associated with a bad outcome 4.Difficult Comparison Effect –high number of experience attributes –inherent heterogeneity ©2011 Cengage Learning. All rights reserved. 11
5.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 6.Expenditure Effect –amount of expenditure relative to consumer household income Price Sensitivity Factors ©2011 Cengage Learning. All rights reserved. 12
7.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 consumers end-benefit 8.Shared-cost Effect –consumer price sensitivity decreases as the shared-costs with third parties increase Price Sensitivity Factors ©2011 Cengage Learning. All rights reserved. 13
9.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 10.Inventory Effect –consumers are able to protect themselves from future price increases by building inventories Price Sensitivity Factors ©2011 Cengage Learning. All rights reserved. 14
6 Criteria for Effective Price Segmentation Strategy 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. ©2011 Cengage Learning. All rights reserved. 15
3.No opportunity should exist for individuals in one segment who have paid a low price to sell their tickets to those in other segments. 4.The segment should be large enough to make it worthwhile. 5.Costs should not exceed the incremental revenues obtained. 6.Customers should not be confused. 6 Criteria for Effective Price Segmentation Strategy ©2011 Cengage Learning. All rights reserved. 16
Customer Considerations Price tends to be one of the few search clues available More likely to use price as a quality cue Consumers are less certain about reservation prices ©2011 Cengage Learning. All rights reserved. 17
Competitive Considerations Comparing prices is more difficult Self-service is a viable alternative ©2011 Cengage Learning. All rights reserved. 18
Profit Considerations ©2011 Cengage Learning. All rights reserved. 19 Price bundling makes the determination of individual prices in the bundle of services more complicated Price bundling is more effective in a service context
Product Considerations ©2011 Cengage Learning. All rights reserved. 20 Many different names for price Consumers are less able to stockpile by taking advantage of discount prices Product-line pricing is more difficult –Home sellers have three levels of service (6, 7, or 8%)
Legal Considerations 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 ©2011 Cengage Learning. All rights reserved. 21
Figure 6.4 Pricing Strategies Pricing StrategyProvides Value byImplemented Satisfaction- based pricing Recognizing and reducing customers perceptions of uncertainty, which the intangible nature of service magnifies Service guarantees Benefit-driven pricing Flat-rate pricing Relationship pricing Encouraging long-term relationships with the company that customers view as beneficial Long-term contracts Price bundling Efficiency pricingSharing with customers the cost savings that the company has achieved by understanding, managing, and reducing the costs of providing the service Cost-leader pricing ©2011 Cengage Learning. All rights reserved. 22
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 ©2011 Cengage Learning. All rights reserved. 23
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 more services as a single package for a single price ©2011 Cengage Learning. All rights reserved. 24
Efficiency Pricing ©2011 Cengage Learning. All rights reserved. 25 Primary objective is to appeal to economically-minded consumers by delivering the best and most cost- effective service for the price. –Cost-leader pricing Southwest Airlines
Services Pricing: Final Thoughts 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 ©2011 Cengage Learning. All rights reserved. 26
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Cengage Learning. Copyright © 2011 Cengage Learning. ©2011 Cengage Learning. All rights reserved. 27
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