Donna J. Hill, Ph.D. Services Marketing Fall 2000 Pricing Donna J. Hill, Ph.D. Services Marketing Fall 2000

Objectives for Chapter 16: Pricing of Services Discuss three major ways that service prices differ from goods prices for customers Demonstrate what value means to customers and the role that price plays in value Articulate the key ways that pricing of services differs from pricing of goods Delineate strategies that companies use to price services Give examples of pricing strategy in action

Role of Pricing in Services Forming expectations. Making purchase decisions. Evaluating service quality. Controlling demand.

Figure 16-2 What Do Customers Know about the Prices of Services? Pet Sitter? Wedding Advisor? Nutritionist? Braces?

Reasons Why --- Customers Lack Accurate Reference Price Service Heterogeneity Limits Knowledge Provider Unwillingness to Estimate Prices Individual Customer Needs Vary Price Information is Overwhelming in Services Prices Are Not Visible

= or or Psychic Costs Time Effort Figure 16-3 Customers Will Trade Money for Other Service Costs --- The Role of Non-monetary Costs = or or Psychic Costs Time Effort

Cost Based Pricing Price = direct costs+ overhead costs+profit margin direct = materials and labor overhead = share of fixed costs profit margin = percent of full costs

Examples and Problems Cost-Plus Pricing Fee for service PROBLEMS: 1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value

Cost Analysis Serve as a pricing floor Variable and fixed (examples) Labor costs

Competition Based Pricing Focus on what others charge Situations Standard Oligopolies

Problems and Examples PROBLEMS: Examples Price signaling Going Rate 1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value Examples Price signaling Going Rate

Demand Based Pricing Set Prices Consistent with Customer Perceptions of Value Value is low price Value is Whatever I Want in a Product or Service Value is the Quality I Get for the Price I Pay Value is What I Get for What I Pay

Examples of Demand Pricing--- Value is Low Price Four Types discounting odd pricing synchro-pricing place time quantity incentives penetration pricing volume sensitive to price exonomies in unit costs strong potentional competiton no class of buyers willing to pay higher

Examples of Demand Pricing--- Value is Everything I Want Prestige Pricing Skimming Price major improvements

Quality for the Price Paid Examples of Demand Pricing--- Value as Quality for the Price Paid “Value is the Quality I Get for the Price I Pay” Value Pricing • giving more for less Market Segmentation Pricing • client category • service version

Conditions for Market Segmentation Pricing Segments must value service differently. Segments must be identifiable and profitable. Lower-paying segments cannot sell to higher-paying segments. Cost of implementation must not be higher than incremental revenue. Must not be confusing to current and future customers. Time of usage. Time of reservation. Time of purchase. Location of consumption Target Market

All that is Received for All that is Given Examples of Demand Pricing--- Value as All that is Received for All that is Given “Value is All that I Get for All that I Give” Price Framing Price Bundling Complementary Pricing Results-based Pricing Multiple Use Discounts

Price Framing Organize price information

Price Bundling Pure bundling Mixed bundling Mixed leader bundling Mixed joint bundling

Complementary Pricing Captive Pricing Two Part Pricing Loss Leadership

Results-based Pricing Contingency Pricing Sealed Bid Contingency Pricing Money-Back Guarantees Commission

Multiple-Use Discounts

Meeting Objectives with Multiple-Use Discounts Limited Usage Unlimited Usage Fixed Unlimited Fixed Unlimited Objectives Duration Duration Gain new customers………. Poor Fair Poor Good Shift demand……...….... Excellent Poor Good Poor Stimulate demand……… Excellent Poor Good Poor Increase repeat purchase behavior…….. O.K. Excellent O.K. Good

Problems with Demand Pricing 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

Price Increases 1. Wait for someone else to increase prices. 2. Communicate to customers why a price increase is necessary. 3. Make no acknowledgment of price increase. 4. Make price increase in small increments. 5. Modify service to justify price increase.