Pricing in Service Industry Vandana Sachdeva and Prabhleen Sarna By

PRICE-A value that will purchase a definite quantity, weight, or other measure of a good or servicevaluepurchase definitequantityweight measureservice PRICING is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. manufacturing cost

“A price is not merely a function of costs and margins…” Costs + Margins = PRICE VALUE …it is an expression of VALUE

► Production costs ► Indirect costs ► Advertising costs ► Distribution costs ► Manufacturer’s margin ► Distributor’s margin ► Seller’s margin ► Product performance Usefulness & Quality ► Image / Aspirations Brand Equity ► Availability Distribution Strategy ► Service Before/During & After sales Minimize Optimize Maximize Costs + Margins = PRICE VALUE

PRICE - One of the 4 P’s of Marketing Mix

When should a firm set price for the first time? When...  It develops a new product  It introduces its regular product into a new distribution channel or geographical area  It enters bids on new contract work (as in Industrial Sale) 6

SIGNIFICANCE OF PRICING ◊ This is the only element in the marketing mix that brings in the revenues. All the rest are costs. PROFIT=(PRICE X QUANTITY SOLD) – TOTAL COST ◊ Price communicates the value positioning of the product. ◊ Price has a psychological impact on consumers and hence marketers can use it symbolically.

OBJECTIVES OF PRICING  Profit maximization in the short term  Profit optimization in the long run  Price Stabilization  Facing competitive situation  Maintenance of market share  Capturing the Market  Entry into new markets  Ability to pay

FACTORS AFFECTING PRICING DECISIONS Internal Factors External Factors

INTERNAL FACTORS  Marketing Objectives  Positioning  Target Group  Marketing Mix Strategy  4 P’s  Costs  Fixed & Variable  Management Approach  Responsibility  Perspective

 Market Pure Competition Monopolistic Competition Oligopolistic Competition Pure Monopoly  Demand Elastic / Inelastic  Competition Competitors’ offers Competitiors’ reactions  Economy Buying power  Government Influence Laws & Regulations

HOW SERVICE PRICES DIFFER FROM GOODS PRICES (Customers Perspective)  Customer knowledge of service prices:  Service variability limits knowledge  Providers are unwilling to estimate prices  Individual customer needs vary  Collection of price information is overwhelming  Prices are not visible  Role of non-monetary costs:  Time costs  Search costs  Convenience costs  Psychological costs  Price as an indicator of service quality

What Do Customers Know about the Prices of Services? Banking? Nutritionist? Wedding Advisor? Hospital?

Customers Will Trade Money for Other Service Costs Effort = Time or Psychic Costs

PRICING POLICIES COST- BASED BUYER-BASED COMPETITION- BASED

 Cost-Plus Pricing Product Cost + Standard Mark-Up = Price  BE Analysis & Target Profit Pricing A necessary survival tool Cost-Based Pricing

Perceived Value Consider buyers’ perceptions of value NOT the cost Buyer-Based Pricing

Competition-Based Pricing Basing prices on competitors’ prices Premium Pricing Going-Rate Pricing Discount Pricing

Demand-Based Cost-Based Competition- Based 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 Three Basic Price Structures and Difficulties Associated with Usage for Services

The Pricing Challenge Setting right price is a crucial decision to the profitability of services and of all the decisions of marketing mix, pricing decisions are hardest to make. It is the most challenging decision the business must take. The marketer may decide to follow any strategy that suits best for their services and earn revenues. PRICE Generates Revenues

Price Change Reaction of Customers: Choose a substitute / Forgo the purchase Reaction of Competitors/responding to competitor’s price change: Maintain price Maintain price and add value Reduce price Increase price and quality Launch a low price fighter

Customer’s Perceived Value  Value is low Price.  Value is what they want in a service.  Value is the quality they get for the price.  Value is all that I get for all that I give Value = Quality ÷ Price

Price Quality Strategies Super valueHigh valuePremium Good valueMedium valueOvercharging EconomyFalse economyRip off 23 Price Quality

Pricing Strategies

Penetration Pricing

Market Skimming

Value Pricing

Loss Leader

Psychological Pricing

Going Rate (Price Leadership)

Tender Pricing

Price Discrimination

Destroyer Pricing/Predatory Pricing

Absorption/Full Cost Pricing

Marginal Cost Pricing

Contribution Pricing

Target Pricing

Cost-Plus Pricing

Influence of Elasticity

Discounts and Allowances  Cash Discount  Trade Discount  Early payment  Seasonal Discount  Bulk purchase (Quantity Discount)  Commission  Other Allowances 40

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