1. The Pricing of Services
Chapter 6
The Pricing of Services

2. 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.
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3. Opening Vignette: Ticketmaster’s Pricing Policies
Ticketmaster’s 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.”
Ticketmaster’s pricing policy has raised the ire of fans and performs alike.
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4. 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).
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5. Buyer’s Perception of Value
Figure 6.1
Buyer’s Perception of Value
Product value
Service value
Personnel value
Image Value
Monetary cost
Time cost
Energy cost
Psychic cost
Buyer’s perception
of value
Total
customer
value
cost
Source: Philip Kotler, Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.
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6. Special Considerations of Service Pricing
Cost
Demand
Customer
Competitive
Profit
Product
Legal
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7. 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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8. 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
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9. 10 Factors Influencing Consumer Price Sensitivity
Perceived
Substitutes
Inventory Effect
Unique Value
Price sensitivity
decreases as
Fairness Effect
Switching Costs
Shared-costs Effect
Comparison Effect
End-benefit Effect
Price-Quality Effect
Expenditure Effect
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10. Price Sensitivity Factors
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
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11. Price Sensitivity Factors
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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12. 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
Expenditure Effect
amount of expenditure relative to consumer household income
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13. 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 end-benefit.
Price bundling adds value to the consumer’s end-benefit
Shared-cost Effect
consumer price sensitivity decreases as the shared-costs with third parties increase
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14. 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
Inventory Effect
consumers are able to protect themselves from future price increases by building inventories
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15. 6 Criteria for Effective Price Segmentation Strategy
Different groups of consumers must have different responses to price.
Different segments must be identifiable, and a mechanism must exist to price them differently.
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16. 6 Criteria for Effective Price Segmentation Strategy
No opportunity should exist for individuals in one segment who have paid a low price to sell their tickets to those in other segments.
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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17. 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
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18. Competitive Considerations
Comparing prices is more difficult
Self-service is a viable alternative
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19. Profit Considerations
Price bundling makes the determination of individual prices in the bundle of services more complicated
Price bundling is more effective in a service context
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20. 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
Home sellers have three levels of service (6, 7, or 8%)
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21. 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
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22. Figure 6.4 Pricing Strategies
Pricing Strategy
Provides Value by
Implemented
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 pricing
Sharing with customers the cost savings that the company has achieved by understanding, managing, and reducing the costs of providing the service
Cost-leader pricing
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23. 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
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24. 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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25. Efficiency Pricing
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
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26. 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
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27. Copyright © 2011 Cengage Learning.
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.  
©2011 Cengage Learning. All rights reserved.