Chapter 6 The Pricing of Services

Chapter 6 The Pricing of Services

Chapter Objectives Discuss the concept of perceived value as it pertains to comparing total customer cost to total customer value. Understand the special considerations of service pricing as they relate to cost, demand, customer, competitor, profit, product, and legal considerations. Discuss the pros and cons of using cost-based pricing in service pricing decisions. Discuss the circumstances under which price segmentation is most effective. Explain satisfaction-based, relationship, and efficiency approaches to pricing and provide examples of service firms that are using each of these pricing strategies. 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Opening Vignette: Pay What You Can Restaurants The “Pay What You Can” movement began at Salt Lake City’s One World Café more than 12 years ago Denver is now home to three such restaurants Customers can pay for their meals with cash or labor, or nothing at all The business model is simple: – Feed all customers, regardless of their ability to pay – Ask those who can afford it to contribute a little more to help others There are no set prices on the menu These restaurants bring together people from all walks of life, rather than only the poor Entrepreneurs around the country are considering opening these restaurants 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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) 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 6.1: Buyer’s Perception of Value 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

Figure 6.2: Unique Differences Associated with Service Prices 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

Cost Considerations Service pricing is often not finalized until after provision – Consumers may not know the exact amount they will be charged until after the service is performed Cost-oriented pricing is more difficult for services – Cost of goods sold is either a small or nonexistent portion of total cost – Labor needs are challenging to forecast accurately in many service settings Many services are typically characterized by a high fixed- to variable-cost ratio Service economies of scale tend to be limited 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Demand Considerations Demand for services 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 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 6.3: Factors Influencing Customer’s Price Sensitivity 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

Criteria for an Effective Price Segmentation Strategy 1. Different groups of consumers must have different responses to price 2. The different segments must be identifiable, and a mechanism must exist to price them differently 3. No opportunity should exist for people 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 the exercise worthwhile 5. The cost of running the price segmentation strategy should not exceed the incremental revenues obtained 6. The customers should not be confused by the use of different prices 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Customer Considerations Price tends to be one of the few cues available to consumers during prepurchase Service customers are more likely to use price as a cue to quality Service consumers tend to be less certain about reservation prices 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Competitive Considerations Comparing prices of competitors is more difficult for service customers Self-service is a viable competitive alternative 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product Considerations Compared to the goods sector, there tends to be many different names for price in the service sector Consumers are less able to stockpile by taking advantage of discount prices Product-line pricing tends to be more complicated – For example, beginner, intermediate, and expert level options for sports equipment are generally prices at different price points to reflect the different levels of buyer and seller expertise 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Legal Considerations The 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 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 6.4: Satisfaction-Based, Relationship, and Efficiency Pricing Strategies 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or

Satisfaction-Based Pricing The primary goal is to reduce the amount of perceived risk associated with the service purchase and appeal to target markets that value certainty – Service guarantees are quickly becoming a popular way of attracting customers – Benefit-driven pricing: a pricing strategy that charges customers for services actually used as opposed to overall “membership” fees – Flat-rate pricing: a pricing strategy in which the customer pays a fixed price and the provider assumes the risk of price increases and overruns 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Relationship Pricing The primary objective is to enhance and expand the firm’s relationship with its targeted consumers – Long-term contracts: offer prospective customers incentives for dealing with same provider over a number of years – Price bundling: the practice of marketing two or more services in a single package at a single price – Mixed bundling: price-bundling technique that allows consumers to either buy Service A and Service B together or purchase one service separately 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Efficiency Pricing The primary objective is to appeal to economically minded consumers who are looking for the best price – Example: Southwest Airlines 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adaptive Pricing The idea is to vary product attributes to appeal to a variety of customers and their ideas of value Common adaptive-pricing strategies include: – Altering the product size – Utilizing new distribution channels (online versus brick and mortar) – Requiring purchase minimums – Price versioning (“good,” “better,” and “best” quality) – A la carte pricing (unbundled offerings) – Promotional pricing (two-for-one deals) 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Some Final Thoughts on Pricing Services The price should: – Be easy for consumers 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 2017 Cengage Learning . May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.