Pricing of Services

Difference between Services & Goods`

• Limited or inaccurate reference point of service

• Monetary price is only one of the prices (Time cost, Search cost, Convenience

cost)

• Price is a good indicator of quality of Service

Pricing Strategy :

It is a strategic tool that organizations use to differentiate

their products from competitors and thereby gain the competitive edge

to capture the market.

STEPS in designing the PRICING STRATEGY

• Develop marketing strategy - perform marketing analysis, segmentation, targeting, and positioning.

• Make marketing mix decisions - define the service, distribution, and promotional tactics.

• Estimate the demand curve - understand how quantity demanded varies with price.

• Calculate cost - fixed and variable costs associated with the service

• Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc

• Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo)

• Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts

STEPS in designing the PRICING STRATEGY

Price ~ Quality

• In the absence of other forms of communication from the company, price becomes the sole decisive factor in selection of a service

• High risk services customers associate price with service assurance eg. ?

Pricing Structures

Cost Based Pricing

Cost Based Pricing

• Price = Direct Cost + Overhead Cost + Margin

• Direct Cost = Material + labour used to produce the service

• Overhead costs are apart from the fixed cost

Used in Services like Advertising , Contracting , etc.

Establishing the Cost of Service

• In complex product lines – like retail banking products, Activity Based Costing is used to determine the price.

• Cost is not related to value, which is determined by the market and customer acceptance.

Fee for Service

• Cost of the time involved in providing the service.

• Eg. Professional services where charges are per hour like consultants, lawyers psychologists etc.

Competition Based pricing

Competition Based pricing

• This approach is based on using the competitors’ price as the point of reference

Eg: Fitness clubs, Driving classes, Computer classes etc.

• When services are standard across providers.

• In oligopolies where there are few large service providers : Airlines

• Price signaling

• Going-rate Pricing

Price Signaling

• Found in markets where there are a number of competitors. If any one company offers a lower cost advantage others immediately match the price. Eg. Airlines.

• In this type of pricing strategy the charges offered are the ones that are prevalent in the market for the same type of service. Eg.Tourist bus services, Car hires etc.

Demand based pricing

Demand Based pricing

• Unlike in cost based and competition based pricing, demand based pricing is customer focused and not company or market focused.

• This type of pricing is fixed keeping in mind what the customers are likely to pay for the perceived value offered by the service.

• For the determination of demand based pricing non monetary costs also have to be considered, as these contribute to the perception of value.

Perceived Value

a. Value is low Price. Eg.?

b. Value is what I want in a service. Eg. ?

c. Value is the quality I get for that price. Eg.?

d. Value is all that I get for all that I give

Pricing Strategies for each of the Perceived Value

definitions

a) Value is low price

• Discounting eg?

• Odd pricing eg?

• Synchro-pricing : Place, time, qty

• Penetration pricing eg?

b) Value is what I want in a service

• Prestige pricing

• Skimming pricing

c) Value is the quality I get for that price

• Value pricing eg?

This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales.

• Market segmentation pricing

d) Value is what I get for what I give

• Price bundling eg.

• Complementary pricing: a) captive

pricing b) two part pricing c) loss

leadership pricing.

• Result based pricing

• Contingency pricing: a form of result based pricing

Pricing Strategies - Exercise

Place pricing strategies onto the correct section of the matrix :

• Wall-Mart launch a new range of own-label soups.

• A cable TV provider moves into a new area and needs to achieve a market share.

• Holiday Inns try to fill hotels during winter weekends.

• Kingfisher launching funliners• Burger King introduces new

range of value meals.• CunardCruise launched two new

crew ships

Pricing Strategies - Exercise

Kingfisher

Price Wars

Price wars are frequent in industries where…

• Cost differentiation opportunities exists

• Capital is intensive and products are homogeneous

egs.?

Project Presentation – Gp 1& 2

• All team members to participate

• 45 min per group incl Q& A with minimum 5 min for Q & A

• 30:70 or 70:30 ?

Thank you