Chapter17-1

Pricing of Services

17

Three Key Ways that Service Prices Are

Different for Consumers
Approaches to Pricing Services
Pricing Strategies that Link to the Four
Value Definitions

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All

17-2

Differences between customer

evaluation of pricing for services and
goods
Customers often have inaccurate or limited
reference prices for services
Price is a key signal of quality in services
Monetary price is not the only price relevant
to service customers

17-3

Pricing Quiz
Which dentist would you choose for a filling
in your tooth?
Dentist

Cost for
Filling

Distance
to Dentist

Wait Period
for an
Appointment

Time in
Waiting
Room

Anesthesia

$50

15 miles

3 Weeks

1.5 hour

None

$75

15 miles

1 Week

.5 hour

Novocain

$125

3 miles

1 Week

1 hour

Novocain

$200

3 miles

1 Week

No wait

Nitrous Oxide
& Novocain

17-4

Reference Price
A price point in memory for a good or a
service, and can consist of the price last
paid, the price most frequently paid, or the
average of all prices customers have paid
for similar offerings.

17-5

Customer Often Lack Knowledge of

Service Prices
Customers often lack reference prices for service
Service variability limits knowledge Eg., Medical check-up
Providers are unwilling to estimate prices Eg., Legal Services
Individual customer needs vary Eg., Hairstylists
Collection of price information by customers is difficult Eg., Dry
cleaning
Prices are not visible Eg., Financial services

17-6

The Role of Non-monetary Price

Time costs Eg., DND Flyway
Search costs Eg., mysmartprice.com
Convenience costs Eg., elderly persons
Psychological costs Eg., When banks first introduced
ATMs.
Fear of not understanding (insurance)
Fear of rejection (bank loans)
Fear of outcomes (medical treatment or surgery)

17-7

Price as an Indicator of Service Quality

Can price attract some

customers?

17-8

Price as an Indicator of Service Quality

Infers High Quality

Service

Infers Low Quality Service

17-9

Three Basic Marketing Price Structures

and Challenges for Services

17-10

Cost-based Pricing
A company determines expenses from raw materials and
labour, adds amounts or percentages for overhead and
profit, and thereby arrives at the price. Eg., Advertising
Price = Direct Costs + Overhead Costs + Profit margin
Direct Costs Materials and labour that are associated with
delivering the service
Overhead Costs A share of fixed costs
Profit margin a percentage of full costs (direct + overhead)

17-11

Challenges
Costs are difficult to trace Eg., Tutoring
Labour is more difficult to price than
materials Eg., Time spent for each customer
in banks
Costs may not equal the value that
customers perceive the services are worth
Eg., Tailor

17-12

Examples of Cost-Based Pricing

Strategies
Cost-plus pricing Eg., Construction
Fee for services Eg., Lawyers charge for
their services on an hourly basis.

17-13

Competition Based Pricing

Focuses on the prices charged by other
firms in the same industry or market.
Used predominantly in two situations:
When services are standard across providers
Eg., Dry cleaning industry
In oligopolies Eg., Airline industry

17-14

Challenges
Small firms may charge too little to be viable
Eg., Dry cleaning
Heterogenity of services limits comparability
Eg., Bank charges
Prices may not reflect customer value

17-15

Pricing Strategies
Price Signaling Any price offered by one company will be
matched by competitors to avoid giving a low-cost seller a
distinct advantage.
Occurs in markets with a high concentration of sellers.
Eg., Airline Industry.

Going-rate Pricing Involves charging the most prevalent

price in the market.
Prices in different geographic markets.

17-16

Demand-Based Pricing
Involves setting prices consistent with
customer perceptions of value: Prices are
based on what customers will pay for the
services provided.

17-17

Challenges
Monetary price must be adjusted to reflect
the value of non monetary costs.
Information on service costs is less available
to customers, hence, price may not be a
central factor.

17-18

Four Customer Definitions of Value

17-19

Pricing Strategies When the Customer

Defines Value as Low Price

17-20

Discounting - Service providers offer discounts or price

cuts to communicate to price-sensitive buyers that they are
receiving value. Eg., Colleges offer discounting to attract
students
Odd Pricing The practice of pricing services just below
the exact amount to make buyers perceive that they are
getting a lower price. Eg., Bata charges Rs.799 rather than
Rs.800
Syncho-Pricing Use of price to manage demand for a
service by capitalising on customer sensitivity to prices.
Place Differentials Used for services in which customers have a
sensitivity to location. Eg., The front row at concerts

17-21

Time Differentials Involves price variation that depend on when

the service is consumed. Eg., Telephone service after 11.00 P.M
Quantity Differentials Price decreases given for volume
purchasing Eg., Corporate discounts for airlines
Penetration Pricing New services are introduced at low prices to
stimulate trial and widespread use. Eg., Mobile phones

17-22

Pricing Strategies When the Customer Defines

Value as Everything Wanted in a Service

17-23

Prestige Pricing Form of demand-based pricing by

service marketers who offer high quality or status services
Eg., Restaurants
Skimming Pricing New services are introduced at high
prices with large promotional expenditures. Eg., Mobile
phones

17-24

Pricing Strategies When the Customer

Defines Value as Quality for the Price Paid

17-25

Value pricing Involves assembling a bundle of services

that are desirable to a wide group of customers and then
pricing them lower than they would cost alone. Eg.,
McDonalds and Burger King
Market Segmentation Pricing A service marketer
charges different prices to groups of customers for what
are perceived to be different quality levels of service.
Client Category Eg., Health Clubs
Service Version Eg., Hotels

17-26

Pricing Strategies When the Customer Defines

Value as All that Is Received for All that Is Given

17-27

Price Framing Customers naturally look for price

anchors as well as familiar prices against which to judge
focal services. If they accept the anchors, they view the
price and service package favourably.
Price Bundling Some services are consumed more
effectively in conjunction with other services; other services
accompany the products they support.
Mixed Bundling Eg., Health Clubs
Mixed-leader Bundling Eg., DTH
Mixed-Joint Bundling

17-28

Complementary Pricing Services that are highly

interrelated can be leveraged by using complementary
pricing.
Results-Based Pricing Clients value the settlement they
receive at the conclusion of the service.
Contingency pricing

Sealed Bid Contingency Pricing A form of resultsbased pricing that involves sealed bid guaranteeing results.
Money-Back Guarantees Colleges promising to get
students jobs upon graduation
Commission Service providers earn their fees through
commissions based on a percentage of the selling price.

17-29

Summary of Service Pricing Strategies for

Four Customer Definitions of Value

17-30

A Customer-Focused Approach to
The Pricing Process