Chapter 8

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Chapter 8Setting a

Price for the Service Rendered


Objectives

1. To examine why service prices vary so much

2. To explore yield management in services

3. To explain the role of pricing objectives in service organizations

4. To analyze the challenge of establishing value for a service offering

5. To show how service costs may be calculated

6. To explore price bundling strategies for services

7. To examine additional pricing considerations


Outline

I. Introduction

II. Why Do Service Prices Vary?

III. Yield Management in Services

IV. Pricing Objectives and Approaches

V. The Relationship Between Service Price and Value

VI. Calculating Service Costs

VII. Price Bundling

VIII. Additional Pricing Considerations

IX. Summary and Conclusion


Introduction

• Price labels vary; You might pay:– A commission to a stockbroker

– A membership fee to a fitness club

– A finance charge to a credit card company

– A premium to an insurance firm

– A fare for transportation

– Rent for housing

– A rate for telephone services


Why Do Service Prices Vary?

• Inseparability and perishability characteristics of services

• Creative ways to maximize revenues and reduce costs per customer served


Yield Management in Services

• The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities

• The inherent trade-off between price and demand makes yield management a difficult strategy for services marketer


Pricing Objectives and Approaches

• Profit-oriented objectives stress generating high returns on the service’s investments in resources and labor

• Volume-oriented objectives stress processing large numbers of customers or their possessions


Pricing Objectivesand Approaches (cont’d)





• A cost-based approach focuses on the price floor: the minimum price that covers all costs of producing the service

• A customer-based approach focuses on the price ceiling: the maximum price customers are likely to pay

• A competition-based approach establishes the service’s price in relation to the competition


The RelationshipBetween Service Price and Value

• Value is an assessment of the benefits of a service versus the costs associated with it.– Cost-benefit analysis

– Price/demand elasticity


Calculating Service Costs

• Cost determinations– Direct costs

– Indirect costs

– Fixed costs

– Variable costs

– Allocated overhead costs

– Shared costs


Calculating Service Costs (cont’d)

• Formula for calculating price– P = TC + NP and TC = FC + SC + VC

Where:

• P=Price

• TC=Total Costs

• NP=Net Profits

• FC=Fixed Costs

• SC=Shared Costs

• VC=Variable Costs


Calculating Service Costs (cont’d)


Price Bundling

• Price bundling links several service offerings or features into one attractive price to give different customer segments a packaged service offering.


Price Bundling (cont’d)






Additional Pricing Considerations


Web Sites• The Broadmoor

(http://www.broadmoor.com), p. 111

• Forbes (http://www.forbes.com/), p.111

• AAA (http//:www.AAA.com/), p.111

• Travel+Leisure Magazine (http://www.travelandleisure.com/), p.111

• Zagat (http://www.zagat.com/), p.111

• Holiday Inn(http://www.sixcontinentshotels.com), p. 111


Web Sites (cont’d)• Motel 6

(http://www.motel6.com), p. 111

• United Airlines(http://www.united.com), p. 124

• Northwest Airlines(http://www.nwa.com), p. 124

• American Airlines(http://aa.com), p. 124

• Delta Airlines(http://www.delta.com), p. 124

• Marriott(http://www.marriott.com), p. 129


Web Sites (cont’d)• SnapFish

(http://www.snapfish.com), p. 124

• Shutterfly(http://www.shutterfly.com), p. 124

• Picasa (http://picasa.google.com), p.124

• Flickr(http://www.flickr.com), p. 124

• Photobucket (http://www.photobucket.com), p. 124

• SmugMug (http://smugmug.com), p. 124

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Chapter 8

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