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Setting a Price for the Service Rendered
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Price Labels (or Names) 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
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Why Do Service Prices Vary?
• Perishability
• Yield management systems
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Yield Management in Services
• The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities.
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Pricing Objectives
• 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.
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Copyright © Houghton Mifflin Company. All rights reserved. 8 - 8
Pricing Approaches
• Cost-based approach• focuses on the price floor: the minimum price
that covers all costs of producing the service.
• Customer-based approach• focuses on the price ceiling: the maximum
price customers are likely to pay.
• Competition-based approach• establishes the service’s price in relation to
the competition.
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The Relationship Between 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
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Basic Pricing Anchors
• Price floor - the marketer’s minimum• Costs and profits
• Price ceiling - the customer’s maximum• Perceived value vs. needs (necessity vs.
discretion)
• Price benchmarks - the competitors’ prices• Comparability indicators
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Basic Pricing Decisions
• Levels and approach• Why? Market share, patronage or profit
• Bases• What basis? Hourly, flat fee,
contingency fee?
• Collection• How and when? Before, during, after
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Calculating Service Costs
• Cost determinations
• Formula for calculating price
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Expenses that are uniform per
unit of output within a
relevant time period
As volume increases, total
variable costs increase
Variable Costs are…
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THERE ARE TWO CATEGORIES OF
VARIABLE COSTS
1.Cost of Goods Sold
2.Other Variable Costs
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Covers materials, labor and factory overhead applied directly to production
Variable Costs – Cost of Goods Sold
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Other Variable Costs
Expenses not directly tied to
production but vary directly
with volume
Examples include:
Sales commissions, discounts,
and delivery expenses
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Expenses that do not fluctuate with output volume within a relevant time period
They become progressively smaller per unit of output as volume increases
No matter how large volume becomes, the absolute size of fixed costs remains unchanged
Fixed Costs
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THERE ARE TWO CATEGORIES OF
FIXED COSTS
1.Programmed costs
2.Committed costs
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Result from attempts to
generate sales volume
Examples include:
Advertising, sales promotion,
and sales salaries
Fixed Costs – Programmed Costs
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Costs required to maintain the
organization
Examples include
nonmarketing expenditures,
such as:
rent, administrative cost, and
clerical salaries
Fixed Costs – Committed Costs
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Relevant and
Sunk Costs
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Future expenditures unique to the
decision alternatives under consideration.
Expected to occur in the future as a result of some marketing action
Differ among marketing alternatives being considered
In general, opportunity costs are considered relevant costs
Relevant Costs are…
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The direct opposite of relevant costs.
Past expenditures for a given activity
Typically irrelevant in whole or in part to future decisions
Examples of sunk costs:
Past marketing research and development expenditures
Last year’s advertising expense
Sunk Costs are…
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When marketing managers attempt to
incorporate sunk costs into future
decisions, they often fall prey to the Sunk
Cost Fallacy – that is, they attempt to
recoup spent dollars by spending even more
dollars in the future.
Example: Continuing to advertise a failing
product heavily in an attempt to recover
what has already been spent on it.
Sunk Cost Fallacy
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Copyright © Houghton Mifflin Company. All rights reserved. 8 - 26
P
TCNPFC
SCVC
price;
total costs;net profit;fixed costs;
shared costs;variable costs.
P = TC + NPwhere TC = FC + SC + VC
Cost Calculations in Pricing a Service
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Price Bundling and Other Strategies
• Price bundling means linking several service offerings or features into one attractive price to give different customer segments a packaged service offering.
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Pricing Considerations
• Positioning• price/quality relationship
• Portfolio mix• segments differ in price sensitivity
• Demand/capacity• demand management tool
• Membership• affinity benefits
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Pricing Considerations
• Customization• higher priced tailored versions
• Price bundling• combination prices
• Participation• lower price for customer effort