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Chapter Objectives
Describe how consumers relate valueand price.
Understand the special considerations
of service pricing as they relate todemand, cost, customer, competitor,
profit, product and legal considerations.
Discuss the circumstances under which
price segmentation is most effective.
Explain satisfaction-based, relationship,
and efficiency approaches to pricing.
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Opening Vignette: Pricing Woes
Continue for US Airlines
The airlineindustry is
expected tolose at least $2billion in 2005.
Who will be leftin the end?
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The Art of Pricing
Pricing policy is the last stronghold of
medievalism in modern management
[Pricing] is still largely intuitive and evenmystical in the sense that the intuition is
often the province of the big boss (Dean,
1947).
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Pricing is approached in Britain like
Russian roulette--to be indulged in mainly
by those contemplating suicide (ChiefExecutive, 1981).
The Art of Pricing
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Product value
Service value
Personnel value
Image Value
Monetary cost
Time cost
Energy cost
Psychic cost
Buyers perception
of value
Total
customer
value
Total
customer
value
Total
customer
cost
Figure 7.1 Buyers
Perception of Value
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Demand 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
Demand Considerations
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Factors Influencing Consumer
Price Sensitivity
Price sensitivitydecreases as
Inventory Effect Unique Value
Fairness Effect Switching Costs
Price-Quality Effect
Shared-costs Effect Comparison Effect
End-benefit Effect
Expenditure Effect
PerceivedSubstitutes
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Perceived Substitute Effect
few search attributes
providers often lack resources and
marketing expertise limited product mix
Unique Value Effect
conveying uniqueness is difficult
provider may need to educate the market
uniqueness is often short-lived
Price Sensitivity Factors
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Price Sensitivity Factors
Switching Costs
higher levels of perceived risk
uncertainty involved in changing providers
consequences associated with a bad
outcome
Difficult Comparison Effect high number of experience attributes
inherent heterogeneity
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Price-Quality Effect
price acts as a quality indicator whenconsumers:
believe that quality differs among providers believe that low quality imposes greater
consequences
lack other sources of objective information
Expenditure Effect
amount of expenditure relative toconsumer household income
Price Sensitivity Factors
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End-benefit Effect
the more price sensitive consumers are tothe cost of the end-benefit, the more
sensitive they will be to purchases thatcontribute to the end-benefit.
Price bundling adds value to the consumersend-benefit
Shared-cost Effect
consumer price sensitivity decreases asthe shared-costs with third parties
increase
Price Sensitivity Factors
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Fairness Effect
fairness is typically assessed by comparing the
price to:
previous prices paid for similar services
prices paid for similar services under similar
circumstances
the benefit gained
assessing service fairness is difficult
Inventory Effect
consumers are able to protect themselves from
future price increases by building inventories
Price Sensitivity Factors
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Criteria for Effective
Price Discrimination
1. Different groups of consumers must
have different responses to price.
2. Different segments must be
identifiable, and a mechanism must
exist to price them differently.
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3. No opportunity should exist for individualsin one segment who have paid a low priceto sell their tickets to those in othersegments.
4. The segment should be large enough tomake it worthwhile.
5. Costs should not exceed the incrementalrevenues obtained.
6. Customers should not be confused.
Criteria for Effective
Price Discrimination
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Price is sometimes not know until after theservice has been produced
Cost-oriented pricing is more difficult activity-based costing breaks down the
organization into a set of activities, and activitiesinto tasks, which convert materials, labor, andtechnology into outputs
High fixed cost to variable cost ratio
Economies of scale tend to be limited
Cost Considerations
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Price tends to be one of the few search
clues available
More likely to use price as a quality cue
Consumers are less certain aboutreservation prices
Customer Considerations
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Comparing prices is more difficult
Self-service is a viable alternative
Competitive Considerations
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Price bundling makes
the determination of
individual prices in the
bundle of servicesmore complicated
Price bundling is moreeffective in a service
context
Profit Considerations
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Many different names
for price
Consumers are less
able to stockpile bytaking advantage of
discount prices
Product-line pricing is
more difficult Home sellers have
three levels of service
(6, 7, or 8%)
Product Considerations
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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
Legal Considerations
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Satisfaction-based pricing
primary goal is to reduce the amount of
perceived risk
service guarantees
benefit-driven pricing: charges customers for
services actually used as opposed to overall
membership fees flat-rate pricing: customer pays a fixed price
and the provider assumes the risk of price
increases and overruns
Emerging Service Pricing
Strategies
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Relationship Pricing
primary objective is to enhance the firms
relationship with its targeted consumers. long-term contracts: offers price and
nonprice incentives for dealing with the
same provider over a number of years
pricing bundling: marketing two or moreservices as a single package for a single
price
Emerging Service Pricing
Strategies
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Efficiency Pricing primary objective is to appeal to economically-
minded consumers by delivering the best and
most cost-effective service for the price.
Example: Southwest Airlines
Emerging Service Pricing
Strategies
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The price should:
Be easy for customers to understand
Represent value to the customer
Encourage customer retention and facilitate
the customers relationship with the
providing firm
Reinforce customer trust Reduce customer uncertainty
Services Pricing: Final Thoughts