Pricing
Donna J. Hill, Ph.D.
Services Marketing
Fall 2000
Objectives for Chapter 16:
Pricing of Services
• Discuss three major ways that service prices differ
from goods prices for customers
• Demonstrate what value means to customers and
the role that price plays in value
• Articulate the key ways that pricing of services
differs from pricing of goods
• Delineate strategies that companies use to price
services
• Give examples of pricing strategy in action
Role of Pricing in Services
 Forming
expectations.
 Making purchase
decisions.
 Evaluating service
quality.
 Controlling demand.
Figure 16-2
What Do Customers Know about
the Prices of Services?
Wedding
Advisor?
Nutritionist?
Pet Sitter?
Braces?
Reasons Why --- Customers
Lack Accurate Reference Price
 Service
Heterogeneity Limits
Knowledge
 Provider Unwillingness to
Estimate Prices
 Individual Customer Needs
Vary
 Price Information is
Overwhelming in Services
 Prices Are Not Visible
Figure 16-3
Customers Will Trade Money for
Other Service Costs --- The Role of
Non-monetary Costs
=
or
Time
or
Effort
Psychic
Costs
Cost Based Pricing

Price = direct costs+
overhead costs+profit
margin
– direct = materials and
labor
– overhead = share of
fixed costs
– profit margin = percent
of full costs
Examples and Problems
Cost-Plus
Pricing
Fee for service
PROBLEMS:




1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
Cost Analysis
 Serve
as a pricing floor
 Variable and fixed (examples)
 Labor costs
Competition Based Pricing
Focus on what others
charge
 Situations

– Standard
– Oligopolies
Problems and Examples
PROBLEMS:







1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
Examples
– Price signaling
– Going Rate
Demand Based Pricing
 Set
Prices Consistent with
Customer Perceptions of
Value
– Value is low price
– Value is
Whatever I Want in a Product
or Service
– Value is the Quality I Get for
the Price I Pay
– Value is What I Get for What
I Pay
Examples of Demand Pricing--Value is Low Price
 Four
Types
– discounting
– odd pricing
– synchro-pricing




place
time
quantity
incentives
– penetration pricing




volume sensitive to price
exonomies in unit costs
strong potentional competiton
no class of buyers willing to pay higher
Examples of Demand Pricing--Value is Everything I Want
Prestige Pricing
 Skimming Price

– major improvements
Examples of Demand Pricing--Value as
Quality for the Price Paid
“Value
is the Quality
I Get for the Price I Pay”
 Value Pricing
• giving more for less
 Market Segmentation
Pricing
• client category
• service version
Conditions for
Market Segmentation
Pricing





Segments must value service
differently.
Segments must be identifiable and
profitable.
Lower-paying segments cannot sell to
higher-paying segments.
Cost of implementation must not be
higher than incremental revenue.
Must not be confusing to current and
future customers.
Time of usage.
Time of reservation.
Time of purchase.
Location of consumption
Target Market
Examples of Demand Pricing--- Value as
All that is Received for All that is Given
“Value is All that
I Get for All
that I Give”





Price Framing
Price Bundling
Complementary Pricing
Results-based Pricing
Multiple Use Discounts
Price Framing
 Organize
price information
Price Bundling
Pure bundling
 Mixed bundling
 Mixed leader bundling
 Mixed joint bundling

Complementary Pricing
 Captive
Pricing
 Two Part Pricing
 Loss Leadership
Results-based Pricing
 Contingency
Pricing
 Sealed Bid Contingency Pricing
 Money-Back Guarantees
 Commission
Multiple-Use Discounts
Duration
Usage
Limited
Limited
Limited
Unlimited
Unlimited Limited
Unlimited Unlimited
Example
“Ten sessions in November for
$20.00”
“$30.00 for April, no limit to
number of sessions.”
“Ten sessions for $20.00”
“10% discount to senior
citizens.”
Meeting Objectives with
Multiple-Use Discounts
Objectives
Limited Usage
Fixed Unlimited
Duration
Gain new customers………. Poor
Fair
Shift demand……...….... Excellent Poor
Stimulate demand……… Excellent Poor
Increase repeat
purchase behavior…….. O.K. Excellent
Unlimited Usage
Fixed Unlimited
Duration
Poor
Good
Good
Good
Poor
Poor
O.K.
Good
Problems with Demand Pricing
PROBLEMS:


1. Monetary price must be
adjusted to reflect the value of nonmonetary costs
2. Information on service costs
less available to customers, hence
price may not be a central factor
Price Increases
1. Wait for someone else to increase prices.
2. Communicate to customers why a price
increase is necessary.
3. Make no acknowledgment of price increase.
4. Make price increase in small increments.
5. Modify service to justify price increase.