Setting a Price for
the Service
Rendered
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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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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Variable Costs are…
Expenses that are uniform per
unit of output within a
relevant time period
As volume increases, total
variable costs increase
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THERE ARE TWO CATEGORIES OF
VARIABLE COSTS
1.Cost of Goods Sold
2.Other Variable Costs
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Variable Costs – Cost of Goods Sold
 Covers materials,
labor and factory
overhead applied
directly to production
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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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Fixed Costs
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
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THERE ARE TWO CATEGORIES OF
FIXED COSTS
1.Programmed costs
2.Committed costs
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Fixed Costs – Programmed Costs
Result from attempts to
generate sales volume
Examples include:
 Advertising, sales promotion,
and sales salaries
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Fixed Costs – Committed Costs
Costs required to maintain the
organization
Examples include
nonmarketing expenditures,
such as:
 rent, administrative cost, and
clerical salaries
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Relevant and
Sunk Costs
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Relevant Costs are…
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
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Sunk Costs are…
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
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Sunk Cost Fallacy
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.
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Cost Calculations in Pricing a Service
P = TC + NP
where TC = FC + SC + VC
P
TC
NP
FC
SC
VC
price;
total costs;
net profit;
fixed costs;
shared costs;
variable costs.
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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
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