Pricing
of
Services
What Makes Service Pricing
Strategy Different (and Difficult)?
• No ownership - hard for firms to calculate financial costs of
creating an intangible performance
• High ratio of fixed to variable costs - cost to serve one
extra customer may be minimal (but must still recover fixed
costs)
• Variability of inputs and outputs - how can firms define a
“unit of service” and establish basis for pricing?
• Many services hard for customers to evaluate - what are
they getting in return for their money?
• Importance of time factor - same service may have more
value to customers when delivered faster
• Use of physical or electronic channels - may create
differences in perceived value
What Do Customers Know about
the Prices of Services?
Wedding
Advisor?
Nutritionist?
Pet Sitter?
Braces?
Customers Will Trade Money for
Other Service Costs
=
or
Time
or
Effort
Psychic Costs
Customer “expenditures” on service
comprise both financial and
non-financial outlays
Financial costs:
– price of purchasing service
– expenses associated with search, purchase activity, usage
• Time expenditures
• Physical effort (e.g., fatigue, discomfort)
• Psychological burdens (mental effort, negative feelings)
• Negative sensory burdens (unpleasant sensations affecting
any of the five senses)
Increasing Net Value by Reducing
Non-financial Outlays
• Reduce time expenditures at each
stage, especially waiting time
• Minimize unwanted psychological
burdens
• Eliminate unwanted physical effort
• Decrease unpleasant sensory
burdens
Net Value = (Benefits – Outlays)
Effort Time
e
Perceived
Benefits
Perceived
Outlays
What Price Should We
Charge for Our Service?
• What costs do we have to recover?
• What prices are competitors charging?
• How sensitive are our customers to
variations in price?
• What out-of-pocket expenditures and non-financial
outlays do customers incur beyond the price of our
service?
• Can we charge different prices at different times or
to different customers?
Alternative Pricing Objectives
Revenue Oriented
• Profit seeking - maximize surplus or achieve target profit
• Cover costs
– fully allocated costs
– costs of providing a specific service
– incremental costs of one extra sale
Operations Oriented (fill productive capacity)
• Vary prices to balance demand and supply at given times
Patronage Oriented (understand demand factors)
• Maximize demand subject to achieving revenue goal
• Recognize different abilities to pay by segment
• Offer payment methods that increase chance of purchase
The Pricing Tripod
Pricing Strategy
Competition
Costs
Value to customer
Four Approaches to Pricing
• Cost-Based Pricing
– set prices relative to financial costs (problem: defining costs)
• Competition-Based Pricing
– monitor competitors’ pricing strategy (especially if service lacks
differentiation)
– who is the price leader?
(one firm sets the pace)
• Demand-Led
– Auctions
– Requests for Bids
• Value-Based
– relate price to value perceived by customer
Difficulties Associated with Basic Price
Structures and Usage for Services
Competition-based problems:
1. Small firms may charge too
little to be viable
2. Heterogeneity of services
limits comparability
3. Prices may not
reflect customer
value
Cost-based problems:
1. Costs difficult to trace
2. Labor more difficult to
price than materials
3. Costs may not equal value
Demand-based problems:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor
Value Strategies for Service Pricing
• Pricing strategies to reduce uncertainty
– service guarantees
– benefit-driven (pricing that aspect of service that creates value)
– flat rate (quoting a fixed price in advance)
• Relationship pricing--incentives to patronize one supplier
– non-price incentives
– discounts for volume purchases
– discounts for purchasing multiple services
• Low-cost leadership
– Convince customers not to equate price with quality
– Must keep economic costs low to ensure profitability at low price
Four Customer Definitions of Value
“Value is Low Price”
“Value is Everything
I Want in a Service”
“Value is the
Quality I Get for
the Price I Pay”
“Value is All that
I Get for All
that I Give”
Pricing Strategies
When the Customer Defines Value as
Low Price
“Value is Low Price”
Discounting
 Odd Pricing
 Synchro-pricing
 Penetration Pricing

Pricing Strategies When the
Customer Defines Value as
Everything Wanted in a Service
“Value
is Everything
I Want in a Service”
Prestige Pricing
 Skimming Pricing

Pricing Strategies When the
Customer Defines Value as
Quality for the Price Paid
“Value
is the Quality
I Get for the Price I Pay”
 Value Pricing
 Market Segmentation
Pricing
Pricing Strategies When the
Customer Defines 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
Summary of Service Pricing
Strategies for Four Customer
Definitions of Value
“Value is Low Price”




Discounting
Odd Pricing
Synchro-pricing
Penetration Pricing
“Value is the Quality
I Get for the Price I Pay”
 Value Pricing
 Market Segmentation
Pricing
“Value is Everything
I Want in a Service”
 Prestige Pricing
 Skimming Pricing
“Value is All that
I Get for All that I Give”
 Price Framing
 Price Bundling
 Complementary
Pricing
 Results-based Pricing
Pricing Issues:
Putting Strategy into Practice
• What is the basis for pricing?
• How much to charge?
• Who should collect payment?
• Where should payment be made?
• When should payment be made?
• How should payment be made?
• How to communicate prices?
Ethical Concerns in Pricing
• Customers are vulnerable when service is hard to
evaluate or they don’t observe work
– may pay for unnecessary work
– may pay for poorly executed work
– may be charged for work that wasn’t actually performed
• Many services have complex pricing schedules
– hard to understand
– difficult to calculate full costs in advance of service
• Unfairness and misrepresentation in price promotions
– misleading advertising
– hidden charge
• Too many rules and regulations
– customers feel constrained, exploited
– customers unfairly penalized when plans change