Service Pricing
Tom Chapman
Indicative Content
• Pricing Strategies• Problems associated with pricing
services• Influences on Price• Price discrimination• Relating Price and Value
Pricing Strategies
• Revenue & Profit Objectives• Seek Profit• Cover Costs
• Patronage & User Base• Build Demand• Build a user base
The Pricing Tripod
Pricing Strategy
Costs Competition
Value to Customer
Cost Based Pricing• Difficult to establish costs of intangibles• Services tend to have a higher fixed
cost ratio to variable costs. Why?• ABC (Activity based cost)• Ignores the competition• Useful where the service is uncertain• Ignores customer perception of value
Service pricing strategies for Value
Value is low priceDiscountingOdd Pricing
Synchro PricingPenetration Pricing
Value is all that I get for all that I give
Price framingPrice Bundling
Complimentary PricingResults-based pricing
Value is the quantity I get for the price I pay
Value PricingMarket Segmentation Pricing
Value is everything I want in a service
Prestige PricingSkimming Pricing
(Zeithaml, V. (1988) Consumer Perceptions of Price, Quality, and Value: A means-End Model and Synthesis of
Evidence Journal of Marketing. 52(July), 2 –21.
How do you communicate value?
• Reduce uncertainty• Benefit driven pricing• Flat rate pricing
• Enhance relationships• Relationship pricing
• Bulk discounts• Bundled pricing
• Low cost leadership• The challenge of cost v quality
• Value perception management• Credence services? • Price v speed of service
User Costs
Search costs
Purchase &use costs
After costs
Sensory
Time
Problem-solving
Follow-up
Psychological
Physical
Money
Incidentalexpenses
Purchase price
Lovelock, 1999
Competition Based Pricing
Going rate pricing
Sealed-bidpricing
High Price Competition when - • Large number of competitors• Large number of substitutes• Wide distribution of offers• Surplus capacity in industry
• Think Porters 5 Forces• Think Globalisation• Think Internet
Reduced Price Competition -
• Non-price related costs of alternatives are high
• Personalisation, Customisation & Switching costs matter
• Time & Location reduce choice
Revenue / Yield Management
• Supply & Demand forecasting• Reserve Capacity• Price Elasticity • Rate Fences
• Physical • Non-physical
Rate Fences• Physical
• Basic Product• Amenities• Service Level
• Non-Physical• Transactional
Characteristics• Consumption
Characteristics• Buyer
Characteristics
Yield Management
• Effective When-• Relatively fixed capacity• High fixed cost structure• Perishable inventory• Variable / uncertain demand• Varying customer price sensitivity
Ethical Concerns• Clear, logical & fair pricing
schedules• Use high published prices and
frame fenced as discounts• Communicate benefits• Use bundles to hide discounts• Take care of loyal customers• Use service recovery to
compensate for overbooking
Service Pricing in Practice• How much should be charged?• What should be the basis of pricing?• Who should collect payment?• Where should payment be made?• When should payment be made?• How should payment be made?• How should prices be
communicated to the target market?
Pricing Strategies
• New Service Pricing• Portfolio Pricing• Tactical Pricing• Public Sector Pricing• Internal Market Pricing
New Service Pricing Strategy
• Price Skimming• Saturation Pricing• Evaluating Options
• Market research• Competitive actions• Government regulation
• Leader or follow
Service Portfolio Pricing
• Optional additional services• Captive services• Competing Services• Price Bundling
Tactical Pricing• Short term competitive advantage• Remove unplanned excess supply• Defend against new entrants• Method of differential pricing
• Time• Place• Segments
• Motivate intermediaries
Public Sector Pricing
• External benefits difficult to appropriate from consumers
• Benefits to society may be as large as the benefits to the individual consumer
• Pricing as a means of social policy
Internal Market Pricing
• Cross billing / inter-departmental costing
• Does not necessarily reflect market pricing
• Real market may not exist
Pricing Problems• Demand based
• Monetary price must be adjusted to reflect the value of non-monetary costs
• Information on service costs are less available to customers, hence price may not be a central factor
• Cost based• Costs are difficult to trace• Labour is more difficult to price than materials • Costs may not equal value
• Competitor based• Small firms may charge too little to be viable• Heterogeneity of services limits comparability.• Prices may not reflect customer value