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Pricing of services

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Pricing of services: Pricing approaches, Pricing Strategies

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Pricing of services

  1. 1. MBA 906 1 Pricing of services: Pricing approaches, Pricing Strategies Services Marketing Course Instructor: Sneha Sharma (PhD*, MBA, Dip T & D)
  2. 2. MBA 906 Pricing Strategy It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the competitive edge to capture the market.
  3. 3. MBA 906 Three Key Ways Service Prices are Different for Consumers • Customer Knowledge of service prices – Service heterogeneity limits knowledge – Providers are unwilling to estimate prices • Medical, legal services – Individual customer needs vary • Hotel room , hair stylist – Price information is overwhelming in services – Prices are not visible
  4. 4. MBA 906 The Role of Non Monetary Cost Time Cost Search Cost Convenience Cost Psychological Cost • Fear of not understanding , fear of uncertainty
  5. 5. MBA 906 Price as an Indicator of Service Quality Can price attract some customers?
  6. 6. MBA 906 Price as an Indicator of Service Quality Infers Low Quality Service Infers High Quality Service
  7. 7. MBA 906 A Customer-Focused Approach to The Pricing Process Understand Customer Value Determine Demand based on Competition and Offering Estimate Cost, Revenues and LTV Establish a Pricing Structure and Level Set Final Price
  8. 8. MBA 906 Three Basic Price Structures and Difficulties Associated with Usage for Services PROBLEMS: 1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value PROBLEMS: 1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value 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
  9. 9. MBA 906 Cost Based Pricing • Price = Direct Cost + Overhead Cost + Margin • Direct Cost = Material + labour used to produce the service • Overhead costs are apart from the fixed cost
  10. 10. MBA 906 Cost Based Pricing Strategies • Cost Plus Pricing – Component cost + Mark Up – Difficult in services as estimation of cost is difficult • Fee for service – Cost of the time involved in providing the service • Consultants, psychologist, accountants
  11. 11. MBA 906 Competition Based pricing This approach is based on using the competitors’ price as the point of reference • Eg: Fitness clubs, Driving classes, Computer classes etc. It is used in two situations • When services are standard across providers. • In oligopolies where there are few large service providers : Airlines
  12. 12. MBA 906 Examples of Competition Based Pricing in Service Industries Price Signaling: • Found in markets where there are a number of competitors. • If any one company offers a lower cost advantage others immediately match the price. Eg. Airlines • In this type of pricing strategy the charges offered are the ones that are prevalent in the market for the same type of service. • Eg.Tourist bus services, Car hires etc. Going Rate Pricing: • Charging the most prevalent price in the market
  13. 13. MBA 906 Demand Based pricing • Unlike in cost based and competition based pricing, demand based pricing is customer focused and not company or market focused. – This type of pricing is fixed keeping in mind what the customers are likely to pay for the perceived value offered by the service. – For the determination of demand based pricing non monetary costs also have to be considered, as these contribute to the perception of value.
  14. 14. MBA 906 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”
  15. 15. MBA 906 Value is low price Discounting Odd pricing • ( Rs 99,199,299 Synchro-pricing • Place Differential • Time Differential • Quantity Differential Penetration pricing
  16. 16. MBA 906 Value is what I want in a service Prestige pricing • Offering high quality services Skimming pricing • New services introduced at higher price
  17. 17. MBA 906 Value is the quality I get for that price Value pricing • This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales. Market segmentation pricing • Service versions • Client category
  18. 18. MBA 906 Value is what I get for what I give Price bundling • Mixed Bundling • Mixed Leader Bundling • Mixed Joint Bundling Complementary pricing: • Captive pricing • two part pricing • Loss leadership pricing. Result based pricing • Contingency pricing (lawyers)