Chapter 8 Setting Price for a Service Rendered

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Chapter 8
Setting a
Price for the
Service Rendered

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Objectives
1. To examine why service prices vary so much
2. To explore yield management in services
3. To explain the role of pricing objectives in service
organizations
4. To analyze the challenge of establishing value for
a service offering
5. To show how service costs may be calculated
6. To explore price bundling strategies for services
7. To examine additional pricing considerations

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Introduction
• Price labels 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?
• Inseparability and perishability characteristics
of services
• Creative ways to maximize revenues and
reduce costs per customer served

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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
• The inherent trade-off between price and
demand makes yield management a difficult
strategy for services marketer

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Pricing Objectives and
Approaches
• 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 Objectives
and Approaches (cont’d)

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Pricing Objectives
and Approaches (cont’d)
• A cost-based approach focuses on the price
floor: the minimum price that covers all costs of
producing the service
• A customer-based approach focuses on the
price ceiling: the maximum price customers are
likely to pay
• A 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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Calculating Service Costs
• Cost determinations
– Direct costs
– Indirect costs
– Fixed costs
– Variable costs
– Allocated overhead costs
– Shared costs

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Calculating Service Costs (cont’d)
• Formula for calculating price
– P = TC + NP and TC = FC + SC + VC
Where:
• P=Price
• TC=Total Costs
• NP=Net Profits
• FC=Fixed Costs
• SC=Shared Costs
• VC=Variable Costs

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Price Bundling
• Price bundling links several service offerings or
features into one attractive price to give different
customer segments a packaged service offering.

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Additional Pricing
Considerations