PRICING OF SERVICES

Why Pricing of Services is different?

Customer knowledge of service price a reference

price is a price point in memory for a good or a service

High degree of variability often exists across providers

of services not every physician defines a checkup the
same way

Providers are unwilling to estimate prices in advance

legal service providers; fundamental reason being they
do not know themselves what the service will involve
until the process of service delivery unfolds

Individual customer needs vary your haircut fro the

same stylist may cost you differently

Price invisibility particularly in financial services,

most customers know about only the rate of return and
not the costs they pay in form of fund and insurance
fees

Role of Non-monetary Costs

Demand is not just a function of monetary price but is

influenced by other costs as well. Like:
Time cost since most services require direct participation of the

consumer and thus their real time

Search costs - the effort invested to identify and select among

services you desire since prices for services are rarely displayed
in shelves an each service establishment offers only one brand
of service (except brokers & agents)

Convenience costs like customers have to travel to the

service, if service hours do not coincide with customers

available time

Psychological costs fear of not understanding (education), fear

of rejection (bank loan), fear of results (surgery)

Price as an Indicator of Service Quality

Customers prefer cues like company reputation, level of

advertising to access the quality
In other situations when quality is hard to detect or
price varies a great deal within a class of services,
consumers may believe that price is the best indicator
of quality
In case of high risk services like medical treatment,
customer looks price as a surrogate for quality
Thus in addition to cover the cost and match
competitors price, prices must be set with care to
convey the appropriate service quality

Price as an Indicator of Service

Quality
Infers High Quality
Service

Infers Low Quality Service

APPROACHES TO PRICING
SERVICES

COST

BASED PRICING

COMPETITION
DEMAND

BASED PRICING

BASED PRICING

Cost -Based Pricing

Price = Direct costs + Overhead costs + Profit Margin

Challenges:
Costs are difficult to trace as cost based pricing involves

defining the units in which a service is purchased

Thus services are sold in terms of input units (like hours) rather
units of measured output
Labor is more difficult to price than material
Used in industries in which cost can be estimated in advance
like, advertising, construction

Competition-Based Pricing

Monitor competitors pricing strategy (especially if

service lacks differentiation like dry cleaning and its an
oligopoly like airline)

Challenges:

Small firms may charge too and not make margins high enough to

remain in business
Heterogeneity of services across and within providers makes it
difficult to compare

Demand-Based Pricing

Relate price to value perceived by customer i.e. prices

are based on what customers will pay for the services
provided

Challenges:

Monetary price must be adjusted to reflected the value of

non-monetary costs
Information on service costs may be less available to
customers, making monetary price not as salient indicator
to quality


1.

Value has 4 meanings:

Value is low price equate value with low price like, a
carpet on sale

2.

Value is everything I want in a service emphasize the

benefits rather price like, best education for a MBA

3.

Value is the quality I get for the price I pay trade off
between the money they give up and the quality they
receive like, for a business travel, lowest price for a
quality brand

4.

Value is all that I get for all that I give consider all
benefits and sacrifice components (money, time, effort)