Post on 15-Jul-2015
PRICING STRATEGIES FOR SERVICES
Services Marketing / Venkatesh Ganapathy
Pricing Strategies
Cost based pricing
Competition based
Demand based pricing
Value based pricing
Cost based
Look at accounting data
Variable Cost – Direct Material, Direct Labour, Overheads – directly allocate to each unit of service
Fixed cost – employee costs, marketing costs of advertising, sales promotion and distribution costs
Financial – cost, interest, depreciation, Return
example
When mobile telephony was introduced for the first time, cost was based on ROI, number of connections and service operator’s cost.
When no. of competitors in market is limited to one or two. Pricing is reviewed when a 3rd
competitor is on the scene or when the current pricing policy is not enabling them to grow and achieve larger returns in the end,
Exceptional cost based pricing For exceptional work, the service provider
and the client may come to a mutual agreement on the basis of cost of service provider
Consulting business
Engineering supervision
Limitations of Cost based pricing Accurate estimation of variable cost is difficult
Trouser cost Rs 750 , Hand bag cost Rs 100
Zip repair
Rs 25 charges for zip for trouser will be ok.
Rs 25 charges for zip for hand bag ? But the customer will perceive this to be high for the hand bag.
Sometimes cost based pricing is difficult/ impractical.
Example
Park a car in multiplex – Rs.25
Multiplex is close to the railway station –parking in space near station – Rs.5
For a movie theatre, Rs 25 is the minimum that they can charge to pay the rental to the cinema hall.
Most of the service offers are usually not comparable, so the utility and cost comparison based on cost based prices is confusing to the customer.
Competition based pricing
Airlines
Mobile Phones
Cable
Charges for using internet café
More supply, pricing will fall
For charging a price, something unique / special about the service
Demand based pricing
Time differential pricing
Usage of network capacity in non-peak hours – evening and night will be at reduced rates.
Trunk calls – late nights
Hotels – attractive rates during weekends for local residents
Sunday morning shows – ticket price less
Demand based pricing
Quantity differential pricing
Bus pass, Train pass
High volume customers should enjoy pricing advantage
Loyalty card
Membership card
When you buy 2 trousers, you get 1 trouser free
Demand based pricing
Place differential pricing
Balcony / Stall – cinema hall
Theatre – seats close to the stage are priced higher.
Front row seats can be high for a concert but back row seat tickets will be priced much lower
Demand based pricing
Seasonal differential pricing
Resorts in Goa experience a slump in monsoon
Low off-season rates are offered to customers to promote capacity utilisation.
This pricing strategy is based on marginal cost.
Marginal cost is the additional cost of serving an additional customer, So long as this cost is covered, any additional revenue generated contributes towards overheads and profits.
Value based pricing
Value = perceived benefits
Higher value … price low in relation to service, perceived benefit from service high.
Market Skimming Pricing
High price in the initial stages when there is no competition
Unique product / service
Monopoly
Later on , when competition increases, the price is lowered
In initial stages, company creates a profit due to the higher value. Later on, they reduce price to gain from volume selling.
Skimming Pricing
Strategy wherein a firm charges premium prices and attracts customers less concerned with price than service, assortment & status
Producer sets a high price for a new high-end product (perfume, samsonite bags, Hi design)
CKC Jewellers, Commercial Street, command a premium
It can also be a uniquely differentiated technical product (a unique software) or an advanced computer.
Objective – Get maximum revenue from market
Later on, the producer lows the price drastically to capture low end buyers and thwart the copy cat competitors.
Market penetration pricing
To capture a greater share of the market, the firm offers a lower price in the initial stages and to penetrate the market
Later on, when the firm gets a competitive advantage, the firm starts increasing its prices.
Type of pricing to build large volumes. Initial price low – once the service becomes well known, the prices are set back to the normal level.
Price Discounting
Same service offered at lower price, the value of perception of the service goes up.
Subscriber of a Health magazine gets a coupon – discount for the 1st month’s fee in a gym.
Credit card companies offer a waiver of joining fees.
Odd pricing
Prices set at a price just below the rounded sum.
Large pizza : Rs 199 instead of Rs 200
Psychologically, the customers feel that they have paid much less than Rs 200
Bundled Pricing
Give more for less
Medium Pizza Rs 149
Garlic Bread Rs.50
Pepsi Rs 20
To get customers to buy all, the three may be offered as a combined meal (combo offer) for Rs.195
Prestige Pricing
Value perception is more about making a statement about their status, wealth, leadership
Eg. Golden Palms Spa –
New Health Club
Premium Apartment – Bangalore – Windmills of Mind – Total Environment
Premium Club
Higher the price, higher the demand
A dance class started by celebrity
Commands a special price
Segment wise pricing
Software packages for office users is highest because utility is more important. For individual users, the price may be lower.
Loss leadership pricing
Basic services priced at a low level. If client needs higher level of services, he has to pay a premium.
Eg. Satellite tv – pay channels
Money-back guarantee
Software training institutes
Coaching classes
They give a money back guarantee if customers are dissatisfied.
Pricing of Services
Complex
Dependent on overall marketing strategy
Why is customer retention important Lifetime value of customer
Loyal customer
Repeat purchases represent cumulative value that is greater than a single transaction
Reduced costs
Acquiring a new customer more costly
More opportunities to market more products and services to loyal customers.