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.