MOS Unit- 7 Pricing in Services

8/3/2019 MOS Unit- 7 Pricing in Services

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ANKUR BHATNAGARwww.managementstudies.tk

PRICING DECISION IN SERVICESPRICING DECISION IN SERVICES

Marketing of Services

Unit VII

Instructor

Ankur Bhatnagarwww.managementstudies.tk


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PRICE

It is an influencing factor in consumer-decision making,related to a purchase.

Whatever be the product, whether it is a good or aservice, whether high priced or low priced, whether thecustomer has a high ability to purchase or belongs tomiddle or low income group, the influence of price in apurchase decision cannot be overemphasized.

Price is the medium for

exchange of value between a

buyer and a seller.


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Several services use different terminology to denote price. For

instance -Educational institutions- Tuition fees

Professional organizations- Fees

Banks- Interest & service charge

Transporters- FareBridges & highways- Toll

Libraries & clubs- Subscriptions

Hotels- Tariffs

Insurance- Premium

It is commission to brokers, rent to landlords,


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Pricing Decision

In service marketing mix, price is the only P thatgenerates inflow to the company.

The revenue of the company will be greatly influenced

by the pricing decision.

Traditional approaches of pricing have some problemwhen applied to services.

Taking in to consideration the service characteristics &consumer perceptions, service firms should take theright decision relating to the pricing of services.


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FactorsFactors

in Pricingin Pricing

of Servicesof Services


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1. No Ownership of services

It is more difficult to calculate the costs involved in creating an

intangible service than in producing a physical good.

The absence of ownership transfer compel the customer to

assess the value of the service before its production &

consumption.

In the case of goods consumers can leisurely verify & compare

with substitutes & can take a purchase decision after production.


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2. Input & Output Variability

Changes in the combination of service provider,

customer, tools & equipment used, time taken,

and so on makes the output of the service

variable.

Therefore, price output relations very

significantly.


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3. Price Value Relations

Often customers use personal reference prices. Personal reference pricesconsist of the price last paid, the price most frequently paid or the average ofall prices paid for similar service offerings.

A large number of varieties, combinations & versions lead to complex pricestructures.

Example:

An LIC agent cannot quickly tell you the premiums of variouspolicies without referring to the price table. A railway clerkcannot immediately tell you the cargo tariffs for various goods.He has to refer to the price list of the Indian Railways.


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4. Influence of Non Monetary Costs

Non monetary costs are the sources of sacrifices

perceived by customers, which may sometime

become more important for the customers than

monetary costs.

TimeTime costs,costs,

SearchSearch costscosts PsychicPsychic costs,costs,


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Time costs refer to the spending of time by the

service customer on travel to reach the service outlet,waiting time, service process time and so on.

Search costs refer to the effort the service customers

puts in collecting information relating to the service& the service provider takes for making a correctdecision.

Psychic costs refer to the psychological pressure theservice customer undergoes in selecting a serviceprovider.


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5. Price Quality Relations

Buyers are likely to use price as an indicator of both servicecost & service quality in the absence of complete informationon the service, price providers clues with regard to the qualityof the services.

In credence services such as medical treatment ormanagement consultancy, price is surrogate for quality.

As price is viewed as an indicator of quality of the services,service provider should be careful in fixing prices.


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If the prices are set too low, there is danger ofindicating low quality of the service.

On the other hand, if price is set high, it may raise

consumer expectations on quality; it then becomesdifficult to match service delivery with service

expectations.


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Pricing Objectives

1. Revenue oriented objectives

2. Operation oriented objectives

3. Patronage oriented objectives


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1. Revenue - Oriented Objectives

Profit making is one of the goals of the business

concerns.

Companies are responsible for satisfying the

stake of stock holders and also for expanding

the business as per the expectation of the stock

holders.


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2. Operation - Oriented Objectives

Hotels, transport vehicles &

other such services seek to fill

vacancies because the unfilled

position becomes an

unproductive asset.


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3. Patronage - Oriented Objectives

Price may be used effectively to develop

loyalty & relationship with customers.

Companies can grow multiple benefits

through relationship building.


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Approaches to Pricing of Services

The approaches for services pricing are more

or less the same as that of pricing of goods.

The three recognized pricing approaches are:

1. Cost based pricing

2. Competition based pricing

3. Demand based pricing


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1. Cost Based Pricing

Cost based pricing is a traditional approach & simple method.

The company determines the expenditure incurred, either direct orindirect, on production and adds a desired profit margin top arrive at a

price.

When the demand for service does not fluctuate and when there is supply demand balance at optimum capacity of the firm, this approach of

pricing is convenient to the producer.

The service firms that face fluctuating demand trends cannot use thismethod as the fixed cost component will be very high in proportion to

the total cost.


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Problems in Cost Based Pricing

The major problem is that it is very difficult to trace the cost of eachunit of a service.

Consultancy services, legal services, education services & so on aresold in terms of time in many markets.

The other problem is that labour is more difficult to price than

materials. The value of an employees time, particularly non professionaltime, is not easy to calculate.


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2. Competition Based Pricing

There are two situation in which Competition basedpricing is most applicable;

That is when all service providers offer services more or less of the samestandard such as in the dry cleaning sector.

When oligopoly competitive situation is present in the market wherein afew large service providers have control over the market.

However, some small firms may charge too little to be viable & createproblems to the competitors.

Heterogeneity of services does not allow customers to compare a serviceof a firm to that of another firm.


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3. Demand Based Pricing

Cost based pricing is oriented to ensure adequate return to theservices provider & competition based pricing is to attack

Competition or to defend the company from competitive attacks.

But neither of the two is customer oriented. Demand based

pricing is customer oriented pricing.

Demand based pricing promotes the most important pricingconcept for services, that is, value pricing.


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According to Zeithaml & Bitner

The value perceptions of a service vary among differentgroups of customers. Zeithaml & Bitner have identified four

important value perceptions which, generally, the service

customer perceive.a) Value is low price

In a market some customers may see value

when services are available at low price.

Money is the most important limitation for

them in purchasing services.


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b) Value is everything I want in a service

Some customers may consider the benefits that they

receive from the service as the most importantcomponent in assessing value of the service.

These customers give value to the suitability or thequality or the features of service to their needs.

c) Value is the quality I get for the price I pay

This group of customers will see a trade off betweenthe money they pay and the quality of a service theyreceive. They try to optimize their benefits from everytransactions.


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ANKUR BHATNAGAR

www.managementstudies.tk

d) Value is what I get for what I give

This group of customers consider the total benefitthey receive & the total sacrifices they makeincluding money, time and effort when assessingvalue of services.

This group of customers are critical assessors andless loyal.

They prefer such services providers who can givemore customer delivered values.


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ANKUR BHATNAGAR


Next Figure illustrates the components of customer

values and customer costs. Services firms can use them

as a guide to understand the customer assessment

process and to develop a right policy for serviceproviding.

Components of Customer Delivered Value

(CDV)

CDV = TCV + TCC

CDV = Customer Delivered Value

TCV = Total Customer Value

TCC = Total Customer Cost


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Customer Value Variable

Core service value

Supportive service value

Image value

Other values

Customer Cost Variable

Monetary price

Search cost

Time cost

Energy cost

Psychic cost

Other cost

CDV

Customer Delivered Value

TCV

Total Customer Value

TCC

Total Customer Cost

Components of Customer Delivered Value


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References

Lovelock - Service Marketing

K. Rama Mohana Rao- Services Marketing

JournalofMarketing Management

4Ps ofBusiness & Economy

MOS Unit- 7 Pricing in Services

Documents

Transcript of MOS Unit- 7 Pricing in Services