Pricing in Service IndustryVandana Sachdeva

andPrabhleen Sarna

By

PRICE-A value that will purchase a definite quantity, weight, or other measure of a good or service

PRICING is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product.

“A price is not merely a function of costs

and margins…”

Costs + Margins = PRICE

…it is an expression of VALUE

► Production costs► Indirect costs► Advertising costs► Distribution costs► Manufacturer’s

margin► Distributor’s margin► Seller’s margin

► Product performanceUsefulness & Quality

► Image / AspirationsBrand Equity

► AvailabilityDistribution Strategy

► Service Before/During & After

sales

Minimize Optimize Maximize

Costs + Margins = PRICE

VALUE

PRICE - One of the 4 P’s of Marketing Mix

When should a firm set price for the first time?

When. . . It develops a new product It introduces its regular product

into a new distribution channel or geographical area

It enters bids on new contract work (as in Industrial Sale)

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SIGNIFICANCE OF PRICING◊ This is the only element in the

marketing mix that brings in the revenues. All the rest are costs.

PROFIT=(PRICE X QUANTITY SOLD) – TOTAL COST

◊ Price communicates the value positioning of the product.

◊ Price has a psychological impact on consumers and hence marketers can use it symbolically.

OBJECTIVES OF PRICING Profit maximization in the short term Profit optimization in the long run Price Stabilization Facing competitive situation Maintenance of market share Capturing the Market Entry into new markets Ability to pay

FACTORS AFFECTING PRICING DECISIONS

Internal Factors

External Factors

INTERNAL FACTORS

Marketing Objectives Positioning Target Group

Marketing Mix Strategy 4 P’s

Costs Fixed & Variable

Management Approach Responsibility Perspective

EXTERNAL FACTORS Market

•Pure Competition•Monopolistic Competition•Oligopolistic Competition•Pure Monopoly

Demand•Elastic / Inelastic

Competition•Competitors’ offers•Competitiors’ reactions

Economy•Buying power

Government Influence•Laws & Regulations

HOW SERVICE PRICES DIFFER FROM GOODS PRICES

(Customers Perspective) Customer knowledge of service prices:

Service variability limits knowledge Providers are unwilling to estimate prices Individual customer needs vary Collection of price information is overwhelming Prices are not visible

Role of non-monetary costs: Time costs Search costs Convenience costs Psychological costs

Price as an indicator of service quality

What Do Customers Know about the Prices of Services?

Banking?

Nutritionist?

WeddingAdvisor?

Hospital?

Customers Will Trade Money for

Other Service Costs

Effort

=Time

or or

Psychic Costs

PRICING POLICIES

COST-BASED

BUYER-BASED

COMPETITION-BASED

Cost-Plus Pricing

Product Cost + Standard Mark-Up = Price

BE Analysis & Target Profit Pricing

A necessary survival tool

Cost-Based Pricing

• Perceived Value

Consider buyers’ perceptions of value NOT the cost

Buyer-Based Pricing

Competition-Based Pricing

Basing prices on competitors’ prices

• Premium Pricing

• Going-Rate Pricing

• Discount Pricing

Demand-BasedCost-Based

Com

petit

ion-

Bas

ed

PROBLEMS: 1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value

PROBLEMS: 1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value

PROBLEMS: 1. Monetary price must be adjusted to reflect the value of non-monetary costs 2. Information on service costs less available to customers, hence price may not be a central factor

Three Basic Price Structures and Difficulties Associated with Usage

for Services

The Pricing ChallengeSetting right price is a crucial decision to the

profitability of services and of all the decisions of marketing mix, pricing decisions are

hardest to make. It is the most challenging decision the business must take. The marketer

may decide to follow any strategy that suits best for their services and earn revenues.

PRICEGenerates Reven

ues

Price Change

• Reaction of Customers:Choose a substitute / Forgo the

purchase• Reaction of Competitors/responding to competitor’s price change:

• Maintain price• Maintain price and add value• Reduce price• Increase price and quality• Launch a low price fighter

Customer’s Perceived Value

Value is low Price. Value is what they want in a service. Value is the quality they get for the price. Value is all that I get for all that I give

Value = Quality ÷ Price

Price Quality Strategies

Super value High value Premium

Good value Medium value Overcharging

Economy False economy Rip off

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Price

Qu

ality

Pricing Strategies

Penetration Pricing

Market Skimming

Value Pricing

Loss Leader

Psychological Pricing

Going Rate (Price Leadership)

Tender Pricing

Price Discrimination

Destroyer Pricing/Predatory Pricing

Absorption/Full Cost Pricing

Marginal Cost Pricing

Contribution Pricing

Target Pricing

Cost-Plus Pricing

Influence of Elasticity

Discounts and Allowances

Cash Discount Trade Discount Early payment Seasonal Discount Bulk purchase (Quantity Discount) Commission Other Allowances

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Thank you all for your co-operation!