Pricing Services

Pricing being one factor received much less attention in service firms as these decisions are not approached in sophisticated manner.

Pricing is important as it has direct bearing on sales and profits of an organization.

So trade off is done between sales and profits and then the prices are decided.

While deciding about the price, firm should consider the following:

• Customer.• Marketing offer (extent of perishability).• Level of competition.• Legal framework.• Social and Technological environment.

Price ~ QualityPrice ~ Quality

• In the absence of communication from the company, price becomes the sole decisive factor in selection of a service.

• High risk services customers associate price with service assurance.

Pricing StrategyPricing Strategy : :

It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the competitive edge to capture the market.

• Penetration Pricing.• Skimming Pricing.• Value Pricing.• Loss Leader.• Psychological Pricing.• Going Rate.• Tender Pricing.• Cost Plus Pricing.

• Price Discrimination.• Destroyer Pricing.• Absorption Pricing.• Marginal Cost Pricing.• Contribution Pricing.• Target Pricing.• Influence of Elasticity.

Foundations of setting prices/ Foundations of setting prices/ Pricing StrategiesPricing Strategies

Penetration PricingPenetration Pricing• Price set to ‘penetrate the market’• ‘Low’ price to secure high volumes• Typical in mass market products – chocolate bars,

food stuffs, household goods, etc.• Suitable for products with long anticipated life

cycles• May be useful if launching into a new market

Market SkimmingMarket Skimming

• High price, Low volumes• Skim the profit from the market• Suitable for products that have short life cycles or

which will face competition at some point in the future (e.g. after a patent runs out)

• Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Value PricingValue Pricing• Price set in accordance with customer perceptions

about the value of the product/service.

• Value= Perceived benefits against perceived cost(Money, time & effort).

• Examples include: Airlines, Hotel industry, status products/exclusive products.

• Uncertainty reduction, relationship enhancement, Low-cost leadership and value perception management are distinct but related strategies for capturing and communicating value.

Loss LeaderLoss Leader• Goods/services deliberately sold below cost to

encourage sales elsewhere• Typical in supermarkets, e.g. at Christmas, selling

bottles of gin at £3 in the hope that people will be attracted to the store and buy other things

• Purchases of other items more than covers ‘loss’ on item sold

• e.g. ‘Free’ mobile phone when taking on contract package

Psychological PricingPsychological Pricing• Used to play on consumer perceptions• Classic example – Rs.99.99 instead of Rs.100!• Links with value pricing – high value goods priced

according to what consumers THINK should be the price

Going Rate (Price Going Rate (Price Leadership)Leadership)

• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market.

• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share.

• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets

Tender PricingTender Pricing• Many contracts awarded on a tender basis• Firm (or firms) submit their price for carrying out

the work• Purchaser then chooses which represents best

value• Mostly done in secret

Price DiscriminationPrice Discrimination

• Charging a different price for the same good/service in different markets

• Requires each market to be impenetrable• Requires different price elasticity of demand in

each market

Destroyer/Predatory PricingDestroyer/Predatory Pricing

• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants.

• Anti-competitive and illegal if it can be proved

Absorption/Full Cost PricingAbsorption/Full Cost Pricing

• Full Cost Pricing – attempting to set price to cover both fixed and variable costs.

• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production

Marginal Cost PricingMarginal Cost Pricing• Marginal cost – the cost of producing ONE extra or

ONE fewer item of production.

• MC pricing – allows flexibility • Particularly relevant in transport where fixed costs

may be relatively high.

• Allows variable pricing structure – e.g. on a flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft

Marginal Cost PricingMarginal Cost Pricing• Aircraft flying from Bristol to

Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*

• Number of seats = 160, average price = £93.75

• MC of each passenger = 2000/160 = £12.50

• If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all!

• *All figures are estimates only

Contribution PricingContribution Pricing

• Contribution = Selling Price – Variable cost

• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs.

• Similar in principle to marginal cost pricing.

• Break-even analysis might be useful in such circumstances.

Target PricingTarget Pricing

• Setting price to ‘target’ a specified profit level.

• Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up.

• Mark-up = Profit/Cost x 100

Cost-Plus PricingCost-Plus Pricing

• Calculation of the average cost (AC) plus a mark up

• AC = Total Cost/Output

Influence of ElasticityInfluence of Elasticity

• Any pricing decision must be mindful of the impact of price elasticity

• The degree of price elasticity impacts on the level of sales and hence revenue

• Elasticity focuses on proportionate (percentage) changes

• PED = % Change in Quantity demanded/% Change in Price

Influence of ElasticityInfluence of Elasticity

• Price Inelastic:• % change in Q < % change in P• e.g. a 5% increase in price would be met by a fall

in sales of something less than 5% • Revenue would rise• A 7% reduction in price would lead to a rise in

sales of something less than 7%• Revenue would fall

STEPS in designing the STEPS in designing the PRICING PRICING

STRATEGYSTRATEGY• Develop marketing strategy - perform

marketing analysis, segmentation, targeting, and positioning.

• Make marketing mix decisions - define the service, distribution, and promotional tactics.

• Estimate the demand curve - understand how quantity demanded varies with price.

• Calculate cost - fixed and variable costs associated with the service

STEPS in designing the STEPS in designing the PRICING PRICING

STRATEGYSTRATEGY

• Understand environmental factors - evaluate likely competitor actions, understand legal constraints, etc

• Set pricing objectives - for example, profit maximization, revenue maximization, or price stabilization (status quo)

• Determine pricing - using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts

Pricing ObjectivesPricing Objectives

1. Survival.2. Profit maximization.3. Present Revenue maximization.4. Prestige.5. Product Quality leadership.

Objectives of Pricing in servicesObjectives of Pricing in services

• Revenue & Profit objective: Profit/Contribution maximization. Achieving specific target. Revenue maximization. Covering cost.

• Patronage and User Base-Related objectives: Create or build demand. Achieving full capacity utilization. Stimulate trial and adoption of service. Creating large user base.

Value based Pricing StrategiesValue based Pricing Strategies

ReferencesReferences• http://books.google.co.in/books?id=fT1SVOGU7-

oC&pg=PA538&lpg=PA538&dq=cost+based+pricing+examples+in+service+industry&source=bl&ots=ufX5OM5cRY&sig=1W3U8-_Lv4E0SSUV9JEpaCj5OsY&hl=en&sa=X&ei=_nXfUta8NsmQrQe4-4EQ&ved=0CGAQ6AEwBw#v=onepage&q=cost%20based%20pricing%20examples%20in%20service%20industry&f=false

• http://www.pricingleadership.com/why-cost-based-pricing-sucks/

You don’t sell through price. You sell the price.