Service Pricing

Tom Chapman

Indicative Content

• Pricing Strategies• Problems associated with pricing

services• Influences on Price• Price discrimination• Relating Price and Value

Pricing Strategies

• Revenue & Profit Objectives• Seek Profit• Cover Costs

• Patronage & User Base• Build Demand• Build a user base

The Pricing Tripod

Pricing Strategy

Costs Competition

Value to Customer

Cost Based Pricing• Difficult to establish costs of intangibles• Services tend to have a higher fixed

cost ratio to variable costs. Why?• ABC (Activity based cost)• Ignores the competition• Useful where the service is uncertain• Ignores customer perception of value

Service pricing strategies for Value

Value is low priceDiscountingOdd Pricing

Synchro PricingPenetration Pricing

Value is all that I get for all that I give

Price framingPrice Bundling

Complimentary PricingResults-based pricing

Value is the quantity I get for the price I pay

Value PricingMarket Segmentation Pricing

Value is everything I want in a service

Prestige PricingSkimming Pricing

(Zeithaml, V. (1988) Consumer Perceptions of Price, Quality, and Value: A means-End Model and Synthesis of

Evidence Journal of Marketing. 52(July), 2 –21.

How do you communicate value?

• Reduce uncertainty• Benefit driven pricing• Flat rate pricing

• Enhance relationships• Relationship pricing

• Bulk discounts• Bundled pricing

• Low cost leadership• The challenge of cost v quality

• Value perception management• Credence services? • Price v speed of service

User Costs

Search costs

Purchase &use costs

After costs

Sensory

Time

Problem-solving

Follow-up

Psychological

Physical

Money

Incidentalexpenses

Purchase price

Lovelock, 1999

Competition Based Pricing

Going rate pricing

Sealed-bidpricing

High Price Competition when - • Large number of competitors• Large number of substitutes• Wide distribution of offers• Surplus capacity in industry

• Think Porters 5 Forces• Think Globalisation• Think Internet

Reduced Price Competition -

• Non-price related costs of alternatives are high

• Personalisation, Customisation & Switching costs matter

• Time & Location reduce choice

Revenue / Yield Management

• Supply & Demand forecasting• Reserve Capacity• Price Elasticity • Rate Fences

• Physical • Non-physical

Rate Fences• Physical

• Basic Product• Amenities• Service Level

• Non-Physical• Transactional

Characteristics• Consumption

Characteristics• Buyer

Characteristics

Yield Management

• Effective When-• Relatively fixed capacity• High fixed cost structure• Perishable inventory• Variable / uncertain demand• Varying customer price sensitivity

Ethical Concerns• Clear, logical & fair pricing

schedules• Use high published prices and

frame fenced as discounts• Communicate benefits• Use bundles to hide discounts• Take care of loyal customers• Use service recovery to

compensate for overbooking

Service Pricing in Practice• How much should be charged?• What should be the basis of pricing?• Who should collect payment?• Where should payment be made?• When should payment be made?• How should payment be made?• How should prices be

communicated to the target market?

Pricing Strategies

• New Service Pricing• Portfolio Pricing• Tactical Pricing• Public Sector Pricing• Internal Market Pricing

New Service Pricing Strategy

• Price Skimming• Saturation Pricing• Evaluating Options

• Market research• Competitive actions• Government regulation

• Leader or follow

Service Portfolio Pricing

• Optional additional services• Captive services• Competing Services• Price Bundling

Tactical Pricing• Short term competitive advantage• Remove unplanned excess supply• Defend against new entrants• Method of differential pricing

• Time• Place• Segments

• Motivate intermediaries

Public Sector Pricing

• External benefits difficult to appropriate from consumers

• Benefits to society may be as large as the benefits to the individual consumer

• Pricing as a means of social policy

Internal Market Pricing

• Cross billing / inter-departmental costing

• Does not necessarily reflect market pricing

• Real market may not exist

Pricing Problems• Demand based

• Monetary price must be adjusted to reflect the value of non-monetary costs

• Information on service costs are less available to customers, hence price may not be a central factor

• Cost based• Costs are difficult to trace• Labour is more difficult to price than materials • Costs may not equal value

• Competitor based• Small firms may charge too little to be viable• Heterogeneity of services limits comparability.• Prices may not reflect customer value