The Pricing of Services
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Transcript of The Pricing of Services
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
Chapter7
The Pricing of Services
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
THE ART OF PRICING Pricing policy is the last stronghold of
medievalism in modern management
[Pricing] is still largely intuitive and even
mystical in the sense that the intuition is
often the province of the big boss (Dean,1947).
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
THE ART OF PRICING Pricing is approached in Britain like
Russian roulette--to be indulged in mainly
by those contemplating suicide (Chief
Executive, 1981).
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
Figure 7.1 Buyers Perception of Value
Source: Philip Kotler,Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.
Product value
Service value
Personnel value
Image Value
Monetary cost
Time cost
Energy cost
Psychic cost
Buyers perceptionof value
Totalcustomer
value
Total
customer
cost
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
DEMAND
CONSIDERATIONS
Demand tends to be inelastic
Cross price and income elasticities need to
be examined
Price discrimination is a viable alternative
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learning
is a trademark used herein under license.
ALL RIGHTS RESERVED.
FACTORS INFLUENCING
CONSUMER PRICE SENSITIVITY Perceived-substitutes
Unique value
Switching costs
Comparison effect
Price-quality effect
Expenditure effect
End-benefit effect
Shared-cost effect
Fairness effect
Inventory effect
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Perceived Substitute Effect
few search attributes
providers often lack resources and marketing
expertise
limited product mix
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Switching Costs
higher levels of perceived risk
uncertainty involved in changing providers
consequences associated with a bad outcome
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Difficult Comparison Effect
high number of experience attributes
inherent heterogeneity
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Price-Quality Effect
price acts as a quality indicator when
consumers:
believe that quality differs among providers
believe that low quality imposes greaterconsequences
lack other sources of objective information
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Expenditure Effect
amount of expenditure relative to consumer
household income.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS End-benefit Effect
the more price sensitive consumers are to the
cost of the end-benefit, the more sensitive they
will be to purchases that contribute to the end-
benefit. Price bundling adds value to the consumers end-
benefit.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Shared-cost Effect
consumer price sensitivity decreases as the
shared-costs with third parties increase.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Fairness Effect
fairness is typically assessed by comparing theprice to:
previous prices paid for similar services
prices paid for similar services under similar
circumstances the benefit gained
assessing service fairness is difficult
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY FACTORS Inventory Effect
consumers are able to protect themselves from
future price increases by building inventories.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRICE SENSITIVITY
(CONCLUSIONS)
Consumers of professional services tend tobe less price sensitive.
Need to identify perceptions of keysensitivity factors across service industries
Key factors may be useful for
differentiation purposes Providers may reinforce or alter beliefs
pertaining to key factors.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
CRITERIA FOR EFFECTIVE
PRICE DISCRIMINATION
Different groups of consumers must havedifferent responses to price.
Different segments must be identifiable, and a
mechanism must exist to price them
differently.
Individuals in one segment who have paid alow price should not be able to pass those
savings on to other segments.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
CRITERIA FOR EFFECTIVE
PRICE DISCRIMINATION
The segment should be large enough to makeit worthwhile.
Costs should not exceed the incrementalrevenues obtained.
Customers should not be confused.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
COST
CONSIDERATIONS
Price is sometimes not know until after the service
has been produced Cost-oriented pricing is more difficult
activity-based costing breaks down the organizationinto a set of activities, and activities into tasks, whichconvert materials, labor, and technology into outputs.
High fixed cost to variable cost ratio
Economies of scale tend to be limited
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
CUSTOMER
CONSIDERATIONS
Price tends to be one of the few search clues
available. More likely to use price as a quality cue
The relationship between price and informationmay be U-shaped.
Consumers are less certain about reservationprices
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
COMPETITIVE
CONSIDERATIONS
Comparing prices is more difficult
Self-service is a viable alternative
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
PRODUCT
CONSIDERATIONS
Many different names for price
Consumers are less able to stockpile by
taking advantage of discount prices
Product-line pricing is more difficult
Less likely to use odd-pricing
Price discounting tends to be less common
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
EMERGING SERVICE PRICING
STRATEGIES
Satisfaction-based pricing
primary goal is to reduce the amount of
perceived risk.benefit-driven pricing--charges customers for
services actually used as opposed to overall
membership fees.
flat-rate pricing--customer pays a fixed price and
the provider assumes the risk of price increases
and overruns.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED.
EMERGING SERVICE PRICING
STRATEGIES
Relationship Pricing
primary objective is to enhance the firms
relationship with its targeted consumers.
long-term contracts--offers price and nonprice
incentives for dealing with the same provider over a
number of years.
pricing bundling--marketing two or more services as
a single package for a single price.
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COPYRIGHT 2002 Thomson Learning, Inc. Thomson Learningis a trademark used herein under license.
ALL RIGHTS RESERVED
SERVICES PRICING:
FINAL THOUGHTS
The price should:
Be easy for customers to understand
Represent value to the customer
Encourage customer retention and facilitate the
customers relationship with the providing firm
Reinforce customer trust Reduce customer uncertainty