PRICING OF SERVICES

What Makes Service Pricing Strategy Different (and Difficult)? :

What Makes Service Pricing Strategy Different (and Difficult)? No ownership of

services--hard for firms to calculate financial costs of creating an intangible performance
Variability of inputs and outputs--how can firms define a “unit of service” and establish
basis for pricing? Many services hard for customers to evaluate--what are they getting in
return for their money? Importance of time factor--same service may have more value to
customers when delivered faster Price is key signal of quality

Why Pricing of Services is Critical? :

Why Pricing of Services is Critical? Customer knowledge of service price – a reference

price is a price point in memory for a good or a service High degree of variability often
exists across providers of services – not every physician defines a checkup the same way
Providers are unwilling to estimate prices in advance – legal service providers;
fundamental reason being they do not know themselves what the service will involve
until the process of service delivery unfolds

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Individual customer needs vary – your haircut fro the same stylist may cost you
differently Comparison of prices becomes difficult unlike goods where the product range
is displayed for comparison – like to compare dry cleaning prices, customer must drive to
or call individual outlets Price invisibility – particularly in financial services, most
customers know about only the rate of return and not the costs they pay in form of fund
and insurance fees

Role of Non-monetary Costs :

Role of Non-monetary Costs Demand is not just a function of monetary price but is
influenced by other costs as well. Like: Time cost since most services require direct
participation of the consumer and thus their real time Search costs - the effort invested to
identify and select among services you desire since prices for services are rarely
displayed in shelves an each service establishment offers only one brand of service
(except brokers & agents) Convenience costs – like customers have to travel to the
service, if service hours do not coincide with customer’s available time Psychological
costs – fear of not understanding (education), fear of rejection (bank loan), fear of results
(surgery)

Price as an Indicator of Service Quality :

Price as an Indicator of Service Quality Customers prefer cues like company reputation,
level of advertising to access the quality In other situations when quality is hard to detect
or price varies a great deal within a class of services, consumers may believe that price is
the best indicator of quality In case of high risk services like medical treatment, customer
looks price as a surrogate for quality Thus in addition to cover the cost and match
competitors price, prices must be set with care to convey the appropriate service quality
Too low prices- inaccurate inferences Too high prices- difficult to match in service
delivery

The Pricing Tripod :

The Pricing Tripod The tripod explains the foundation underlying the pricing strategy
The cost that a firm needs to recover usually impose a minimum price, or floor, for a
specific service offering Customer’s perceived value of the offering sets a ceiling on the
price The price charged by competitors determines where, within the floor-to-ceiling
range, the price can be set

Cost -Based Pricing :

Cost -Based Pricing Price = Direct costs + Overhead costs + Profit Margin Challenges:
Costs are difficult to trace as cost based pricing involves defining the units in which a
service is purchased Thus services are sold in terms of input units (like hours) rather units
of measured output Labor is more difficult to price than material Actual service costs mat
misrepresent the value of the service to the customer Used in industries in which cost can
be estimated in advance like, advertising, construction

Competition-Based Pricing :

Competition-Based Pricing Monitor competitors’ pricing strategy (especially if service

lacks differentiation like dry cleaning and its an oligopoly like airline) Challenges: Small
firms may charge too and not make margins high enough to remain in business
Heterogeneity of services across and within providers makes it difficult to compare

Value/ Demand-Based Pricing :

Value/ Demand-Based Pricing Relate price to value perceived by customer i.e. prices are
based on what customers will pay for the services provided Challenges: Monetary price
must be adjusted to reflected the value of non-monetary costs Information on service
costs may be less available to customers, making monetary price not as salient indicator
to quality

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Value has 4 meanings: Value is low price – equate value with low price like, a carpet on
sale Value is everything I want in a service – emphasize the benefits rather price like,
best education for a MBA Value is the quality I get for the price I pay – trade off between
the money they give up and the quality they receive like, for a business travel, lowest
price for a quality brand Value is all that I get for all that I give – consider all benefits and
sacrifice components (money, time, effort)
DISTRIBUTION OF SERVICES :

DISTRIBUTION OF SERVICES

SERVICE DISTRIBUTION :

SERVICE DISTRIBUTION Direct Delivery of Service Channels for services are often
direct- from creator of the service directly to the customer Services cannot be owned,
there are no titles or rights to most services that can passed along a delivery channel
Inventories cannot exist, making warehousing a dispensable function

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Delivery of Service through Intermediaries Intermediaries may co-produce service,

fulfilling service principals’ promises to customers. eg: Franchise Services They make
service locally available Provide time and place convenience for the customers Provide
retailing function for customers because they represent multiple service principals. eg:
travel agents Primary types of intermediaries – Franchisees, Agents & Brokers,
Electronic Channel

COMMON ISSUES INVOLVING INTERMEDIARIES :

COMMON ISSUES INVOLVING INTERMEDIARIES conflict over objectives and

performance conflict over costs and rewards control of service quality empowerment
versus control channel ambiguity – lack of role clarity

DIRECT/ COMPANY OWNED CHANNELS :

DIRECT/ COMPANY OWNED CHANNELS Benefits Company has control over the
outlets thus owner can maintain consistency in service provision Control over hiring,
firing, and motivating employees Allow expansion or contraction of sites without being
bounded by contractual agreements Owns the customer relationship

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Challenges Company must bear all financial risk Large companies are rarely experts in
local market. When adjustments are needed in business formats for different markets,
they may be unaware of what these adjustments should be Service partnerships – they are
very much like company owned channels except that they have multiple owners. eg: Jet
& Kingfisher Benefit: risk, resources and effort are shared Disadvantage: control and
returns gets distributed
FRANCHISING :

FRANCHISING Benefits for Franchisor Leveraged business format for greater

expansion and revenues- increased revenues, market share, brand name recognition and
economies of scale for Franchisors Can maintain consistency in outlets across cultures
and countries Company can obtain connection to the (knowledge about) local markets
Franchisees must contribute their own capital for equipment and personnel, thereby
bearing part of the financial risk of doing business.

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Benefits for Franchisee Franchisees obtain an en established business format They

receive benefit of national or regional brand marketing expertise as well as established
reputation Minimized risk of starting a business

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Challenges for Franchisor Difficulty in maintaining and motivating franchisees Highly

publicized disputes and conflict Inconsistent quality that may undermine the company’s
image, reputation and brand name Customer relationships are controlled by the franchisee
rather than the franchisor

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Challenges for Franchisee Encroachment – the opening of new units near existing ones
without compensation to the existing franchisee Disappointing profits and revenues Lack
of perceived control over operations High fees

AGENTS & BROKERS :

AGENTS & BROKERS Benefits Reduced selling and distribution costs – eg: if an airline
need to contact every potential traveler to promote its offerings, cost would be exorbitant
Intermediary’s possess special skills and knowledge in their areas – eg: Passport Agent
Wide representation – they act as company representative in different areas

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Knowledge of local markets – knowing the culture and taboos of a country is critical for
successful selling Customer choice – agents provide retailing service (assorted services of
multiple service providers) for customers Challenges Loss of control over pricing and
other aspects of marketing Representation of multiple service principals

ELECTRONIC CHANNELS :

ELECTRONIC CHANNELS Benefits Consistent delivery for standardized services Low

cost Customer convenience Wide distribution Customer choice and ability to customize
Quick customer feedback

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Challenges Customers are active, not passive Lack of control of electronic environment
Price competition Inability to customize with highly standardized services Lack of
consistency with customer involvement Requires changes in consumer behavior Security
concerns Competition from widening geographies

STRATEGIES FOR EFFECTIVE SERVICE DELIVERY THROUGH

NTERMEDIARIES :

STRATEGIES FOR EFFECTIVE SERVICE DELIVERY THROUGH

NTERMEDIARIES Control Strategies create standards both for revenues and service
performance, measures results, and compensates or rewards on basis of performance
level Empowerment Strategies Service principal allows greater flexibility to
intermediaries Help intermediary develop customer oriented service processes Provide
needed support systems Develop intermediaries to deliver service quality Change to a
cooperative management structure

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Partnering strategies Partnering with intermediaries to learn together about end

customers, set specifications, improve delivery, and communicate honestly Alignment of
company and intermediary’s goals Consultation & Cooperation