Services Marketing

Assignment # 03
Submitted to: Sir Salman Rabbani Submitted by: Yumna Malik Maria Siddiqui Dated: 27 April, 2012
th

Class: BBA 8 (A)

PRICING THE SERVICES

Price is one of the key factors in the marketing mix but it plays a more critical role in service industry for two major reasons. Firstly, price is a measure of quality in services. For product, tangible attributes express quality but in services, price is often the only measure of quality before using the service. Secondly, more often than not, several non-monetary costs are associated with services compared to products such as time cost, search cost, convenience cost, and psychological cost. These factors make pricing the services more difficult. Keeping all these difficulties in view, the service firms should base their pricing policies on the basis of objectives and market-share goals. Some companies might just want to survive in market by keeping low prices while others may plan to achieve quality leadership through premium pricing. How the company plans to position itself in the long-term also helps in determining the price of services. Pricing in service industry have three basic approaches; cost-based pricing, market-oriented pricing or demand-based pricing, and competition based pricing. All these approaches have their pros and cons and need to be chosen carefully. Also, services can be priced by using some value strategies; satisfaction-based pricing, relationship pricing, efficiency pricing, and convenience pricing. These value strategies help enhancing the perceived value of services through pricing, creating an image of higher quality. These different pricing approaches are discussed below.

1. COST - BASED PRICING:

In this approach, the firm determines the direct and indirect costs incurred in producing services and add a markup or profit margin, the total sum being charged as price. This is often done by determining the average hourly cost and customers are charged on hourly basis. This method, although being the simplest method of pricing, has a number of disadvantages. The indirect costs are often difficult to trace and distribute among individual customers. Also, since labor is the major component in services rather than material, their prices are fluctuating and hard to calculate. And often, the cost of services may not be equal to the value customers perceive and the price may end up under-representing the value of service.

2. MARKET - ORIENTED PRICING OR DEMAND - BASED PRICING:

In this approach, pricing is done on the basis of perception of value for the customers and the demand of service. It is essential in this approach that the non-monetary costs are compensated for when setting the price foe services. Some different ways implied in this approach are: Market skimming: If offers high value or unique services for a higher price. This can be done when there are no competitors. Eventually, the price has to be lowered when competitors enter the market. Penetration Pricing: In this approach, the prices are kept low initially to gain market share and then prices are increased, carefully observing the effect of price increase in the demand. If the demand remains, the prices can be further enhanced. This approach can be used when your

target audience is price sensitive and not willing to pay too much, when there is high threat of competitors and high demand can lead to achievement of economies of scale. Price Discrimination: Also known as differential pricing, here pricing is done on the basis of different service attributes provided to different customers such as the location, timing or quantity of services acquired.

3. COMPETITION - BASED PRICING:

This can be applied when the services are standard and the competition is extensive. The prices and demand of competitors is observed before making the pricing decision. The firms can either set prices equal to competitors or lower than the competitors to drive them out of market. This approach has drawback for small firms which may have to charge too low prices in order to market. Also, services vary widely and comparing them poses a challenge for firms and customers both.

4. SATISFACTION-BASED PRICING:
Some firms offer service guarantees to customers regarding the quality of services which satisfies the customers or the pricing is done solely on the basis of benefits derived from the service.

5. RELATIONSHIP PRICING:
In highly competitive markets, this approach is very critical. Pricing is done to ensure that the customers keep coming back to the service provider in the future. It can be done by formulating long-term contracts with the customers offering them with discounts or bundling up different services for prices less than their total price.

6. EFFICIENCY PRICING:
This pricing is made on the basis of estimating and monitoring of the costing of services, and continuously improving on it. Thus the efficiency of the service delivery is increased and finally transferring any price benefit to customers.

7. CONVENIENCE PRICING:
This type of pricing give emphasis to the convenience the customers get in the process of consuming the services.