Pricing of services

• Key Characteristics of pricing in services

• Pricing objectives

• Approaches to pricing services

• Incorporating perceived value into service pricing

• Value strategies in pricing of services

• Issues in pricing of services

 Pricing of services

• Price – an important element of the marketing mix – brings revenue

• Pricing strategy developed by company can either help organization reap

maximum profits or throw it out of business

• Pricing structure should

- cover the cost incurred to produce a service

- earn profitable margins
- provide maximum value to the customers
 Pricing of services

• Pricing of services is different from pricing of goods in many ways

• Price has single name in manufacturing sector, whereas in service sector it takes
different names.

Eg :
Boarding and lodging services - tariffs

legal and healthcare – fees

stock services – brokerage and commission

 Pricing of services

• Pricing of goods is determined by market demand – most cases, unless regulated

by govt

• Price for services – controlled by different bodies

Eg :
- govt provided services like railways – controlled by govt

- hotels, recreation etc - vary according to the demand of the market

- hospitals, legal services – determined by service providers

 Pricing of services

• Price of a service – perceived by customers in many ways

Eg : high price = high quality

Services are perishable in nature – demand for a service at a given point

determines the changes in price

 Key Characteristics of pricing in services
1) Price is a measure of quality in services

• customer turns to pricing to access the quality of service – when they no

other information ( brand name) available to judge a company’s reputation

• price considered to be the best measure of quality, especially in services

whose quality or price differs widely from other players

Eg: facial = Rs 250 against average market price of Rs 150

• pricing helps customer estimate the quality of services , minimize perceived risks

Eg : services like medical treatment , educational facilities etc involve high risks,

hence customers rely on pricing in absence of other information to rely on the

quality of services

Service providers should design pricing strategy that stands as evidence for the
Quality of services offered by them
 Key Characteristics of pricing in services
2) Non monetary costs and pricing

• some non monetary costs are incurred by the customers in the process of
consuming a service or purchasing a product

• Non-monetary costs = costs in addition to the actual price paid for the service

Eg : time cost, search cost, convenience cost, psychological costs

• time cost – time spent by consumers in waiting to receive the service

Eg : time spent by patient in the OPD to see a doctor or receive a prescription

Service provider should minimize the time spent by the customers in

the process of availing the service
 Key Characteristics of pricing in services

• search cost – cost involves the effort made by a customer to choose the required
service

Eg : customer wants to hire a taxi from bangalore to mysore –

enquires with 3 -4 service providers before selecting the cheapest one

• psychological costs – cost borne by the customer either at the time of buying the
services or at the time of consuming the services

Eg : - fear of being rejected by a the bank when he/she applies for a loan
- using credit card for online reservation

• convenience costs – involve the inconvenience faced by customers in

consuming the service
Eg : - hotel situated 40 km away from city limits
 Key Characteristics of pricing in services

3) Difficulty in comparing prices of services

• pricing structure in services is very complicated , since variety of services can be

offered due to the flexibility involved

Eg : in a hotel, a/c non a/c room, single/ double bed – prices vary for each combination

Difficult for consumers to compare the prices

4) Prices vary with demand

• pricing of services varies with the demand for a particular service

• Demands depends on seasonal variations

Eg : in a hotel, room charges – A/C rooms during season and off season
Goa tourism – season and off season charges
 Pricing Objectives
• Pricing strategies of a firm largely depends on the objectives of the firm

• Marketers should have clear understanding of the company objectives and market
conditions to design an effective pricing strategy

1) Survival

• when company adopts survival as the basic objective , hope of reviving later

• Lowers the prices of its products or services - to cover its variable costs and part of
fixed costs

• goes easy on its margins, sacrifice profitability to sustain in the market

• Eg: an airline may reduce its fares temporarily in order to stay in business
 Pricing Objectives
2) Present profit maximization

• increasing current profits

• companies adopting this objective analyze the demand and cost at different prices

• Select a price that results in high current profits, return on investment

3) Present revenue maximization

• set the prices to maximize the revenues

• companies usually believe that by initially setting low prices, they can increase their
market share

• this could lead to economies of scale and increased profits in the long run

• one should not lower the prices to such extent that sustenance becomes difficult
 Pricing Objectives
4) Prestige

• Company wants to position its services in the premium category,

• Charge very high from its customers , to attract elite customers

• eg : high end hotels like taj, sheraton etc – high class quality and high charges

Pricing objectives are basically dependent on various factors like :

• How would the company like to position its services

• Are the prices chosen are compatible with the corporate objectives

• How do competitors react to the price changes made by the company

• What is the duration of the lifecycle of the services

 Approaches to Pricing Services

Cost based pricing

Competition based
• cost plus pricing / pricing
basic cost covering
• Destroyer pricing
• contribution pricing • Price matching /
going rate pricing
• Working back Market oriented/ • Price bidding /
method Demand based • Close bid pricing
• Skimming pricing
• Penetration pricing
• Price discrimination
• Pricing to meet
customer expectations
• Discount and sales
 Approaches to Pricing Services
A) Cost based pricing

• concept of direct and indirect costs are applicable

• Direct costs
- cost incurred on producing a product or service
- direct costs are associated with fundamental existence of the business
- eg : cost incurred on providing telecom service from an exchange

• In direct costs
- not associated with the production of products or services
- indirect costs are known as overheads
- eg : telecom service prividor paying the licence fee
 Approaches to Pricing Services
A) Cost based pricing

1) Basic cost covering / cost plus pricing

• cover all the direct cost and gain a profit

• In direct costs are not taken into consideration

2) Contribution pricing

• cover all the direct cost plus certain amount of indirect cost,
and making a profit

3) Working back method

• Service provier first estimates the cost of producing a particular service plus the
amount of priit one would like to gain

• then works back and sets the price

• If price is too high compared to others , then service provider should add value to
make the customer feel that it is worth paying the extra amount
 Approaches to Pricing Services
B) Market / Demand based pricing
• service providers study the variations in demand with changes in prices.

• They also observe the changes in demand for each market segment

1) Skimming pricing
• generally used by service providers who use unique services to the market

• high prices , earn more profits until other service providers come up with similar
service offerings
Eg : cyber café rates – initially very high
 Approaches to Pricing Services
B) Market / Demand based pricing

2) Penetration pricing
• when new services are introduced in the existing market, or existing services are
introduced in new markets

• Prices are kept low initially, so customers repurchase take place , loyal customers
• More market share

Eg : reliance india mobile

3) Price discrimination

- Based on time and type of customers

Time –low prices during period of low demand

Type of customers – lower prices for students to encourage them to use certain services
 Approaches to Pricing Services
B) Market / Demand based pricing

4) Pricing to meet customer expectations

• meeting customer expectations of price with frequent market research activities

• helpful when introducing services in a new market or when an unique service

is offered to the customers

• Helps service providers know if price set by them meet the customers standards

5) Discounts and sales

• basically done to attract a segment of customers

• During of season, only discounted services are being offered to customers

 Approaches to Pricing Services
C) Competition based pricing
• observing the competitor’s pricing strategy to designs one’s own pricing structure

1) Destroyer pricing

• to throw competitor out of business by setting the lowest prices in the market

• prices so low that competitors find it difficult to match and they cannot survive if they
reduce their prices to same level.

• Even company using such strategy needs to be careful, might get thrown out of the
market incase the competitors are stronmg enough to survive the price cuts
 Approaches to Pricing Services
C) Competition based pricing

2) Going rate / Price matching

• who wants to play it safe in mature market

• price almost similar to that of competitors

3) Price bidding / close bid pricing

• Mostly used by construction, building and manufacturing services

• send bids to the company that needs the service and the company select the bid
that will satisfy its requirement the best