17-1

Pricing of Services
 17-2

Pricing Strategy :

It is a strategic tool that

organizations use to differentiate
their products from competitors
and thereby gain the competitive
edge to capture the market.
 17-3

Price as an Indicator of Service Quality

Can price attract some

customers?
Three Basic Price Structures and 17-4

Difficulties Associated with Usage for Services

PROBLEMS:
PROBLEMS: 1. Costs difficult to trace
1. Small firms may charge too 2. Labor more difficult to
little to be viable price than materials
2. Heterogeneity of services 3. Costs may not equal value
limits comparability
3. Prices may not
reflect customer
value

PROBLEMS:
1. Monetary price must be adjusted to reflect
the value of non-monetary costs
2. Information on service costs less available to
customers, hence price may not be a central factor
 17-5

The Role of Non-monetary Price

Do you trade time for money?

 Time costs
 Search costs
 Convenience costs
 Psychological costs
 17-6

Cost-Based Pricing
 17-7

Cost Based Pricing

 Price = Direct Cost + Overhead Cost + Margin

 Direct Cost = Material + labour used to produce

the service

 Overhead costs are apart from the fixed cost

Used in Services like Advertising ,

Contracting , etc.
 17-8

Competition-Based Pricing
 17-9

Competition-Based pricing

 This approach is based on using the competitors’

price as the point of reference
Eg: Fitness clubs, Driving classes, Computer classes etc.
 When services are standard across providers.
 In oligopolies where there are few large
service providers : Airlines
 Price signaling
 Going-rate Pricing
 17-10

Price Signaling

 Found in markets where there are a

number of competitors. If any one
company offers a lower cost advantage
others immediately match the price. Eg.
Airlines.

 In this type of pricing strategy the charges

offered are the ones that are prevalent in
the market for the same type of service.
Eg. Tourist bus services, Car hires etc.
 17-11

Demand-based Pricing
 17-12

Demand-based Pricing

 Unlike in cost-based and competition-based

pricing, demand based pricing is customer focused
and not company or market focused.

 This type of pricing is fixed keeping in mind what

the customers are likely to pay for the perceived
value offered by the service.

 For the determination of demand-based pricing

non-monetary costs also have to be considered,
as these contribute to the perception of value.
 17-13

A Customer-Focused Approach to
The Pricing Process

Understand Customer Value

Determine Demand based on

Competition and Offering

Estimate Cost, Revenues and

LTV

Establish a Pricing Structure

and Level

Set Final Price

 17-14
Service Pricing Strategies
for Four Customer Definitions of Value

“Value is Low Price” “Value is Everything

I Want in a Service”
 Discounting
 Prestige Pricing
 Odd Pricing
 Skimming Pricing
 Synchro-pricing
 Penetration Pricing

“Value is the Quality “Value is All that

I Get for the Price I Pay” I Get for All that I Give”

 Value Pricing  Price Framing

 Market Segmentation  Price Bundling
Pricing  Complementary
Pricing
 Results-based Pricing