SM: Session 7 Pricing In Services

In services prices are known by many name. They are rate of interest in bank or other loans, fees in education, consultancy, brokerage as in commission on sale or purchase of shares. They are termed as rent in property deals, toll in road or bridge use, premium in insurance, commission in advertising, admission fee in Museums, tourist attractions and honorarium for guest speakers.

Issue in Pricing Decisions

Reference Prices

In case of services it is difficult for customers to predict the price for a service. They may have some internal price reference, which is based on a price point in a memory for a good or service and can be price last paid, the price most frequently paid, or the average of all prices customer have paid for similar offerings. But these reference prices rarely give accurate idea of prices. The reasons for that are:

1. Service Variability

An important characteristics of service is its variability. Service products are usually designed considering number of permutations and combinations and offered by different people. For example, a hair spa may contain different product use (Kerastase, Schwarzkopf and Wella), given by different people (master stylist, senior stylist, trainee) and for different duration ( 30 mins, 45 mins and 1 hour) that itself comes to 3 X 3 X 3 = 27 combinations. If a customer asks for any additional service like hair wash ( 3 types of shampoos) or anti dandruff treatment (4 varieties) its adds up to 27X3X7 = 324 combinations. In such cases it is very difficult to predict reference prices.

2. Inaccurate Advance Price Estimations

In many cases the service provider can give an idea of the base price in advance. They are usually unwilling to discuss prices in advance as they themselves don't know what service will involve until the service is delivered. For example, a legal practitioner can't predict in advance how much time and efforts are required and hence can't predict the price. 

3. Varying Individual needs

Another reason for customer lack accurate reference prices are their individual needs. For example, if the reference prices are based on previous experience, next time the service combination may be different. If the reference prices are based on recommendations of a friend, for a hair care service, the quality of hair may be the different and hence a different product may be used. 

4. Contrasting Information

Reference price estimation is also difficult due to amount of information is available for various service products and providers. This leads to a lot of references for a given category and results in customer confusion. At times consumer confuses promotional prices (special offers and discounted prices) to reference prices. 

5. Hidden Prices

In service price visibility may be limited. In many service like financial and banking services, many elements of costs are hidden or implicit. For example their may be a penalty clause or taxes. 

Price Calculations - Non Monetary Costs

Service prices calculation is difficult as compared to that of physical goods. The reason being difference in consumer perception regarding pricing for the two. In case of services there are other considerations also and with monetary price other non monetary costs also play a role.

NON MONETARY COSTS

1. Time costs

The time cost is important in the services where customers physical presence required. The customers has to invest time to avail the service and there is waiting time also. For example, long waiting hours on a visit to a physician.

2. Search costs

The efforts put in identifying the desired service are also non monetary costs. Due to intangibility of services, it is difficult to evaluate various options. Initially, the customer may contact number of service providers and compare different prices and schemes. The search may also be done on internet. For example, for booking a tour customer may inquire with many travel agents for the desired itinerary and compare prices.

3. Convenience Cost

The other element of non monetary cost is the cost of convenience (or inconvenience) If the customer is traveling far to a preferred service providing, there is traveling time (to and fro) involved. Heavy traffic in most of the cities cause further inconvenience.

4. Psychological costs

These non monetary cost involve the fear of rejection (application of bank loan), fear of not understanding (using an ATM), fear related to making a choice. Towards the end of it all the customer may feel that there can be better service.

Also price determination take into account the perishibility aspect of the service.

Price a Service Quality Indicator

žIn the absence of other forms of communication from the company, price becomes the sole decisive factor in selection of a service. Customers look for cues like information through advertising, brand image etc. žIn certain services which are perceived as high risk like consultancy services and medical treatment the customers associate pricing with quality assurance.ž Too low a pricing can act as a repellent. It could send negative signals. Too high a price can set very high expectations.

Price Determination

Following three criteria are used to determine prices in services:

1. Cost Based Pricing

A company determines the prices on the basis of expenses adds profit margins and overhead and arrives at prices. The expenses may include human costs, overhead costs are share of fixed costs. 

Price = Direct Cost + Overhead Cost + Profit Margin

This type of pricing is used in services like advertising, contracting etc.

Cost plus pricing is used in services where component costs can be calculated and a markup is added. In complex product lines – like retail banking products, Activity Based Costing is used to determine the price. Cost of the time involved in providing the Service. Example professional services where charges are per hour like consultants, lawyers psychologists etc.

Most services are sold by hour as it is difficult to determine unit price. Also variability of services make it difficult to ascertain uniform cost per hour. 

2. Competition based pricing

This approach is based on using the competitors’ price as the point of reference and used in services where services are standard across providers such as E.g: Fitness clubs, Driving classes, Computer classes Tourist bus services, Car hires etc. 

However, this type of pricing makes competition difficult for small firms as they can't keep prices as large firms. Further heterogeneity of service make it difficult for different service providers and within the service firm. 

Going rate pricing: In this type of pricing strategy the charges offered are the ones that are prevalent in the market for the same type of service. 

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. For example when in airlines industry spicejet drops the price, indigo and goair quickly follow.

In some cases there may be an unstated understanding among competitors (group called Cartel, which is illegal) for example Cell phone operators.

3. Demand Based Pricing or Value Based Pricing

This criteria is based on establishing prices consistent with customer perception of value i.e. pricing depends on what customers are likely to pay for the services provided.

Unlike in cost based and competition based pricing, demand based pricing is customer focused and not company or market focused. žThis type of pricing is fixed keeping in mind what the customers are likely to pay for the perceived value offered by the service.

žFor the determination of demand based pricing non monetary costs also have to be considered, as these contribute to the perception of value.

Understanding VALUE

1.Value is low Price.

2.Value is what I want in a service.

3.Value is the quality I get for the price I pay.

4.Value is what all I get for what I give

STRATEGIES FOR EACH PERCEIVED VALUE

Value is Low Price

For some customers the perception of value is to get the product at lowest cost. The monetary price considerations are more important than quality of service. This can be understood as production concept in services. Some of low pricing strategies are:

DISCOUNTING: Price sensitive customers often perceive discounted or reduced prices as value. The service marketers offer number of discounts like off-season discounts, festival discounts, patronage discounts and so on. The problem with such strategy is that over period of time the customers starts considering these discounted price as reference prices. In such cases, it is very difficult for the service provider to go back to original prices.

ODD PRICING: Many time a service is strategically priced just below the rupee to give a feel of a lower price. It is also known as psychological prices. The idea is to make consumer feel that he/she is paying low price.

SYNCHRO-PRICING: This pricing is used to manage the fluctuations in demand. Time, place quantity and incentive differentials are used to attract the price to price sensitive customers.

1. Time differentials: Price variations are offered depending on the time when the service is utilized, so as to gain optimum advantage. For example morning show in movie theaters are less prices than to evening shows.

2. Place differentials: Here location sensitive customers are willing to pay a higher price for the service. Soft drinks and snacks are charged more in a theater or inside a stadium than to a local store. In movie theaters front seats are less priced than higher seats and vice-versa in plays.

3. Quantity differentials: In this strategy higher the purchase in terms of volume, lower is the price per unit. Many hotel charge for minimum number of days of stay. The price per day decreases as number of days increases. 

PENETRATION PRICING : This is the strategy where new services are introduced at very low prices to attract customers. It is useful when sales volume are price sensitive. Economies of scale are achieved by selling large volumes. This strategy is appropriate for the services where there is threat of strong potential competitor. In such markets, no one is willing to pay a higher price for the service.

INCENTIVE PRICING - Low or discounted prices are offered to loyal customers to retain them or to new customers to entice them. Some professional like lawyers, dentists and some physicians offer free service to encourage them to use service and to help them overcome the fear of high prices.

Value is Everything I Want in Service

Here the customer is willing to pay any price for the quality that he expects, the perception being that higher the price better the quality.

PRESTIGE PRICING: Pricing for exclusive services which have a status value. For certain services - restaurants, health clubs, airlines, and hotels - a higher price is charged for luxury. 

PRICE SKIMMING : This strategy is deployed when services are being launched at very high prices or improvised services are launched for which a category of customers is willing to pay the highest prices.

Value is What I Get for the Price I Pay

Here the price and quality are matched depending on the targeted segment. 

VALUE PRICING: It is the scenario when the customer feels "getting more for less". The concept of value meal is practiced by McDonald with their Rs. 20 burgers. Taco Bell also have $0.59 value meal.

MARKET SEGMENTATION PRICING: Customers are charged based upon client category or service version, both used to segment the customers. For example, economy class in airlines.

Value is All that I Get for What I Give

PRICE BUNDLING: – An assortment of services are priced in such a way that buying the services individually would be more expensive. There may be bundling of accompanying services like extended warranties, training and expedited delivery.

The effectiveness of such method depends on how well service firm understands the bundle of value that the customer segments perceive.

COMPLEMENTARY PRICING: – In this method two complementary products are priced are priced together. The three related strategies are: 

1. Captive Pricing: In captive price base service or product and then provides the supplies or peripheral services needed to continue them using the service. For example, Gynecologist, Dentist

2. Two-part Pricing: The firm offers  very low price in the beginning and then charge heavy fees. For example, DTH service providers charge installation fee as the base price and then charge monthly fees.

3. Loss leader Pricing: Typically used in retail stores when service providers place some service on special discount to draw customer to the store. For example, Dry cleaner can offer discount for men formal shirts. 

RESULT BASED PRICING: In some services the outcome is very important but uncertainty is high. Here, the most relevant aspect of value is the result. For example, employment agencies, property dealer charge fee only if the result is achieved.

Contingency Pricing:  A term used for result based pricing in case of a lawyer fighting an accident case.

Result-based pricing are also demonstrated in Google's products - Adsense and Adwords, where they charge their clients on Pay-per-click(PPC) or Pay-per-thousand-impressions (PPMI) methods.

Reference: Services Marketing: People, Technology, Strategy - Lovelock, Wirtz & Chatterjee & Service Marketing - Zeithmal, Bitner, Gremler & Pandit