Chapter-6

Pricing of Services
Dynamic pricing
Which clinic would you patronize if you needed a chest x-ray (assuming all
three clinics offer good quality)?

Clinic A Clinic B Clinic C

 Price $45  Price $85  Price $125

 Located 1 hour away by  Located 15 mins away by  Located next to your
car or transit car or transit office or college
 Next available  Next available  Next appointment is in
appointment is in 3 appointment is in 1 week 1 day
weeks
 Hours: Mon-Fri, 8AM-  Hours: Mon-Fri, 8AM-
 Hours: Mon-Fri, 9AM-5PM 10PM 10PM
 Estimated wait at clinic is Estimated wait at clinic is  By appointment—
about 2 hours about 30 to 45 mins estimated wait at clinic
is 0 to 15 mins
What Makes Service Pricing Strategy Different and Difficult?

Harder to calculate financial costs of creating a service process or performance than a manufactured good

Variability of inputs and outputs—how can firms define a “unit of service” and establish basis for pricing?

Customers find many services hard 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

Delivery through physical or electronic channels—may create differences in perceived value

Effective Pricing Is Central To Financial Success
Characteristics of Service Pricing

• Pricing of services is complicated

• Service organizations use different terms to describe the prices they set – Fee, Interest, Charges,

Commission, Tolls, Tariffs etc.

• Consumers find service pricing difficult to understand, risky, and sometimes even unethical

• Firms have to consider:

• (1) search costs,

• (2) purchase and service encounter costs, and

• (3) post-purchase or after costs, while pricing services.

Pricing Tripod
Pricing Tripod
Cost-Based Pricing
• Set prices relative to financial costs (problem: defining costs)
• Higher ratio of fixed cost to variable cost
• Activity-based costing
• Pricing implications of cost analysis
Cost-based Pricing
Establishing the Costs of Pricing Implications of
Activity-based Costing
Providing Service Cost Analysis
• Fixed, semi-variable, • Indirect costs are linked • A firm must set its price
and variable costs, to the variety and high enough to recover
contribution and break- complexity of services the full costs of
even analysis produced and not just producing and
on physical volume marketing the service
and add a sufficient
margin to yield the
desired profit.
• Some firms promote
loss leaders, which are
services sold at less
than full cost to attract
customers
Value-based Pricing
• Understanding Net Value
• Customers weigh the perceived benefits of the service against the perceived costs they will incur.
• Net value equals perceived benefits minus perceived costs.

Valarie Zeithaml • Value is a low price.

• Value is whatever I want in a product.
proposes four • Value is the quality I get for the price
broad expressions I pay.
of value: • Value is what I get for what I give.

• Managing the Perception of Value

– Effective communications and personal explanations are needed to help
customers understand the value they receive.
 Four Customer Definitions of Value

Value is everything
Value is low price.
SETTING PRICES AND IMPLEMENTING

I want in a service.
REVENUE MANAGEMENT

Value is the Value is all that

quality I get for I get for all
the price I pay. that I give.

Valarie Zeithaml proposes four broad expressions of value:

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Reducing Related Monetary and Non-Monetary Costs
• Reduce related-monetary costs.
o Cut time spent searching for, purchasing and using service (over and above
the purchase price paid to the supplier)
• Reduce non-monetary costs (Reflect the time, effort, and
discomfort associated with the search, purchase, and use of a
service)
o Time Costs
o Physical Costs
o Psychological (Mental) Costs
o Sensory Costs (unpleasant sights, sounds, feel, tastes, smells)
Reducing the Related Monetary and Non-Monetary Costs
Working with
operations experts
to reduce the time
required to
complete service
purchase.

Suggesting Minimizing
ways in which unwanted
customers can
reduce
psychological
associated costs of
monetary costs. service.

Eliminating or
Decreasing
minimizing
unpleasant
unwanted
sensory costs
physical
of service.
effort.
Total user cost
• Service users can incur costs during any of the three stages of the service
consumption model
Competition based pricing
Price Competition Intensifiers
• Increasing number of competitors.
• Increasing number of substituting offers.
• Wider distribution of competitor and/or substitution offers.
• An increasing surplus capacity in the industry.

• Non-price related costs of using competing

Price alternatives are high
Competition • Personal relationships
• Switching costs are high
Inhibitors • Services are often time and location specific
Revenue management

Maximizing Revenue from

Available Capacity at a Given Time
Most effective when
• Relatively high fixed capacity
• High fixed cost structure
• Perishable inventory
• Variable and uncertain demand
• Varying customer price sensitivity
Revenue management is price
customization
• Charge different value segments different
prices for same product based on price
sensitivity
Illustration Of Price Elasticity

This figure shows the price

elasticity for two segments,
one with a highly elastic
demand and the other with a
highly inelastic demand.

To allocate and price capacity

effectively, the revenue
manager needs to find out
how sensitive demand is to
price and what net revenues
will be generated at different
price points for each target
segment.
Revenue management
Maximizing Revenue from Available Capacity at a Given Time
• Revenue management is price customization

o Charge different value segments different prices for same product based on price
sensitivity
The Strategic Levels of Revenue (Yield) Management
Price
Fixed Variable

Quadrant 1 Quadrant 2
Predictable
 Movies  Hotel rooms
 Stadiums/arenas  Airline seats
 Function space  Rental cars
 Cruise lines

Duration

Quadrant 3 Quadrant 4
Unpredictable  Restaurants  Continuing care
 Golf courses  Hospitals

Source: Fig 1 from Kimes and Chase reading (p. 212)

Role of rate fences
Key Categories of Rate Fences: Physical
Role of rate fences
Key Categories of Rate Fences: Non-Physical (1)
Role of rate fences
Key Categories of Rate Fences: Non-Physical (2)
Role of rate fences
Key Categories of Rate Fences: Non-Physical (3)
A good understanding of the demand curve is needed so that
“buckets” of inventory can be assigned to the various
products and price categories.
An example from the airline industry is shown below.
Putting Strategy into Practice
• How much to charge?
• What basis for pricing?
• Price bundling
• Discounting
• Freemium
• Who should collect payment?
• Where should payment be made?
• When should payment be made?
• How should payment be made?
• How to communicate prices?
Putting Service Pricing into Practice
• How much to charge?
• The pricing tripod model provides a useful departure point
• A specific figure must be set for the price
• Need to consider the pros and cons, the ethical issues
• What basis for pricing? (How define unit of service?)
• Completing a task
• Admission to a service performance
• Time based
• Monetary value of service delivered (e.g., commission)
• Consumption of physical resources (e.g., food and beverages)
Putting Service Pricing into Practice
• Who should collect payment?
• Service provider or specialist intermediaries
• Direct or non-direct channels
• Where should payment be made?
• Conveniently located intermediaries
• Mail/bank transfer
• When should payment be made?
• In advance
• Once service delivery has been completed
Putting Service Pricing into Practice
• How should payment be made?
• Cash
• Token
• Stored value card
• Electronic fund transfer
• Charge card (debit/credit)
• Vouchers
• Third-party payment
• How to communicate prices?
• Relate the price to that of competing products
• Ensure price is accurate and intelligible