Tutorial 6

1. Why is the pricing of services more difficult than the pricing of goods?
Pricing services is often more difficult than pricing products especially for small firms or
individual professional ventures. The difference in complexity lies in costs being harder to
compute in services, unlike when you are selling tangible products. In the case of products,
it is relatively easier to identify either your product acquisition cost or the cost of direct
materials. For example, if you are selling burgers then your cost will be what you pay to buy
ingredients such as cucumber, bread, tomato, burger meat and egg. However, in the case of
services, it is difficult when you have to put a price on the value created, not on a tangible
product. For example, you are providing consultation service, the price charge is based on
your own value which is intangible. It is just on personal judgement how much it worth. 
Not only that, pricing services is more difficult because the variation of inputs and outputs
are big. In the case of products, the variation is normally small or even none, so the pricing
will be easier as it is fixed. For example, burger biasa (without egg) RM4 each and burger
special (with egg) RM5 each. It is fixed and seldom has much variation. However, services
are usually priced according to different situations, location, time hence it is harder. For
example, in hair stylish service, the price is charged based on the condition of customers’
hair and the length of hair. It does not have a fixed price but just an estimated range, it needs
to adjust the price accordingly. 
Time may influence consumers' perception of value, consumers may be willing to pay more
for a faster service.
The inability to inventory services. Service cannot be counted and stored

2. Why can’t we compare competitor prices dollar for dollar in a service context?
Competitor price cannot be compared dollar for dollar in a service context as services are
often varied due to location. For example, clinic A located 1 hour away by car, clinic B
located 15minutes away by car and clinic C located 5 minutes away by car. The clinic where
located further might be cheaper and clinic that located nearer might be more expensive as it
is more convenient to customers. Even they are all providing similar services but prices can
be different because of their location.
Next, the competitor prices also vary based on the time factor. Using the example above, the
estimated waiting time for clinic A is about 2 hours while for clinic B is about 30 to 45
minutes. For clinic C, the estimated waiting time is not more than 15 minutes. Due to the
different waiting time, the prices for these 3 clinics will be different. The least waiting time of
the clinic might be more expensive than the others.
Besides, value to customers usually varies widely among segments. For example, some
companies might target customers with higher standard of living, they might charge higher
price by giving high class services and facilities. On the other hand, some companies might
target customers with normal or lower standard of living, they might charge lower prices to
attract more customers.
3. What is revenue management and how does it work?
Revenue management is price customization that charges different value segments different
prices for the same product based on price sensitivity. It is also known as yield management.
It is usually used by airlines, hotels, car rental firms, hospitals, restaurants, golf courses,
concert organizers, cinemas, etc. For example, airlines seek to maximize revenue per
available seat kilometer and hotels try to maximize their revenue per available room-night.
Revenue management uses mathematical models to examine historical data and real time
information to determine what prices to charge within each price bucket and how many
service units to allocate to each bucket. Revenue management is effective to be applied when
there is relatively high fixed capacity, high fixed cost structure, perishable inventory, variable
and uncertain demand and varying customer price sensitivity.

4. Under what situations can price competitions be reduced?

Non-price related costs of using competing alternatives are high

When saving in time to having a service and the effort of using the service are of equal or
greater importance to customers than price in selecting a supplier, price competition is
reduced.

Personal relationships matter

For services that are highly personalized and customized, such as hairstyling or family
medical care, relationships with individual providers often are very important to customers,
thus discouraging them from responding to competitive offers. Many global banks, for
example, prefer to focus on wealthy customers in order to form long-term personal
relationships with them.

Switching cost are high

When it takes effort, time, and money to switch providers, customers are less likely to take
advantage of competing offers. Cell phone providers often require one- or two-year contracts
from their subscribers and charge significant financial penalties for early cancellation of
service. Likewise, life insurance firms charge administrative fees or cancellation charges
when policyholders want to cancel their policy within a certain time period.

Services are often time and location specific

When people want to use a service at a specific location or at a particular time (or perhaps
both), they usually find they have fewer options. Therefore, it naturally reduces price
competition.
5. What are rate fences? Provide examples to aid your explanation.

Rate fences are “products” that used to allow customers to self-segment on the basis of
service characteristics and customers' willingness to pay. Rate fences can be physical and
non-physical.

Physical fences

It refers to tangible product differences related to the different prices which includes basic
product (e.g. the seat location in a theater), amenities (e.g. valet parking), or a service level
(e.g. dedicated service hotlines).

Non-physical fences

It refers to consumption (e.g. stay must be over a week), transaction (e.g. two weeks’ advance
booking with cancellation and change penalties) or buyer characteristics (e.g. student and
group discount). The service experience is identical across fence conditions although
different prices are charged.

6. Give an example of a trade-off between monetary and non-monetary costs

associated with patronizing a dental clinic.

Monetary cost

It definitely is the money that is involved for receiving the services from the dental clinic
such as the price of purchasing and using the services.

Time cost (Non-monetary costs)

Not only customers are paying money to receive services from the dental clinic; they also are
expending time. Time becomes a sacrifice made to receive service at a dental clinic. First,
because dentists cannot completely control the number of customers or the length of time it
will take for each customer to be served, customers are likely to expend time waiting to
receive the service. Waiting time for a service is virtually always longer and less predictable
than waiting time to buy goods. For example, the time spent before deciding which dental
clinic to have a service with.

Physical cost- effort and energy that put in

Psychological cost- perceived risk, cognitive dissonance
Sensory cost- noise, uncomfortable sitting position