MKTG 3209

Services Marketing
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Setting a Price to the Service Rendered

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Group Members
Gutierrez, Longawis, Mabalot, Mabansag, Mapanao, Salvador, Prado
▪ To examine why service prices vary so much
▪ To explore yield management in services
▪ To explain the role of pricing objectives in service organizations
▪ To analyze the challenge of establishing value for service offering
▪ To show how service costs may be calculated
▪ To explore price bundling strategies for services
▪ To examine additional pricing considerations
Inseparability and perishability
characteristics of services
Creative ways to maximize
revenues and reduce costs per
customer served
A pricing strategy, which is commonly utilized by businesses
in hospitality, air travel, and other tourism related fields, in
order to generate maximum revenue from perishable
industry.

It is typically means selling to the right customer, at the

right time, for the right price.
 Cruise Line
Rail Roads
Touring Industries
 Harnesses Demands

Catering the marketers to the right customer

Carry out price changes

Pricing Objectives
and Approaches
Pricing strategies, driven by pricing objectives, are
Pricing Strategies

linked to the service organization's overall marketing

Pricing Strategies

strategy. All service organizations (except nonprofits

and government agencies) focus pricing strategies on
covering costs and making a profit.
The two types of pricing objectives are:
Pricing Strategies

▪ Profit-oriented Objectives
Pricing Strategies

▪ Volume-oriented Objectives
Stress generating high returns on the service's
investments in resources and labor. This objective is
aimed, simply, at making as much money as possible
for your business and to maximize price for long-
term profitability.
Example:
In 2014 Nike initiated a new pricing strategy. The company
determined from a market analysis that its customers
appreciated the value that the brand provided, which
meant that it could charge a higher price for its products.
Nike began to raise its prices 4–5 percent a year.
Volume-oriented Objectives
Stress processing large numbers of customers or their
possessions. Organizations can develop strategies to
accomplish these objectives by approaching price
determination in three ways:
• Cost-based Approach
• Customer-based Approach
• Competition-based Approach
An operations perspective focuses on the price floor, that
is, the minimum price that covers all costs of producing
the service. It is sometimes referred to as a cost-based
approach because the service organization begins by
carefully calculating all costs and then sets its price
accordingly after adding a profit margin to the total.
 A revenue perspective that focuses on the price
ceiling or the maximum price customers are
Customer- likely to pay. In this case, the marketer begins
Based with a range of prices acceptable to the
Approach customer and sets a price that reflects
customers' perception of the service's value
while taking into account the desired profits.
 Example: A dealer typically displays a high
sticker price for a car, which is nothing more
Customer- than a wished-for price intended to frame
Based the value of the car for the customer. Then
Approach
a salesperson takes the prospective buyer
out for a test drive and determine it’s
ability to pay.
Establishes the service's price in relation to the
competition. Depending on how an organization wants
to be perceived:
▪ Pricing to Meet the Competition
▪ Pricing above Competitors
▪ Pricing below Competitors
Ideally, all three approaches combine to address the three critical
factors that affect price: customers, costs and competition.

Three Approaches to Price Determination

Customers

Costs Competition
 Value is an assessment of the benefits of the
service versus the costs associated with it.

Source: businessnewsdaily.com businessinsider.com

 All types of benefits and costs can be weighed in the
determination of value, but two particularly important
elements are need satisfaction and price.

Problem services marketers face is the

real-time nature of services.
 Customers often use price as a surrogate indicator of
service excellence.

Customers often use price as a surrogate indicator of

service excellence.

Source: news.worldcasinodirectory.com
 Customers often use a cost-benefit analysis to
determine the value of a service offering.

The longer the customer has been loyal to a service

provider, the greater the perceived value of the service.
The perceived value of a service
Customers often use price as a surrogate indicator of
is reflected in the price/demand
service excellence.
elasticity for the offering.
 Highly elastic service and inelastic service.

Customers often use price as a surrogate indicator of

service excellence.

Source: magzter.com Source: govserv.org

 The total cost of producing each unit of a
service involves both fixed and variable cost of
using these assets. Some of these costs are
direct costs and indirect costs.
 Fixed Cost
Variable Cost
Direct Cost
Indirect Cost
Fixed cost is a cost that does not change with an increase or decrease
in the amount of goods or services produced or sold

Variable cost is a corporate expense that changes in proportion to

production output

Direct cost are costs that can be directly tied to the production of
specific goods or services.

Indirect cost are costs that are not directly accountable to a cost
object, it can be either fixed or variable.
 Example: Motel Room
Direct Costs -the price of the laundry and bathroom supplies.
 Example: Motel Room
Indirect Cost - the allocated overhead cost of maintaining and staffing the
front desk.
 Example: Motel Room
Fixed Cost - motel property mortgage payments or debt financing
occur regardless of the number of customers served.
 Example: Motel Room
Variable Cost - the cost of bath soaps and
electricity ( depends on the number of rooms sold).
 services often share indirect
Shared
Cost
costs with other services that
use the same sources
 SHARED FIXED COSTS
customers of different services share space,
equipment, and other facilities, their fixed
Shared costs
Cost
SHARED VARIABLE COSTS
the costs of these shared resources also vary
by the number of customers
Total Fixed Cost Per-Unit
Contribution
Total Shared Cost to Fixed Cost
Per-Unit Desired Price Charged
+ =
Total Cost Net Profit to Customer

Total Per-Unit
Variable Variable
Cost Cost
 TC = FC + SC + VC
P = TC + NP
FC - Per Unit Fixed Costs SC - Shared Costs
VC - Variable Costs TC - Per Unit Total Costs
P - Price NP - Net Profit Per Unit
PONTCHARTRAIN MANOR
- a ten-room motel that must calculate costs and set the price for a room for one night.

G i v en:
Mo rtg ag e P ay m ent ( f o r entire f ac ility ) = $1 0 , 0 0 0 p er m o nth
P er ro o m m o rtg ag e ( d aily allo c atio n f o r a sing le ro o m ) = $33
T o tal Staf f P ay = $3, 0 0 0 p er m o nth
1 . O ne f ull tim e f ro nt - d esk m anag er
2. O ne d aily ho use keep er
3. O ne w e e kly g ro u nd ske ep er
Shared Fixed Co st = $1 0 0 p er d ay / $1 0 p er ro o m p er d ay
Variab le Co sts = $7 p er ro o m p er d ay
PONTCHARTRAIN MANOR
- a ten-room motel that must calculate costs and set the price for a room for one night.

Calculate the following:

Total Cost = Fixed Costs + Shared Costs + Variable Costs

= $33 + $10 + $7
= $50 per day

Price = TC + NP/Profit margin

=$50 + $10
= $60 per day
PONTCHARTRAIN MANOR
- a ten-room motel that must calculate costs and set the price for a room for one night.

Calculate the following:

Contribution Margin = Price– variable cost

= $60 - $7
= $53
Net Profit = Contribution Margin – Fixed Cost
= $53 – $43
= $ 10
 Service organizations need a certain
number of customers to recover all of
its costs and make a profit.
Breakeven Analysis
shows the number of goods
that must be sold to cover
costs at a given price
 Sevice’s Breakeven Point
– the number of units of a service that
must be sold or the number of customers
Customers oftenthat
usemust
pricebe
asserved
a surrogate indicator
to cover costs.of
service excellence.
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠+𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
BP=
𝑃𝑟𝑖𝑐𝑒 −𝑈𝑛𝑖𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
Applying to our example:
PONTCHARTRAIN MANOR – Motel

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠+𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

BP=
𝑃𝑟𝑖𝑐𝑒 −𝑈𝑛𝑖𝑡 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠

$10,000+$3,000
BP=
$60−$7

BP= 245 𝑛𝑖𝑔ℎ𝑡 𝑠 𝑎𝑐𝑐𝑜𝑚𝑜𝑑𝑎𝑡𝑖𝑜𝑛

′
 The breakeven point changes with price and varies according
to he demand fluctuations that are so prevalent in services.

Service providers can leverage the fixed assets into

providing more services at a low incremental costs.
Price Bundling
combining several products or services
into a single comprehensive package
for an all-inclusive reduced price.
Price Bundling
It also links several service offerings or
features into one attractive price. The
bundle usually is composed of features not
desirable when priced individually.
Pure Price Bundling the price bundled service is the
only available for customers

both the service bundle and the

separate offerings in the bundle are Mixed Price Bundling
available
Pure Price Bundling Mixed Price Bundling
retail banking
vacation packages
cable television
fitness centers
clubs
car washes
HowCustomers
is price bundling
often use price as a surrogate indicator of
important to the
service excellence.
business?
allows the service providers to meet a wider range
of customer’s needs.

develop loyalty from customers

price bundling is also an effective way to cross sell

offerings and earn more revenue
6g Internet Inc
- a business offering cable TV and internet plans.

Service A which is the Cable TV costs 500 pesos per month and
has 10 subscribers
Service B which is the Internet plan costs 1000 pesos per
month has 20 subscribers

T h e t o t a l r e v e n u e o f t h e c o m p a n y w o u l d b e 2 5, 0 0 0 ( 5 0 0 0
(service A) + 20,000 (service B)) per month
 Customer of A

Revenue= 5,000 PESOS

Price

Product A

500PHP

10

Quantity
 Customers of A and B

Price Customers of A Customers of B

Product A Revenue= 5,000 PESOS+20,000PESOS

1000PHP
500PHP Product B

10 20

Quantity
 Customers of AB
Customers of A Customers of B

Revenue= 2,500 PESOS+39,000+10,000PESOS

Price

Product A
1300PHP Product AB
1000PHP
500PHP Product B

5 10 30

Quantity
able to identify segments based
on the nature of service offering
and bundles of products they
desire, buyer characteristics
such as volume user status
(new vs old), timing of purchase
and use, etc.
Factors to Consider in
Implications for the Services Marketer
Pricing
Price-quality relationship among the range of
Positioning
competing products
Segments differ in price sensitivity with differences
Time of Demand
in time of purchase or use
Discount and affinity benefits retain customer
Membership
loyalty and increase switching costs
Tailored version of products or customize bundling of
Customization
products attract more customers
Participation Lower price for customer effort, such as self-service
Positioning
Time of Demand
Membership
Factors to Consider in
Implications for the Services Marketer
Pricing
Price-quality relationship among the range of
Positioning
competing products
Segments differ in price sensitivity with differences
Time of Demand
in time of purchase or use
Discount and affinity benefits retain customer
Membership
loyalty and increase switching costs
Tailored version of products or customize bundling of
Customization
products attract more customers
Participation Lower price for customer effort, such as self-service
Participation
 MKTG 3209
Services Marketing
**********************************

Setting a Price to the Service Rendered

**********************************
Group Members
Gutierrez, Longawis, Mabalot, Mabansag, Mapanao, Salvador, Prado