15 Service Pricing Strategies
Dr. Jasveen Kaur
Service Pricing Strategies
Price is the medium for exchange of value between a buyer and a seller. It is an influencing factor in consumer decision making, related to purchase. (K. Rama Mohana Rao).Price represents one of the important traditional marketing mix variables, because it is only price which generates inflow of revenues to company while all other variables are associated with a cost.
According to D.D. Shipley and D. Jobbers, ‘If effective product development, promotion and distribution sow the seeds of business success, effective pricing is the harvest.’ Price is a key determinant of performance, so it is critical element in competitive strategy. Price is the measure by which customer judge the value of an offering, and it strongly impacts brands selection among competing alternatives. Several services used different terminology to denote price. For example, for educational institutions, it is tuition fees; in the bank, it is interest. The concept of pricing applicable to products applies equally to service. However, a service marketer needs to be extra careful in approaching pricing decisions because the service characteristics have some interfering effects. Pricing decision in services is not a matter of putting a monetary figure for the service use. A marketer needs to be careful as to what ‘other overtones’ the price has for a buyer. (HarshV.Verma). Service companies must understood how pricing works, but first they must understand how customers perceive price and price changes.
Following are the ways in which customer perceives services (Valarie A.Zeithaml):-
1. Customer Knowledge of Service Prices- Often the customers are not aware of cost of service and are unable to assess price- value relationship, generally, customers use personal reference prices. It is a price point in memory for a good or a service and can consist of price last paid, the price most frequently paid, or the average of all prices customer have paid for similar offerings.(K. Rama Mohana Rao).Service firm can make use of this reference price in order to determine the price of their service but there is very uncertainty in regard to knowledge of reference price because of following reasons:-
(i) Service variability limits knowledge-As services are variable in nature, the service firms explore it to bring flexibility in the configuration of services. Firms offer an infinite variety of combinations and permutations, leading to complex pricing structures. For example, in case of life insurance it is difficult to get comparable price quote because different companies offer different features such as life insurance or term insurance.
(ii) Providers are unwilling to estimate prices- Another reason customer lack accurate reference prices for services is that many providers are unable to estimate the price in advance because they do not know what services will involve until they have fully examined the client’ s situation, e.g., in case of medical services.
(iii) Individual customers’ needs vary – Heterogeneity feature is linked with almost all the services because services can be uniquely tailored according to customer’s needs. Each service transaction has to have its own pricing structure, for example, in case of hair styling service.(Harsh V. Verma)
(iv) Collection of price information is overwhelming in services- Another reason is that customers feel overwhelmed with the information they need to gather. With most goods, retail stores display the product by category to allow the customer to compare and contrast the prices of different brands and sizes.
(v) Prices are not visible- In most of the services customers do not know how they are charged or what they pay. There are many situations where the customers do not see the price at all until after they receive certain services. For example, in case of credit card fees, customer knows the interest rates charged, but do not know how the interest amount is calculated.( Valarie A. Zeithaml)
2. Role of Monetary Costs-: Monetary price is not only sacrifice consumers make to obtain services. Demand for service is also influenced by the other cost as well, such as non-monetary cost. It represents the other sources of sacrifice perceived by consumers when buying and using a service.(Harsh V. Verma). The types of non-monetary cost are-
(i) Time cost- It refers to the time the customer hasto spend to acquire the service, for example, waiting time, service process time, travelling time etc.
(ii) Energy cost- It signifies the physical energy spent by the consumer to acquire the service
(iii) Psychic cost- It denotes the mental energy spent by customer to acquire the service.(R. Srinivasan), for
example, fear of not understanding (insurance), fear of rejection (bank loans) etc.
(iv) Search cost- It refers to the efforts put in by customer in collecting the information relating to service and service provider in order to make the correct decision.
(v) Convenience cost – Customers have to face inconvenience in order to acquire the service. For example, service provider’s hours may coincide with customer’s time.(Valarie A. Zeithaml).
3. Prices are Indicator of Service Quality- As the services are intangible in nature, the service customers’ bank on price to signal the service quality. Price is often used by customers in making pre- purchase quality assessments.( Harsh V. Verma) . Apart from covering the service cost and matching competitors, the price should also convey quality. From the strategic marketing perspective, knowing how the customer uses the price quality cue in their decision is critical to optimal position of the brand. If prices are too low, it might indicate low quality of services to consumers. On the other hand, high prices may raise customer expectations on quality. So, it should be determined carefully.
Objectives of Pricing
The first process in the pricing process is to decide the objectives of pricing. These objectives provide company direction for action when setting prices. These should be flexible and change over the time in tune with environmental conditions. Different objectives are-:
1. Revenue-oriented Objectives: Price is determined by considering the profit and sales maximization objective. Price should cover both cost incurred on the provision of service.
2.Operation- oriented objectives: Some service organizations are constrained by capacity. They try to match with demand and supply in order to ensure optimum use of their productive capacity at any given time. Services firms need to change prices frequently to match demand and supply.
3. Patronage- oriented Objectives: Price may be used effectively to develop loyalty and relationship with customers. Many companies now prefer patronage building to profit maximization as a future- oriented strategic option.(Christopher Lovelock)
Approaches to Pricing
The approaches for services pricing are more or less same as that of pricing of goods. There are three pricing approaches which a marketer can choose depending upon the market condition. These approaches are as follows:-
1. Cost Based Pricing
It is a traditional and simple method. The company determines the expense incurred- either direct or indirect- on production and adds a desired profit margin to arrive a price. The popularity of this might be attributed top the simplicity of its application, the fact that is considered fair for both customers and competitors, and the price stability that it tends to establish in an industry. The rationale of this method is to add a percentage mark- up to cost of producing and delivering the service.(K. Rama Mohana Rao)
The basic formula for cost based pricing is
Price = Direct Cost + Overhead Cost + Profit Margin
Here in Direct cost involved the material and labor associated with delivering the service, overhead cost are the share of fixed cost and profit margin is percentage of full cost.
Special challenges in Cost- Based pricing for services-: Various challenges faced by companies using these methods are:
(i) Costs are difficult to trace in service businesses, particularly where multiple services are provided by firm
(ii) A major component of cost is employee time rather than materials, and the value of people’s time is not easy to estimate.
(iii) It involves defining the units in which service is purchased, which is vague entity in case of manufactured goods.(Valarie A.Zeithaml)
This approach is convenient when there is supply demand balance at optimum capacity of firm. The firms have fluctuating demand trends cannot use this method. This method is criticized on following fronts:
· It ignores the image and market position of the firm
· It ignores the demand- price relations
· Some hidden costs are usually forgotten. Therefore, true margins may be lower than what are realized.
· Competitors can lower the price to win the business by having a lower cost base or lower profit margins
· It assumes that the company will achieve the sales target to break even.(K. Rama Mohana Rao)
2. Competition- based Pricing -: This method uses anticipated or observed price level of competitors as a primary source for setting the price. There are two situations in which competition based pricing is most suitable- when all the services provides offer the services more or less of the same standard, or when the oligopoly competitive situation is present in the market. Companies have three main choices under this approach: pricing above the competition, below the competition or at par with the competition. The decision depends upon the extent to which services differs from those of their competitors, the intensity of competition and the company’s position in the market.
3. Demand based Pricing
This method is customer- oriented pricing because this approach takes into consideration the customer’s sensitivity to non- monetary costs, the customer’s perception of the value and customer’s acceptability of service at price. This method promotes “Value Pricing ’’concept which uses the value that a service delivers to the customers as main factor for setting price. (K. Rama Mohana Rao).Here in this method there is challenge to determine the value to customers of each of the non- monetary aspects is involved. Under this method price isbased on what customers well pay for the services provided. (Valarie A.Zeithaml).
Understanding Customer Perception of Value
In order to understand the demand based, it is imperative to find out what does a value means to a customer. The value perception of service varies among different group of customers. Service customers generally perceive the following important value perceptions:-
1. Low or Reduced Price is Value- Some consumers equate value with low price, indicating that what they have to give up in the terms of money is most salient in their perceptions of value. As money is important limitation for them in purchasing, they attach value to low price; i.e. product with low price will have more value in their eyes. For example, value is getting discount coupons.
2. Value is Everything Expected in a Service- Some customers may consider the benefits that they receive from the service as the most important component in assessing the value of the service. As this group of people has enough money, they do not give importance to price. These customers give value to the suitability, quality or features of services.
3. Value is Price Versus Quality Relationship- This group of customers see a tradeoff between the money they pay and the quality of service they receive. They evaluate the alternatives rationally and try to optimize their benefited from every transaction. 4.Value is Special Packages Offered by Company- this group of customers considers the total benefit received and the total sacrifices made by them, including money, time, effort, when assessing the value of services. The special packages offered by company attract these customers. They prefer those service providers who can give more customer delivered value.
Whatever the approach, the customer relates value with benefits from the service offer. (K. Rama Mohana Rao). Every customer will like to choose that product which provides them highest value. The customer perceived value is the difference between the customer’s evaluation of all benefits and all cost of an offer. It is ratio between what a customer sacrifices and what he gets in a marketing exchange.
Customer delivered value= TCV – TCC
Here above TCV stands for Total customer value that is the sum of variables that thec customers attach to specific values in relation to a service. Following are the some of the values consumers generally try to measure in a service
1. Core Service Value: it signifies the relevance and suitability of the service to the prime need of the customer.
2. Supporting Service Value: Customer also assess the additional services associated with the core service and their capacity to enhance value of the service.
3. Personal Value: The suitability of the service to the can be measure for value assessment.
4. Image Value: The corporate image and the local image of service provider influences value perception of the customers.
5. Other Values: Consumers may perceive some additional values in such cases as emergency, impulse and other emotional and psychological values which may be associated with service offer.
TCV stands for Total Customer Cost is the sum of cost, monetary and non- monetary, that customer incurs in having a service. Whereas CDV stands for customer derived value which is the value that customer obtain over and above the cost they incur in obtaining service.(K. Rama Mohana Rao)
Pricing Strategies Linked to Value Perceptions
As there are different types of value perception that consumer can develop in relation to service, so service provider should adopt different types of pricing strategies against those perceptions, while determining the price of service. These strategies are given below:-
A) Pricing Strategies When the Customer Meant ‘Value Is Low Price’: When monetary price is the most important determinant of value to a customer the company focus mainly on price and follows strategies given below-
(i) Discounts: The price sensitive consumers can be lured to service through discounts or price cuts, especially when the competition is tough and the supply of the service is more than demand.
(ii) Psychological Pricing/ Odd Pricing: This strategy is used to influence the consumers psychologically by fixing the price in odd numbers like INR 6999,199, and so on. The intention is to make the customer feel that they are offered services at low prices.( K. Rama Mohana Rao)
(iii) Penetration Pricing: In this strategy in which new services are introduced at low prices to stimulate the trial and widespread use.
(iv) Synchro- Pricing: It is use of price to manage demand for aservice by capitalizing on customer’s sensitivity to prices. Service companies offer the low price to smooth the demand and to gain incremental revenue, for example, loweringof the charges on telephone call after 11 p.m. Under this strategy time, place, quantity and incentive differentials are used effectively.
B) Pricing Strategies When the Customer Means ‘Value Is Everything I Want in a
Service’: For a customer group that perceives value to be everything, following strategies are suitable-
(i) Prestige Pricing: Prestige pricing is a special form of demand- based pricing by service marketers who offer high- quality or status service. This strategy intends to attract premium segments of the market. Customers attach more value to high price of the service. For example, Membership of premium health club, luxury hotel etc.
(ii) Skimming Pricing: It is a strategy in which new services are introduced at a high price. It is an effective approach when services are major improvements over past services. This is suitable in case of products having a short life cycle, due to technology obsolescence.
C)Pricing Strategies When Customers Means ‘ Value Is the Quality I Get for the Price I
Pay’: Under this strategy Marketer should first understand what quality means to the customer and then to match the quality level with the price level.The following strategies are followed-
(i) Value Pricing: This strategy is followed to satisfy the customer who is looking for the deal, which give the ‘more for less’. For Example, McDonald, Burger king offers buffet.
(ii) Segmentation Pricing: This strategy aims at charging different prices from different group of customers demanding different level of service quality. The customers are likely to perceive more value in distinctive identity.
D) That Pricing Strategies when the customer Means ‘Value Is All That I Get for All That I Give’: This Group consists of consumers who are highly evaluative and look for beneficiary service packages. The following strategies are suitable for this group:
(i) Price Framing: It means providing total information on pricing of various service packages so that the customers can group the desired services at the price to place an order. A detailed list of prices should be communicated through an appropriate media, e.g., a price anchor.
(ii) Complementary Pricing: Under the head of complementary pricing, the following three closely related pricing strategies can be adopted:
· Captive Pricing: Under this pricing scheme, the service firm offers a basic service or product and continues supplies or peripheral services that are needed. In case of a cable network firm, the first cable connection is provided for a price or a deposit
· Two-part Pricing: Under this strategy, the price of the services is divided into two parts. The first part may be compulsory and the second part depends on the users of the service. The telecommunication industry adopts this pricing strategy. The rental charges and fixed no of free calls constitutes the first part. The second part of pricing depends on the level of usage of the service.
· Loss-Pricing Leader- The objective of this strategy is to attract a large number of customers to the service outlet. Some supplementary services, generally, are offered at a very low price for attracting customers to the business.(K Rama Mohana Rao)
(iii)Price Bundling: It means pricing and selling services as a group, not individually. Under this, two or more goods or services are offered in a single package for a special price. It is of two types which is as follows-:
(i) Pure Bundling- Two or more services, not sold individually, combined into a single package. It is used when the combinations of goods or services is more valuable to the customer than any of them would be independently.
(ii) Mixed Bundling- Under this two or more service, sold individually combined into a single package. For example, banks offer several packages for their checking account customers
(iii) Mixed Leader Bundling- Under this marketer offer service B for a discount if you purchase service A.
(iv) Mixed Joint Bundling – Under this strategy, customer is offered two or more services at a special price. (David L. Kurtz)
Conclusion
Price is the medium of exchanging value between buyers and sellers. It is the only element of the marketing mix that is associated with revenue. Service characteristics and consumer-value perceptions influence pricing decisions. To determine an effective pricing strategy, affirm has to have a good understanding of its costs, the value created for customers, and competitor pricing. The influence of non- monetary costs are also significant in service pricing. There are three approaches to pricing are cost- based pricing, competition- based pricing and demand pricing.
Learn More:
- Rao, K. Rama Mohana (2013). Services Marketing.India:Prentice Hall.
- Verma, Harsh V. (2008). Services Marketing.India.Prentice Hall.
- Zeithaml, A, Valarie, Bitner, Mary Jo, Gremler, Dwayne D., Pandit, Ajay. (2013).
- Services Marketing. India: McGraw Hill Education Private Ltd.
- Clow, Kenneth E., Kurtz, David L. (2009).Services Marketing.India: Biztantra Lovelock, Christopher, Wirtz, Jochen, Chatterjee, Jayanta,(2011). Services Marketing.India: Pearson Publications.
- Srinivasan, R. (2014).Services Marketing. India: PHI Learning Private Limited.