Ch 17: Pricing of Services Flashcards
3 most common pricing structures?
- cost-based pricing
- competition-based pricing
- demand-based pricing
Reference price (def)
A price point in memory of a good or a service. It can consist of the price last paid, most frequently paid or the average of all prices customers have paid for similar offerings.
Non-monetary costs that a customer faces when looking/taking part in a service (4)
Time costs
Search costs
Convenience costs
Physiological costs
What are time costs
Most services require the customer to be present at the time thus costing them time. Another example that costs time is queueing, the time estimate is not always clear to the customer before they decide they want the service.
What are search costs?
The effort invested to identify and select among services you desire. A service establishment additionally only offers one ‘brand’ of service.
What are convenience costs?
If customers have to travel to a service they incur a cost and the cost becomes greater when the travel is difficult.
What are physiological costs?
Fear of not understanding, fear of rejection, fear of outcomes.
How to reduce non-monetary costs? (2)
→ Increase monetary price in order to reduce non-monetary costs
→ Many services ‘buy’ time e.g. hiring a cleaning service
Cost-based pricing (def)
A company determines expenses and adds the overhead costs and a profit margin to it.
Cost based pricing formula
Price = direct costs + overhead costs + profit margin
Challenges with cost based pricing (3)
- For a service it is difficult to determine what exactly a unit is
- Costs are difficult to trace, a major component is employee time
- The actual service cost may under represent the value of the service to the customer
Cost-plus pricing (def)
An approach in which component costs are calculated and a mark-up is added.
Fee for service (def)
The pricing strategy used by professionals, represents the cost of time involved in providing the service. You must keep tedious records to do this.
Competition based pricing (def)
Focuses on the prices charged by other firms in the same industry or market. Used often when services are standard across providers and in oligopolies.
Challenges with competition-based pricing (2)
*Small firms may be too little and cannot have margins high enough to stay alive
*Heterogeneity across services makes this complicated
Price signalling (def)
Happens in markets with a high concentration of sellers. Any price offered by one company will be matched by competitors to avoid giving a low-cost seller an advantage.
Going rate pricing (def)
Charging the most prevalent price in the market
Demand based pricing (def)
Setting prices consistent with customer perceptions of value: prices are based on what customers will pay for the services provided.
Challenges for demand based pricing (2)
*Non-monetary costs and benefits must be factored into the calculation of perceived value to the customer
*Big challenge to determine the value to customers of each of the non-monetary aspects involved.
Customers perceive value in which 4 ways?
→ Value is low price
→ Value is whatever I want in a product or service
→ Value is all that I get for all that I give
→ Value is the quality I get for the price I pay
Pricing strategies when the customer means ‘Value is low price’ (5)
Discounting
Odd pricing
Synchro pricing
Dynamic pricing
Penetration pricing
Discounting (def)
Use price cuts to communicate to price sensitive buyers that they are receiving value. These attract customers that want a good deal and additionally attracts people to the company’s website.
Odd pricing (def)
When a service is priced just below the exact euro amount. 2.99 instead of 3.00
Synchro-pricing (def)
The use of price to manage demand for a service by capitalising on customer sensitivity to prices. Certain services have demand that fluctuates over time.
Differentials in synchro pricing (4)
Place differentials
Time differentials
Quantity differentials
Differentials as incentives
Dynamic pricing (def)
A form of technology led by synchro-pricing frequently used as a part of revenue management. It involves the buying and selling of goods and services in marketing in which prices move quickly in response to supply and demand fluctuations.
Penetration pricing (def)
A pricing strategy in which new services are introduced at low prices to stimulate trial and widespread use.
Pricing strategies when the customer means ‘Value is everything I want in a service’ (2)
Prestige pricing
Price skimming
Prestige pricing (def)
A special form of demand-based pricing by companies who offer high-quality or status services. In prestige pricing, demand may actually increase as price increases because the costlier service has more value in reflecting quality or prestige.
Skimming pricing (def)
A strategy in which new services are introduced at high prices with large promotional expenditures. It is an effective approach when services are major improvements over past services. Customers are more concerned with acquiring the service than the price.
Pricing strategies when the customer means ‘Value is the quality I get for the price I pay’ (2)
Value pricing
Market segmentation
Value pricing (def)
‘Giving more for less’ In current usage it involves assembling a bundle of services that are desirable to a wide group of customers and then pricing them lower than they would cost separately.
Market segmentation pricing (def)
Asking a different price from different customer segments e.g. students get a discount at certain health clubs or making levels of service.
Pricing strategies when the customer means ‘Value is everything I want in a service’ (4)
Price framing
Price bundling
Complementary pricing
Results-based pricing
Price framing (def)
Show the customers what the price is built out of, provide the customer with price information.
Price bundling (def)
Pricing and selling grouped rather than individual services. Bundling also allows the customer to pay less than when purchasing each of the services on their own.
Complementary pricing exists out of which 3 related strategies?
Captive pricing: the firm offers a base service and provides additional services to continue
Two-part pricing: e.g. a photocopier installation is very cheap but the ink is very expensive
Loss leadership: when providers place a familiar service on special to draw customers to the store.
Results-based pricing (def)
You only pay when the service is succesful
Example: a lawyer does not charge their customers until they have delivered the wanted result.
