Ch 17: Pricing of Services

Question 1

3 most common pricing structures?

Answer 1

• cost-based pricing
• competition-based pricing
• demand-based pricing

Question 2

Reference price (def)

Answer 2

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.

Question 3

Non-monetary costs that a customer faces when looking/taking part in a service (4)

Answer 3

Time costs
Search costs
Convenience costs
Physiological costs

Question 4

What are time costs

Answer 4

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.

Question 5

What are search costs?

Answer 5

The effort invested to identify and select among services you desire. A service establishment additionally only offers one ‘brand’ of service.

Question 6

What are convenience costs?

Answer 6

If customers have to travel to a service they incur a cost and the cost becomes greater when the travel is difficult.

Question 7

What are physiological costs?

Answer 7

Fear of not understanding, fear of rejection, fear of outcomes.

Question 8

How to reduce non-monetary costs? (2)

Answer 8

→ Increase monetary price in order to reduce non-monetary costs
→ Many services ‘buy’ time e.g. hiring a cleaning service

Question 9

Cost-based pricing (def)

Answer 9

A company determines expenses and adds the overhead costs and a profit margin to it.

Question 10

Cost based pricing formula

Answer 10

Price = direct costs + overhead costs + profit margin

Question 11

Challenges with cost based pricing (3)

Answer 11

• 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

Question 12

Cost-plus pricing (def)

Answer 12

An approach in which component costs are calculated and a mark-up is added.

Question 13

Fee for service (def)

Answer 13

The pricing strategy used by professionals, represents the cost of time involved in providing the service. You must keep tedious records to do this.

Question 14

Competition based pricing (def)

Answer 14

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.

Question 15

Challenges with competition-based pricing (2)

Answer 15

*Small firms may be too little and cannot have margins high enough to stay alive
*Heterogeneity across services makes this complicated

Question 16

Price signalling (def)

Answer 16

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.

Question 17

Going rate pricing (def)

Answer 17

Charging the most prevalent price in the market

Question 18

Demand based pricing (def)

Answer 18

Setting prices consistent with customer perceptions of value: prices are based on what customers will pay for the services provided.

Question 19

Challenges for demand based pricing (2)

Answer 19

*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.

Question 20

Customers perceive value in which 4 ways?

Answer 20

→ 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

Question 21

Pricing strategies when the customer means ‘Value is low price’ (5)

Answer 21

Discounting
Odd pricing
Synchro pricing
Dynamic pricing
Penetration pricing

Question 22

Discounting (def)

Answer 22

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.

Question 23

Odd pricing (def)

Answer 23

When a service is priced just below the exact euro amount. 2.99 instead of 3.00

Question 24

Synchro-pricing (def)

Answer 24

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.

Question 25

Differentials in synchro pricing (4)

Answer 25

Place differentials
Time differentials
Quantity differentials
Differentials as incentives

Question 26

Dynamic pricing (def)

Answer 26

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.

Question 27

Penetration pricing (def)

Answer 27

A pricing strategy in which new services are introduced at low prices to stimulate trial and widespread use.

Question 28

Pricing strategies when the customer means ‘Value is everything I want in a service’ (2)

Answer 28

Prestige pricing
Price skimming

Question 29

Prestige pricing (def)

Answer 29

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.

Question 30

Skimming pricing (def)

Answer 30

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.

Question 31

Pricing strategies when the customer means ‘Value is the quality I get for the price I pay’ (2)

Answer 31

Value pricing
Market segmentation

Question 32

Value pricing (def)

Answer 32

‘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.

Question 33

Market segmentation pricing (def)

Answer 33

Asking a different price from different customer segments e.g. students get a discount at certain health clubs or making levels of service.

Question 34

Pricing strategies when the customer means ‘Value is everything I want in a service’ (4)

Answer 34

Price framing
Price bundling
Complementary pricing
Results-based pricing

Question 35

Price framing (def)

Answer 35

Show the customers what the price is built out of, provide the customer with price information.

Question 36

Price bundling (def)

Answer 36

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.

Question 37

Complementary pricing exists out of which 3 related strategies?

Answer 37

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.

Question 38

Results-based pricing (def)

Answer 38

You only pay when the service is succesful

Example: a lawyer does not charge their customers until they have delivered the wanted result.