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Marketing of services

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Services Marketing Mix: Augmented Marketing Mix

Traditional marketing mix: one of the most basic concepts in marketing is the marketing mix, defined as the elements an organization controls that can be used to satisfy or communicate with customers. The traditional marketing mix is composed of 4 P’s: product, price, place (distribution), and promotion. These elements appear as core decision variables in any marketing text or marketing plan. The notion of mix implies that all of the variables are interrelated and depend on each other to some extent. For service industries, it was observed that the traditional marketing mix was inadequate because of three main reasons:

1. The first reason was that the original marketing mix was developed for manufacturing industries, which implies that the services offered by service companies ought to be changed to a more product like manner so that the existing marketing tools can be applied. This was practically difficult.

2. The second reason was that the marketing practitioners in the service sector found that the marketing mix does not address their needs. They observed that the services have certain basic characteristics which, in turn, have marketing implications.

3. The third reason was that since services are basically different in comparison to physical products, the marketing models and concepts have, therefore, to be developed in direction of the service sector.

The above 3 criticism suggests that a revised framework for service marketing mix is required and dimensions of each of the mix elements should be redefined. The marketing mix has extended beyond the 4 Ps for marketing of services. These additional Ps are added to meet the marketing challenges posed by the characteristics of services.Booms & Bitner suggest a “7P” marketing mix model arising out of above three observations

1. Product: service is an intangible product. It consists of a bundle of features & benefits that have relevance to a specific target market. As such, there is a high level of flexibility and opportunity to be innovative in designing a product offer.

2. Price: the pricing decision is a critical component in services too, as this component of the marketing mix alone determines the revenue of the firm. Consumer sensitivity to price would be higher in services than in goods. Pricing is complex in services where unit costs needed to calculate prices may be difficult to determine, and where

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customer frequently uses price as a cue to quality. Though basic methods of pricing are the same as in goods, the pricing strategies for services basically depends upon value perceptions of various groups of people that are targeted by the organization.

3. Promotion: traditionally promotion is thought of as involving decisions related to sales, advertising, sales promotions, and publicity. In services these factors are also important, but because services are produced and consumed simultaneously, service delivery people (such as clerks, ticket takers, nurse, and phone personnel) are involved in real-time promotion of the service even if their jobs are typically defined in terms of the operational function they perform. Consumers co-produce in services. The quality of services will not only depend upon the performance of the service provider but also on the performance of the service consumers. It is the responsibility of the service organizations to educate and, if necessary, train customers so as to make them prepared to use the services efficiently. A well designed promotional programme is of immense importance to organizations to inform, persuade, and train customers to better their experiences.

4. Place: services are intangible as well as inseperable. These two characteristics do not allow a service firm to follow the same channel options available for goods marketing. Due to the intangible character of service, traditional wholesalers and retailers cannot be used. As services cannot be stored and cannot be separated from producers, retailing cannot be an independent activity in services marketing. Production, distribution & consumption are simultaneous activities in services. Direct selling is one of the lowest cost approaches a service provider can opt, but there are other channels of distribution which can also be opted such as, agents and brokers, franchisers and electronic channels, that are used for distribution services.

5. People or internal marketing: all human actors who play a part in service delivery and thus influence the buyer’s perceptions; namely, the personnel, the customer and other customers in the service environment. Employees represent he organization to the customers therefore they play an important role in the marketing operations of a service organization. Employees are the first internal market for the organization. The basic objective of internal marketing is to develop motivated and customer conscious employees. Service is a performance which cannot be separated from the people. If the people don’t meet customer’s expectations, then neither does the service. Investing in people quality in a service business means investing in product quality. Internal marketing paves the way for external marketing of services. There are 7 essentials of internal marketing:i) Compete for talent market share.ii) Offer a vision that brings purpose and meaning to the workplace.

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iii) Equip people with the skills and knowledge to perform their service roles excellently.iv) Bring people together to benefit from the fruits of team play.v) Leverage the freedom factor.vi) Nurture achievement through measurement and rewards.vii) Base job-product design decisions on research.

6. Physical evidence: the environment in which the service is delivered and where the firm and customer interact, and any tangible components that facilitate performance or communication of the service. The physical evidence of service includes all of the tangible representations of the service such as brochures, letterhead, business cards, report formats, signage, and equipment. In some cases it includes the physical facility where the service is offered- the ‘servicescape’- for example, the retail bank branch facility. In other cases, such as telecommunication services, the physical facility may be irrelevant. In this case other tangibles such as billing statements and appearance of the repair truck may be important indicators of quality. Especially when consumers have little on which to judge the actual quality of service they will rely on these cues, just as they rely on the cues provided by the people and the service process. Physical evidence cues provide excellent opportunities for the firm to send consistent and strong messages regarding the organization’s purpose, the intended market segments, and the nature of services.

7. Process: the actual procedures, mechanisms, and flow of activities by which the service is delivered- the service delivery and operating system. Process is a functional activity that assures service availability and quality. In simple terms, the management of process is to manage service encounters (the interaction between service employees and customers, customers and service environment, systems and other facilities) effectively. The actual delivery steps the customer experiences, or the operational flow of the service, also give customers evidence on which to judge the service. Some services were very complex, requiring the customer to follow a complicated and extensive series of actions to complete the process. Highly bureaucratized services frequently follow this pattern, and the logic of the steps involved often escapes the customer. Another distinguishing characteristic of the process that can provide evidence to the customer is whether the service follows a production-line/standardized approach or whether the process is an empowered/customized one. None of these characteristics of the service is inherently better or worse than another. Rather, this point is that these process characteristics are another form of evidence used by the consumer to judge service.

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DEVELOPING THE SERVICE PRODUCT/INTANGIBLE PRODUCT & SERVICE PRODUCT PLANNING

SERVICE PRODUCT: Service is an intangible product. It cannot be photographed, touched, verified and tried out. A service product is a bundle of features and customer benefits.

According to a study; the dominant and most reliable predictors of success for new introductions relate to product/service characteristics (product meeting customer needs, product advantage over competing products, technological sophistication). Strategy characteristics (dedicated human resources to support the initiative, dedicated R&D focused on the new product initiative), process characteristics (marketing, predevelopment, technological and launch proficiencies), and marketplace characteristics (market potential).

Challenges of Service Design:

Because services cannot be touched, examined, or tried out, people frequently resort to words I their efforts t describe them. Lynn Shostack, has pointed out 4 risks of attempting to describe services in words alone. These risks are:

1. Oversimplification: “to say that ‘portfolio management’ means ‘buying and selling stocks’ is like describing the space shuttle as ‘something that flies’. Some people will picture a bird, some helicopter, some an angel”. Words are simply inadequate to describe a whole complex service system.

2. Incompleteness: in describing services, people (employees, managers, customers) tend to omit details or elements of the service with which they are not familiar.

3. Subjectivity: any one person describing a service in words will be biased by personal experiences and degree of exposure to the service. There is a natural (and mistaken) tendency to assume that because all people have gone to a fast-food restaurant, they all understand what that service is. Persons working in different functional areas of the same service organization (a marketing person, an operations person, a finance person) are likely to describe the service very differently as well, biased by their own functional blinders.

4. Biased interpretation: no 2 people will define ‘responsiveness’, ‘quick’ or ‘flexible’ in exactly the same way. For e.g.; a supervisor or manager may suggest to a front-line service employee that the employee should try to be more flexible or responsive in providing service to the customer. Unless flexibility is further defined, the employee is likely to interpret the word differently from the manager.

All of these risks become very apparent in the new service development process, when organizations may be attempting to design services never before experienced by customers.

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Product levels: Customer Value Hierarchy Fig: Five Product Lines

In the planning its market offering, the marketer needs to address 5 product levels. Each level adds more customer value, and 5 constitute a customer value hierarchy.

Core Benefit: the service or benefit the customer is really buying. Ahotel guest is buying “rest and sleep”.

Basic Product: At the second level, the marketer must turn the core benefit into basic product. Thus, a hotel room includes a bed, bathroom, towels, desk, dresser, and closet.

Expected Product: a set of attributes and conditions buyers normally expect when they purchase this product. Hotel guests expect a clean bed, fresh towels, working lamps, and a relative degree of quite.

Augmented Product: this level exceeds customer expectations. In developed countries, brand positioning and competition take place at this level. In developing and emerging markets such as India and Brazil, however, competition takes place mostly at the expected product level.

Potential Product: this level encompasses all the possible augmentations and transformations the product or offering might undergo in the future. Here is where companies search for new ways to satisfy customers and distinguish their offering.

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Differentiation arises and competition increasingly occurs on the basis of product augmentation, which also leads the marketer to look at the user’s total consumption system: the way user performs the tasks of getting and using products and related services. Each augmentation adds cost, however, and augmented benefits soon become expected benefits.

Basic Service PackageA service product is a package of series of service elements executed in proper order in keeping with the needs and wants of the consumer satisfaction. The concept of basic service package (BSP) helps to understand the service product comprehensively. There are 3 elements in BSP. They are:

1. Core service: it is the reason for being in the market.2. Facilitating Service (and goods): are those services without which core service cannot

be performed. Facilitating services and/ or facilitating goods make it possible for customers to use a core service.

3. Supporting services (and goods): Supporting services do not facilitate the consumption or use of a core service, but increase the value of the service offering.

As far as the core service and facilitating services are concerned, there will not be much scope for a competitive edge. But in case of supporting services a high level of differentiation is possible, and as such, the firm can enjoy a competitive edge by being up to date, innovative, fast, bold, and flexible.

Fig: 2 BSP- Basic service Product

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Flower of Service:

Christopher lovelock developed the flower of service, which indicates the core service surrounded by a cluster of supplementary services. The flower consisting of 8 petals; 4 of them are facilitating supplementary services and the other 4 are enhancing supplementary services. The facilitating supplementary services include information, order taking, billing and payment whereas consultation, hospitality, caretaking and exceptions are enhancing supplementary services.

Fig3: Flower of Service

Service Product Mix:

A service product mix is the set of services offered for sale by a company. The service mix of a company can be assessed in terms of:

Width: it refers to the no. of different service lines, the company offers. Depth: it refers to the total no. of variants offered in each service line Length: it refers to the total no. of service items in the mix. Consistency: of a service product mix refers to how closely the service lines are related in

consumer perception, distribution channels and so on.

The service product mix can be expanded in 4 ways:

Service firms can add new service lines They can expand each service line They can add more variants to each service They can have more service line consistency.

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Service Life Cycle:

Marketers believe that every service product that takes birth will die after some time, though there is no universal possible lifetime, like human beings, for any service. Marketers also believe that the life of a service product will pass through different stages. There are 4 identified stages in the life of a service. They are:

(To identify the stages in the life cycle, companies use two parameters. They are sales and profit)

1. Introduction: companies will have pioneer advantage, if the service introduced is really innovative. The initial expenses of promoting the brand would be very high and the focus of promotion is to create awareness and knowledge of the service to the target customers. The sales will increase slowly. Service firms generally do not expect profits at this stage. Service firms make efforts to minimize the time period of the introductory stage.

2. Growth: service firms start yielding good results at this stage. Sales grow at a faster rate and the promotional focus would be on persuasion of target customers. Word- of – mouth communication plays a significant role in image building. As there is less requirement of promotional expenditure and a high turnover of the company, this stage provides profits to the company. The profit curve goes upwards and reaches its peak during the period. The end of the period indicates declining growth rate in sales and increased intensity of competition. Profit starts declining at the end of the period. Service firms hard to stretch this period to the longest possible.

3. Maturity: this stage of the service life is marked by stabilization in turnover and tendency of profit curve. Competition will be severe and the firms need to invest heavily to face competitive threats in the areas of service modernization and sales promotion. The increased expenses on these areas reduce the profit margin and as a result, the profit curve will experience a downward slide. Sales reach their peak with the beginning of the period and then slowly slide down. The end of the period is marked by an increased rate of decline in sales and the profit curve reaches its lowest level. Service firms try to extend the maturity period of the service as it could generate some profit to the organization.

4. Decline: During this stage, the sales curve slides down at a faster rate, profits evaporate and soon the service becomes a loss generating one. As soon as the service product reaches this stage, service firms seriously consider dropping the service product.The life of a service is becoming shorter and shorter. Most service firms try to terminate the service packages in the fastest possible timeframe to introduce a new service in its place. The software industry is the best example for indicating this style. The concern of the firms now is to maximize the benefits from a new product in the shortest possible time rather than to visualize or to work on strategies for a n extended life.

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Stage I Stage II Stage III Stage IV

introduction Growth Maturity Decline

sales

Sales /

profit

profit

Life period

New service Development:

Research suggests that products that are designed and introduced via steps in a structured planning framework have a greater likelihood of ultimate success than those not developed within a framework. The fact that services are intangible makes it even more important for new service development system to have 4 basic characteristics, that is:

1. It must be objective, not subjective.2. It must be precise, not vague.3. It must be fact driven, not opinion driven.4. It must be methodological not philosophical.

Often new services are introduced on the basis of managers’ and employees’ subjective opinion about what the services should be and whether they will succeed, rather than on objective designs incorporating data about customer perceptions, market needs, and feasibility.A new service design process may be imprecise in defining the nature of the service concept because the people involved believe either that intangible processes cannot be defined precisely or that “everyone knows what we mean”. Neither of these explanations or defenses for imprecision is justifiable.

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Types of New Services:

As we build the new service development processes, remember that not all new services are “new” to the same degree. The types of new service options can run the gamut from major innovations to minor style changes:

Major innovations are new services for markets as yet undefined. Past examples include the first broadcast television services and now 3G and computers.

Start –Up business consist of new services for a market that is already served by existing products that meet same generic needs. Service examples include the creation of health maintenance organizations to provide an alternative form of health care delivery, online banking for financial transactions.

New services for the currently served market represent attempts to offer existing customers of the organization a service not previously available from the company (although it may be available from other companies. For e.g. airlines offering fax, phone, and internet service during flights.

Service Improvements represent perhaps the most common type of service innovation. Changes in features of services that are already offered might involve faster execution of an existing service process, extended hours of service, or augmentations such as added amenities in a hotel room. ICICI opens till 8 p.m.

Service line extensions represents augmentations of the existing service line such as a restaurant adding new menu items, an airline offering new routes, an university adding new courses or degrees.

Style changes represent the most modest service innovations, although they are often highly visible and can have significant effects on customer perceptions, emotions, and attitudes. Changing the color scheme of a restaurant, revising the logo for an organization, website redesign, or painting aircraft a different color all represent style change. These do not fundamentally change the service, only its appearance.

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Stages in new service development:

Many of the steps given above can be found very similar to those of new product development process for manufactured goods. Because of the inherent characteristics of services, however the development process for new services requires adaptations.

An underlying assumption of new product development process models is that new product ideas can be dropped at any stage of the process if they do not satisfy the criteria for success at that particular stage. The checkpoints are showed in the form of Stop signals that precede critical stages of the development process. The checkpoints specify requirements that a new service must meet before it can proceed to the next stage of development.

New service product development is rarely a completely linear process. Many companies are finding that to speed up new service development, some steps can be worked on simultaneously, and in some instances a step may even be skipped. The overlapping of steps and simultaneous development of various

Front-end Planning

Implementation

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pieces of the new service/product development process has been referred to as “flexible product development”.

The front end is called “fuzzy” because of its relative abstractness, which is even more apparent with services than with manufactured products.

The two steps involved in new service development are:

1. Front-end Planning: A. Business Strategy Development - It is assumed that organisation will have an overall strategic

vision and mission. Clearly a first step in new service development is to review that vision and mission. If these are not clear, the overall strategic direction of the organisation must be determined and agreed on. The new services strategy and specific new service ideas must fit within the larger strategic picture of the organistion.

B. New Service Strategy Development – A product portfolio strategy and a defined organizational structure for new product or service development are critical-and are the foundations –for success. The types of new services that will be appropriate will depend on the organisation’s goals, vision, capabilities, and growth plans. By defining a new service strategy (possibly in terms of markets, types of services, time horizon for development, profit criteria, or other relevant factors), the organization will be in a better position to begin generating specific ideas.

The above framework allows an organization to identify possible directions for growth and can be helpful as a catalyst for creative ideas. The framework may also later serve as a n initial idea screen if, for example, the organization chooses to focus its growth efforts on one or two of the four cells in the matrix.

Existing Services

New Services

Current Customers

New Customers

Markets

Offerings

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The matrix suggests that companies can develop a growth strategy around current customers or for new customers, and can focus on current offerings or new service offerings.

C. Idea Generation- the ideas generated at this phase can be passed through the new service strategy screen described in the preceding step. Many methods and avenues are available for searching out new service ideas. Formal brainstorming, solicitation of ideas from employees and customers, lead user research and learning about competitors’ offerings are some of the most common approaches. Observing customers and how they use the firm ‘s products and services can also generate creative ideas for new innovations. Sometimes referred to as empathic design, observation is particularly effective in situations where customers may not be able to recognize or verbalize their needs. This mechanism might include a formal new service development department or function with responsibility for generating new ideas, suggestion boxes for employees and customers, new service development teams that meet regularly, surveys and focus groups with customers and employees, or formal competitive analysis to identify new services.

D. Service Concept Development and Evaluation- Once an idea surfaces that is regarded as a good fit with both the basic business and the new service strategies, it is ready for initial development. Drawing pictures and describing an intangible service in concrete terms are difficult. It is therefore important that agreement be reached at this stage on exactly what the concept is. By involving multiple parties in sharpening the concept definition, it often becomes apparent that individual views of the concept are not the same. How this description would translate into an actual service and that there were a variety of ways the concept could be developed. Only through multiple iterations of the service- and raising of hundreds of issues, large and small- was an agreement finally reached on the discount brokerage concept. After clear definition of the concept, it is important to produce a description of the service that represents its specific features and characteristics and then to determine initial customer and employee responses to the concept. The service design document would describe the problem addressed by the service, discuss the reasons for offering the new service itemizes the service process and its benefits, and provide a rationale for purchasing the service. The roles of customers and employees in the delivery process would also be described. The new service concept would then be evaluated by asking employees and customers whether they understand the idea of the proposed service, whether they are favorable to the concept, and whether they feel it satisfies an unmet need.

E. Business Analysis- Demand analysis, revenue projections, cost analysis and operational feasibility are assessed at this stage. This stage will also involve preliminary assumptions about the costs of hiring and training personnel, delivery and feasibility screen to determine whether the new service idea meets the minimum requirements.

2. ImplementationA. Service Development and testing- in the development of new tangible products, this stage

involves construction of product prototypes and testing for consumer acceptance. This stage of service development should involve all who have a stake in the new service: customers and contact employees as well as functional representatives from marketing, operations, and human

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resources. During this phase, the concept is refined to the point where a detailed service blueprint representing the implementation plan for the service can be produced. The blueprint is likely to evolve over a series of iterations on the basis of input from all parties listed. A final step is for each area involved in rendering the service to translate the final blueprint into specific implementation plans for its part of the service delivery process. Because service development, design, and delivery are so intricately intertwined, all parties involved in any aspect of the new service must work together at this stage to delineate the details of the new service idea to fail.

B. Market Testing- it is stage of the development process that a tangible product might be test marketed in a limited no. of trading areas to determine marketplace acceptance of the product as well as other marketing mix variables such as promotion, pricing, and distribution systems. Again, the standard approach for a new manufactured product is typically not possible for a new service due to its inherent characteristics. Because new service offerings are often intertwined with the delivery system for existing services, it is difficult to test new services in isolation. There are alternative ways of testing the response to marketing mix variables, however. The new service might be offered to employees of the organization and their families for a time to assess- their responses to variations in the marketing mix. Or the organization might decide to test variations in pricing and promotion in less realistic contexts by presenting customers with hypothetical mixes and getting their responses in terms of intentions to try the service under varying circumstances. Pilot run the service to be sure that the operational details are functioning smoothly. Frequently this purpose is overlooked and the actual market introduction may be first test of whether service system functions as planned. By this point, mistakes in design are harder to correct.

C. Commercialization- at this stage, the service goes live and its introduction to the marketplace. This stage has two primary objectives. The first is to build and maintain acceptance of the new service among large numbers of service delivery personnel who will be responsible day to day for service quality. The second objective is to monitor all aspects of the service during introduction and through the complete service cycle. If the customer needs six months to experience the entire service, then careful monitoring must be maintained through at least six months.

D. Post introduction Evaluation- the information gathered during commercialization of the service can be reviewed and changes made to the delivery process, staffing, or marketing mix variables on the basis of actual market response to the offering.

Pricing of Services-

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Price is the medium for exchange of value between a buyer and seller. It is an influencing factor in consumer decision-making, related to a purchase. Whatever be the product, whether it is a good or a service, whether high priced or low priced, whether the customer has a high ability to purchase or belongs to middle or low income group, the influence of price in a purchase decision cannot be overemphasized. Service organizations should have strategies for arriving at pricing decisions. In services marketing mix, price is the only “p” that generates inflow to the company.

There are 3 key ways service prices are different for consumers:

1. Customer Knowledge of service prices: A reference price is a price point in memory for a good or a service, and can consist of the price last paid, the price most frequently paid, or the average of all prices customers have paid for similar offerings.a) Service heterogeneity limits knowledge: because services are intangible and are not

created on a factory assembly line, service firms have great flexibility in the configurations of services they offer. Firms can conceivably offer an infinite variety of combinations and permutations, leading to complex and complicated pricing structures. As an example, consider how difficult it is to get comparable price quotes when buying life insurance. Only an expert customer, one who knows enough about insurance to completely specify the options across providers, is likely to find prices that are directly comparable.

b) Providers are unwilling to estimate prices: Another reason customers lack accurate reference prices for services is that many providers are unable or unwilling to estimate prices in advance. Consider most medical or legal services. Rarely are legal or medical service providers willing –or even able- to estimate a price in advance. The fundamental reason in many cases is that they do not know themselves what the services will involve until they have fully examined the patient or the client’s situation or until the process of service delivery (such as an operation in a hospital or a trial) unfolds.

c) Individual customer needs vary: Another factor that results in the inaccuracy of reference prices is that individual customer needs vary. Some hairstylists’ service prices vary across customers on the basis of length of hair, type of haircut, and whether a conditioning treatment and style are included.

d) Price information is overwhelming in services: Still another reason customers lack accurate reference prices for services is that customers feel overwhelmed with the

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information they need to gather. With most goods, retail stores display the products by category to allow customers to compare and contrast the prices of different brands and sizes. Rarely is there a similar display of services in a single outlet. If customers want to compare prices, they must drive to or call individual outlets.

e) Prices are not visible: in many services, particularly financial services, most customers know about only the rate of return and not the costs they pay in the form of fund and insurance fees.

2. The role of non-monetary costs: monetary price is not the only sacrifice consumers make to obtain products and services. Demand, therefore, is not just a function of monetary price but is influenced by other costs as well. Nonmonetary costs represent other sources of sacrifice perceived by consumers when buying and using service.

$ = Time or effort or psychological costsa) Time costs: Most services require direct participation of the consumer and thus

consume real time: time waiting as well as time when the customer interacts with the service provider. Customers will trade money for time savings. Customers who purchase lawn care, housekeeping, and other services often do so because the value of their time is higher than the value of money. Service providers 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.

b) Search Costs: Search costs- the effort invested to identify and select among services you desire- are also higher for services than for physical goods. Prices of services are rarely displayed on shelves of service establishments for customers to examine as they shop, so these prices are often known only when a customer has decided to experience the service. And also each service establishment typically offers only one “brand” of a service, so a customer must initiate contact with several different companies to get information across sellers.

c) Convenience costs: there are also convenience (or perhaps more accurately inconvenience) costs of services. If customers have to travel to a service, they incur a cost, and the cost becomes greater when travel is difficult, as it is for elderly persons. Further, if service hours do not coincide with the customers’ available time, they must arrange their schedules to correspond to the company’s schedule. And if consumers have to expend effort and time to prepare to receive a service they make additional sacrifices.

d) Psychological costs: Fear of not understanding (insurance), fear of rejection (bank loans), fear of uncertainty (including fear of high cost)- all of these constitute psychological costs that customers experience as sacrifices when purchasing and using services. All change, even positive change, brings about psychological costs

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that consumers factor into the purchase of services. For example: when banks introduced ATMs.

3. Price as an indicator of Service Quality: buyers are likely to use price as an indicator of both service costs and service quality- price at once an attraction variable and a repellant. In situations such as when quality is hard to detect or when quality or price varies a great deal within a class of services, consumers may believe that price is the best indicator of quality.

Approaches to pricing services

Cost- based Pricing: in cost- based pricing, a company determines expenses from raw materials and labor, adds amounts or percentages for overhead and profits, and thereby arrives at the price. This method is widely used by industries such as utilities, contracting, wholesaling, and advertising. The basic formula for cost-based pricing is:

Price = Direct costs + Overhead costs + Profit margin

Direct costs involve materials and labor that are associated with the service, overhead costs are a share of fixed costs, and the profit margin is a percentage of full costs (direct – overhead).

Problems in cost-based pricing of services:

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1. The unit in which a service is purchased is not defined in services.2. Costs are difficult to trace or calculate in services businesses, particularly where multiple

services are provided by the firm.3. A major component of cost is employee time rather than materials, and the value of

people’s time, particularly nonprofessional time, is not easy to calculate or estimate.4. Actual service costs may under represent the value of the service to the customer.

Cost-based Pricing Strategies:

1. Cost - plus pricing: is a commonly used approach in which component costs are calculated and a markup added. In product pricing this approach is quite simple; in service industries, however, it is complicated because tracking and identification of costs are difficult. The approach is typically used in industries where cost must be estimated in advance, such as construction, and advertising. A contingency amount – to cover the possibility that costs may be higher than estimated- is also stated because in large projects specifications can change as the service is provided.

2. Fee for service: is the pricing strategy used by professionals: it represents the cost of the time involved in providing the service. Consultants, psychologists, accountants, and lawyers, among other professionals, charge for their services on an hourly basis.

Competition- based pricing:

This approach focuses on the prices charged by other firms in the same industry or market. Competition- based pricing does not always imply charging the identical rate others charge but rather using others’ prices as an anchor for the firm’s price. This approach is used predominantly in 2 situations:

1) When services are standard across providers, such as in the dry cleaning industry, and

2) In oligopolies where there are a few large service providers, such as in the airline or rental car industry.

Problems:

1. Small firms may charge too little to be viable.2. Heterogeneity of services limits comparability.3. Prices may not reflect customer value.

Strategies:

1. Price signaling; occurs in markets with a high concentration of sellers. In this type of market, any price offered by one company will be matched by competitors to avoid

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giving a low- cost seller a distinct advantage. In airline industry when any competitor drops the price of routes, others match the lowered price almost immediately.

2. Going-rate pricing: involves charging the most prevalent price in the market. Rental car pricing is an illustration of this technique (and also an illustration of price signaling, because the rental car market is dominant by a small number of large companies).

Demand-based Pricing:

The third major approach to pricing, demand based pricing, involves setting prices consistent with customer perceptions of value: prices are based on what customers will pay for the services provided.

Problems:

1. Monetary price must be adjusted to reflect the value of nonmonetary costs.2. Information on service costs is less available to customers; hence price may not be a

central factor.

Four meanings of perceived value: one of the most appropriate ways that companies price their service is basing the price on the perceived value of the service to the customers. Among the questions a service marketer needs to ask are the followings- what do consumer means by value? How can we quantify perceived value in dollars so that we can set appropriate prices for our services? Is the meaning of value similar across consumers and services? How can value perceptions be influenced? To fully understand demand – based pricing approaches, we must fully understand what value means to customers.

Customers define value in 4 ways:

1. Value is low price: some consumers equate value with low price, indicating that what they have to give up in terms of money is most salient in their perceptions of value, a typified in these representative comments from customers: for dry cleaning: “value means the lowest price”

For carpet cleaning: “value is price- which one is on sale.”

Pricing Strategies:

Discounting: service providers offer discounts or price cuts to communicate to price- sensitive buyers that they are receiving value. Colleges are now providing many forms of discounting to attract students.

Odd pricing: this is the practice of pricing services just below the exact dollar amount to make buyers perceive that they are getting a lower price.$2.98 rather than $3.00

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Synchro- pricing: it is the use of price to manage demand for a service by using customer sensitivity to prices. Certain services, such as tax preparation, passenger transportation, long-distance telephone, hotels, and theaters have demand that fluctuates over time as well as constrained supply at peak times.

Penetration pricing: penetration pricing is a strategy in which new services are introduced at low price to stimulate trial and widespread use. The strategy is appropriate when 1) sales volume of the service is very sensitive to price, even in the early stages of introduction;2)it is possible to achieve economies in unit costs by operating at large volumes; 3) a service faces threats of strong potential competition very soon after introduction; and 4) form of pricing can lead to problems when companies then select a “regular” increased price. Care must be taken not to penetrate with so low a price that customers feel the regular price is outside the range of acceptable prices.

2. Value is everything I want in a service: rather than focusing on the money given up, some consumers emphasize the benefits they receive from a service or product as the most important component of value. In this value definition, price is far less important than the quality or features that match what the consumer wants. In the telephone industry, for example, business customers strongly value the reliability of the systems, and are very willing to pay for the safety and confidentiality of the telephone lines.Pricing Strategies:

Prestige pricing: this is a special form of demand-based pricing by service marketers who offer high-quality or status services. In prestige pricing the demand may actually increase as price increases because they are given special preference in seating or accommodations and the costlier services has more value in reflecting quality or prestige.

Skimming pricing: this is a strategy in which new services are introduced at high prices with large promotional expenditures. In this situation many customers are more concerned about obtaining the service than about the cost of the service, allowing service providers to skim the customers most willing to pay the highest price.

3. Value is the quality I get for the price I Pay: other consumers see value as a trade-off between the money they give up and the quality they receive. For a hotel for vacation; “value is the price and quality second”. For a hotel for a business travel: “value is the lowest price for a quality brand.

Value pricing: this widely used term has come to mean “giving more for less”. In current usage it involves assembling a bundle of services that are desirable to a

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wide group- of customers and then pricing them lower than they would cost alone.

Market segmentation Pricing: a service marketer charges different prices to groups of customers for what are perceived to be different quality levels of service, even though there may not be corresponding differences in the costs of providing the service to each of these groups. This pricing is based on the premise that different segments show different price elasticities of demand and desire different quality levels.

4. Value is what I get for what I give: Finally, some consumers consider all the benefits they receive as well as all sacrifice components (money, time, effort) when describing value.For housekeeping service: “value is how many rooms I can get cleaned for what the price is”.

Price framing: because many customers do not possess accurate reference prices for services, services marketers are more likely than product marketers to organize the price information for customers so they know how to view it. Customers naturally look for price anchors, as well as familiar services against which to judge focal services. If they accept the anchors, they view the price and service package favorably.

Price bundling: some services are consumed more effectively in conjunction with other services; other services accompany the products they support (such as extended service warranties, training and expedited delivery). When customers find value in a package of services that are interrelated, price bundling is an appropriate strategy. Bundling, which means pricing and selling services as a group rather than individually, has benefits to both customers and service companies? Customers find that bundling simplifies their purchase and payment, and companies find that the approach stimulates demand for the firm’s service line, thereby achieving cost economies for the operations as a whole while increasing net contributions. Bundling also allows the customer to pay less than in purchasing each of the services individually, which contributes to perceptions of value.

Complementary pricing: this pricing includes three related strategies- captive pricing, two- part pricing, and loss leadership. Services that are highly interrelated can be leveraged by using one of these forms of pricing. In captive pricing the firm offers a base service or product and then provides the supplies or peripheral services needed to continue using the service. In this situation the company could off-load some part of the price for basic service to the peripherals. With service firms, this strategy is often called two- part pricing

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because the service price is broken into a fixed fee plus variable usage fees (also found in telephone services, health clubs, etc.) loss leadership is the term typically used in retail stores when providers place a familiar service on special largely to draw the customer to the store and then reveal other levels of service available at higher prices.

Results-based pricing: in service industries in which outcome is very important but uncertainty is high, the most relevant aspect of value is the result of the service. In personal injury law suits, for example, clients value the settlement they receive at the conclusion of the service. From tax accountants, clients’ value cost savings. From trade schools, students most value getting a job upon graduation. In these and other situations, an appropriate value- based pricing strategy is to price on the basis of results or outcome of the service.

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Fig: Summary of Service Pricing Strategies for four Customer definitions of value