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8/3/2019 MOS Unit- 7 Pricing in Services
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ANKUR BHATNAGARwww.managementstudies.tk
PRICING DECISION IN SERVICESPRICING DECISION IN SERVICES
Marketing of Services
Unit VII
Instructor
Ankur Bhatnagarwww.managementstudies.tk
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PRICE
It is an influencing factor in consumer-decision making,related to a purchase.
Whatever be the product, whether it is a good or aservice, whether high priced or low priced, whether thecustomer has a high ability to purchase or belongs tomiddle or low income group, the influence of price in apurchase decision cannot be overemphasized.
Price is the medium for
exchange of value between a
buyer and a seller.
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Several services use different terminology to denote price. For
instance -Educational institutions- Tuition fees
Professional organizations- Fees
Banks- Interest & service charge
Transporters- FareBridges & highways- Toll
Libraries & clubs- Subscriptions
Hotels- Tariffs
Insurance- Premium
It is commission to brokers, rent to landlords,
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Pricing Decision
In service marketing mix, price is the only P thatgenerates inflow to the company.
The revenue of the company will be greatly influenced
by the pricing decision.
Traditional approaches of pricing have some problemwhen applied to services.
Taking in to consideration the service characteristics &consumer perceptions, service firms should take theright decision relating to the pricing of services.
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FactorsFactors
in Pricingin Pricing
of Servicesof Services
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1. No Ownership of services
It is more difficult to calculate the costs involved in creating an
intangible service than in producing a physical good.
The absence of ownership transfer compel the customer to
assess the value of the service before its production &
consumption.
In the case of goods consumers can leisurely verify & compare
with substitutes & can take a purchase decision after production.
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2. Input & Output Variability
Changes in the combination of service provider,
customer, tools & equipment used, time taken,
and so on makes the output of the service
variable.
Therefore, price output relations very
significantly.
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3. Price Value Relations
Often customers use personal reference prices. Personal reference pricesconsist of the price last paid, the price most frequently paid or the average ofall prices paid for similar service offerings.
A large number of varieties, combinations & versions lead to complex pricestructures.
Example:
An LIC agent cannot quickly tell you the premiums of variouspolicies without referring to the price table. A railway clerkcannot immediately tell you the cargo tariffs for various goods.He has to refer to the price list of the Indian Railways.
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4. Influence of Non Monetary Costs
Non monetary costs are the sources of sacrifices
perceived by customers, which may sometime
become more important for the customers than
monetary costs.
TimeTime costs,costs,
SearchSearch costscosts PsychicPsychic costs,costs,
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Time costs refer to the spending of time by the
service customer on travel to reach the service outlet,waiting time, service process time and so on.
Search costs refer to the effort the service customers
puts in collecting information relating to the service& the service provider takes for making a correctdecision.
Psychic costs refer to the psychological pressure theservice customer undergoes in selecting a serviceprovider.
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5. Price Quality Relations
Buyers are likely to use price as an indicator of both servicecost & service quality in the absence of complete informationon the service, price providers clues with regard to the qualityof the services.
In credence services such as medical treatment ormanagement consultancy, price is surrogate for quality.
As price is viewed as an indicator of quality of the services,service provider should be careful in fixing prices.
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If the prices are set too low, there is danger ofindicating low quality of the service.
On the other hand, if price is set high, it may raise
consumer expectations on quality; it then becomesdifficult to match service delivery with service
expectations.
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Pricing Objectives
1. Revenue oriented objectives
2. Operation oriented objectives
3. Patronage oriented objectives
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1. Revenue - Oriented Objectives
Profit making is one of the goals of the business
concerns.
Companies are responsible for satisfying the
stake of stock holders and also for expanding
the business as per the expectation of the stock
holders.
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2. Operation - Oriented Objectives
Hotels, transport vehicles &
other such services seek to fill
vacancies because the unfilled
position becomes an
unproductive asset.
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3. Patronage - Oriented Objectives
Price may be used effectively to develop
loyalty & relationship with customers.
Companies can grow multiple benefits
through relationship building.
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Approaches to Pricing of Services
The approaches for services pricing are more
or less the same as that of pricing of goods.
The three recognized pricing approaches are:
1. Cost based pricing
2. Competition based pricing
3. Demand based pricing
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1. Cost Based Pricing
Cost based pricing is a traditional approach & simple method.
The company determines the expenditure incurred, either direct orindirect, on production and adds a desired profit margin top arrive at a
price.
When the demand for service does not fluctuate and when there is supply demand balance at optimum capacity of the firm, this approach of
pricing is convenient to the producer.
The service firms that face fluctuating demand trends cannot use thismethod as the fixed cost component will be very high in proportion to
the total cost.
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Problems in Cost Based Pricing
The major problem is that it is very difficult to trace the cost of eachunit of a service.
Consultancy services, legal services, education services & so on aresold in terms of time in many markets.
The other problem is that labour is more difficult to price than
materials. The value of an employees time, particularly non professionaltime, is not easy to calculate.
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2. Competition Based Pricing
There are two situation in which Competition basedpricing is most applicable;
That is when all service providers offer services more or less of the samestandard such as in the dry cleaning sector.
When oligopoly competitive situation is present in the market wherein afew large service providers have control over the market.
However, some small firms may charge too little to be viable & createproblems to the competitors.
Heterogeneity of services does not allow customers to compare a serviceof a firm to that of another firm.
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3. Demand Based Pricing
Cost based pricing is oriented to ensure adequate return to theservices provider & competition based pricing is to attack
Competition or to defend the company from competitive attacks.
But neither of the two is customer oriented. Demand based
pricing is customer oriented pricing.
Demand based pricing promotes the most important pricingconcept for services, that is, value pricing.
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According to Zeithaml & Bitner
The value perceptions of a service vary among differentgroups of customers. Zeithaml & Bitner have identified four
important value perceptions which, generally, the service
customer perceive.a) Value is low price
In a market some customers may see value
when services are available at low price.
Money is the most important limitation for
them in purchasing services.
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b) Value is everything I want in a service
Some customers may consider the benefits that they
receive from the service as the most importantcomponent in assessing value of the service.
These customers give value to the suitability or thequality or the features of service to their needs.
c) Value is the quality I get for the price I pay
This group of customers will see a trade off betweenthe money they pay and the quality of a service theyreceive. They try to optimize their benefits from everytransactions.
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d) Value is what I get for what I give
This group of customers consider the total benefitthey receive & the total sacrifices they makeincluding money, time and effort when assessingvalue of services.
This group of customers are critical assessors andless loyal.
They prefer such services providers who can givemore customer delivered values.
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Next Figure illustrates the components of customer
values and customer costs. Services firms can use them
as a guide to understand the customer assessment
process and to develop a right policy for serviceproviding.
Components of Customer Delivered Value
(CDV)
CDV = TCV + TCC
CDV = Customer Delivered Value
TCV = Total Customer Value
TCC = Total Customer Cost
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Customer Value Variable
Core service value
Supportive service value
Image value
Other values
Customer Cost Variable
Monetary price
Search cost
Time cost
Energy cost
Psychic cost
Other cost
CDV
Customer Delivered Value
TCV
Total Customer Value
TCC
Total Customer Cost
Components of Customer Delivered Value
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References
Lovelock - Service Marketing
K. Rama Mohana Rao- Services Marketing
JournalofMarketing Management
4Ps ofBusiness & Economy