natfm pricing.pptx

7/28/2019 natfm pricing.pptx

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PRICING OF SERVICES


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What Makes Service Pricing Strategy Different (and

Difficult)?

No ownership of services--hard for firms to calculate financialcosts of creating an intangible performance

Variability of inputs and outputs--how can firms define a unit

of service and establish basis for pricing?

Many services hard for customers to evaluate--what are theygetting in return for their money?

Importance of time factor--same service may have more valueto customers when delivered faster

Price is key signal of quality


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Three Basic Price Structures andDifficulties Associated with Usage for Services

PROBLEMS:1. Costs difficult to trace

2. Labor more difficult to

price than materials

3. Costs may not equal value

PROBLEMS:1. Small firms may charge too

little to be viable

2. Heterogeneity of services

limits comparability

3. Prices may not

reflect customer

value

PROBLEMS:1. Monetary price must be adjusted to reflect

the value of non-monetary costs

2. Information on service costs less available to

customers, hence price may not be a central factor


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Why Pricing of Services is Critical?

Customer knowledge of service pricea reference price is a

price point in memory for a good or a service

High degree of variability often exists across providers ofservicesnot every physician defines a checkup the same way

Providers are unwilling to estimate prices in advancelegal

service providers; fundamental reason being they do not knowthemselves what the service will involve until the process of

service delivery unfolds


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Individual customer needs varyyour haircut fro the

same stylist may cost you differently

Comparison of prices becomes difficult unlike goods

where the product range is displayed for comparison

like to compare dry cleaning prices, customer must driveto or call individual outlets

Price invisibilityparticularly in financial services,

most customers know about only the rate of return andnot the costs they pay in form of fund and insurance fees


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Role of Non-monetary Costs

Demand is not just a function of monetary price but isinfluenced by other costs as well. Like:

Time cost since most services require direct participation of theconsumer and thus their real time

Search costs- the effort invested to identify and select amongservices you desire since prices for services are rarely displayedin shelves an each service establishment offers only one brandof service (except brokers & agents)

Convenience costs like customers have to travel to theservice, if service hours do not coincide with customersavailable time

Psychological costsfear of not understanding (education),

fear of rejection (bank loan), fear of results (surgery)


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Price as an Indicator of Service Quality

Customers prefer cues like company reputation, level ofadvertising to access the quality

In other situations when quality is hard to detect or pricevaries a great deal within a class of services, consumers

may believe that price is the best indicator of quality In case of high risk services like medical treatment,

customer looks price as a surrogate for quality

Thus in addition to cover the cost and match competitorsprice, prices must be set with care to convey theappropriate service quality Too low prices- inaccurate inferences

Too high prices- difficult to match in service delivery


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The Pricing Tripod

Pricing Strategy

CostsCompetition

Value to customer


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The Pricing Tripod

The tripod explains the foundation underlying the pricingstrategy

The cost that a firm needs to recover usually impose a

minimum price, or floor, for a specific service offering

Customers perceived value of the offering sets a ceiling onthe price

The price charged by competitors determines where, withinthe floor-to-ceiling range, the price can be set


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Cost -Based Pricing

Price = Direct costs + Overhead costs + Profit Margin

Challenges:

Costs are difficult to trace as cost based pricing involves defining theunits in which a service is purchased

Thus services are sold in terms of input units (like hours) rather units of

measured output

Labor is more difficult to price than material

Actual service costs mat misrepresent the value of the service to thecustomer

Used in industries in which cost can be estimated in advance like,

advertising, construction


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Competition-Based Pricing

Monitor competitors pricing strategy (especially if service

lacks differentiation like dry cleaning and its an oligopoly like

airline)

Challenges:

Small firms may charge too and not make margins high enough to

remain in business

Heterogeneity of services across and within providers makes it difficult

to compare


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Value/ Demand-Based Pricing

Relate price to value perceived by customer i.e. prices are

based on what customers will pay for the services provided

Challenges: Monetary price must be adjusted to reflected the value of non-

monetary costs

Information on service costs may be less available to customers,

making monetary price not as salient indicator to quality


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Value has 4 meanings:

1. Value is low priceequate value with low price like, a

carpet on sale

2. Value is everything I want in a serviceemphasizethe benefits rather price like, best education for a MBA

3. Value is the quality I get for the price I paytrade offbetween the money they give up and the quality they

receive like, for a business travel, lowest price for a

quality brand

4. Value is all that I get for all that I giveconsider allbenefits and sacrifice components (money, time, effort)


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Four Customer Definitions of Value

Value is Low PriceValue is Everything

I Want in a Service

Value is theQuality I Get for

the Price I Pay

Value is All thatI Get for All

that I Give


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Price Has Many Names

Rent

Tuition Fare

Monthly

payment

Fee

Dues Interest

Donation


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Setting the Price

Pricing Procedure

Select pricing objective

Determine demand

Estimate costs

Analyze competition

Select pricing method

Select final price

Survival

Maximize current profits

Maximize market share Penetration strategy

Market skimming

Skimming strategy

Product quality leaders Partial cost recovery


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Setting the Price

Pricing Procedure


Determine demand

Estimate costs

Analyze competition


Select final price

Understand factors thataffect price sensitivity

Estimate demandcurves

Understand priceelasticity of demand

Elasticity Inelasticty


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Marketing Strategies

Product is more distinctive

Buyers are less aware of substitutes

Buyers cannot easily comparequality of substitutes

The expenditure is a lower part of

buyers total income

The expenditure is small comparedto the total cost

Part of the cost is borne byanother party

The product is used with assetspreviously bought

The product is assumed to have

more quality, prestige, orexclusiveness

Buyers cannot store the product

Conditions Under Which Consumers are

Less Price Sensitive:


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Marketing Strategies

There are few or

no substitutes

Buyers do not readily

notice the higher price

Buyers are slow to

change their buying

habits and search for

lower prices Buyers think higher

prices are justified

Conditions Under Which Demand

is Less Elastic:


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Setting the Price

Pricing Procedure


Determine demand

Estimate costs

Analyze competition


Select final price

Types of costs and levels of

production must be

considered

Accumulated production

leads to cost reduction via

the experience curve

Differentiated marketing

offers create different costlevels


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Setting the Price

Key Pricing Terms:

Fixed costs: do not vary directly with changes in

level of production

Variable costs: vary with production

Total costs: sum of fixed and variable costs a given

level of production

Average cost: cost per unit at a given level ofproduction


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Setting the Price

Pricing Procedure


Determine demand

Estimate costs

Analyze competition


Select final price

Firms must analyze the

competition with respect

to:

Costs

Prices

Possible price reactions

Pricing decisions are also

influenced by quality ofoffering relative to

competition


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Setting the Price

Pricing Procedure


Determine demand

Estimate costs

Analyze competition


Select final price

Price-setting begins with

the three Cs

Select method:

Markup pricing

Target-return pricing

Perceived-value pricing

Value pricing

Going-rate pricing

Auction-type pricing

Group pricing


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Setting the Price

Pricing Procedure


Determine demand

Estimate costs

Analyze competition

Select pricing method Select final price

Requires consideration of

additional factors:

Psychological pricing

Gain-and-risk-sharing pricing

Influence of other marketing

mix variables

Company pricing policies

Impact of price on otherparties


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Adapting the Price

Geographical Pricing

Barter

Compensation deal

Buyback arrangement

Offset


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Adapting the Price

Cashdiscounts

Quantitydiscounts

Trade-inallowances

Functionaldiscounts

Seasonal discounts

Promotionallowances

Price Discounts and Allowances:


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Adapting the Price

Loss-leaderpricing

Special-eventpricing

Cash rebates

Low-interestfinancing

Longer paymentterms

Warranties and

service contracts

Psychological

discounting

Promotional Pricing Tactics:


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Adapting the Price

Customer segmentpricing

Product-form

pricing

Image pricing

Channel pricing

Location pricing

Time pricing

Discriminatory Pricing Tactics:


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Adapting the Price

Price discrimination works when:

Market segments show different intensities ofdemand

Consumers in lower-price segments can not resellto higher-price segments

Competitors can not undersell the firm in higher-price segments

Cost of segmenting and policing the market doesnot exceed extra revenue


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Adapting the Price

Product-line pricing Optional-feature

pricing

Captive-productpricing

Two-part pricing By-product pricing

Product-bundle

pricing

Product-Mix Pricing Tactics:


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Initiating and Responding

to Price Changes

Strategic Options Include:

Maintain price and perceived quality; selectively

prune customers Raise price and perceived quality

Partially cut price and raise quality

Fully cut price, maintain perceived quality Maintain price, reduce perceived quality

Introduce an economy model


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to Price Changes

Key Considerations

Initiating price cuts

Initiating price increases

Reactions to price changes

Responding to competitorsprice changes

Circumstances leading toprice cuts:

Excess plant capacity

Declining market share Attempt to dominate the

market via lower costs

Price cutting traps:

Price/quality perceptions

Low prices dont createmarket loyalty

Competition may match orbeat price cuts


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to Price Changes

Key Considerations





Circumstances leading toprice increases:

Cost inflation

Overdemand Methods of dealing with

overdemand:

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts


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to Price Changes

Key Considerations





Firms must monitor both

customer and competitor

reactions

Competitor reactions are

common when:

Few firms offer the product

The product is homogeneous

Buyers are highly informed


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to Price Changes

Key Considerations





The degree of product

homogeneityaffects how

firms respond to price cuts

initiated by thecompetition

Market leaders can

respond to aggressive price

cutting by smallercompetitors in several ways


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to Price Changes

Maintain price and

profit margin

Maintain price, addvalue

Increase price,

improve quality

Launch a low-pricefighter line

Market Leader Responses to Competitor Initiated Price Cuts:

Reduce price

Documents

natfm pricing.pptx