Service Industry Quarter 3
Chapter 9: Pricing services
Developing a framework for pricing decisions
Of the 4 P’s price receives the least attention although pricing decision has the
greatest impact on a company’s profits
Pricing behaviour affects customer satisfaction and customer loyalty which impacts
the long term profit potential
First question service marketer asks: what he or she wants to achieve with the
pricing strategy
, First step: determining the objective you want to obtain by setting a price
Second step: determining which pricing strategy the company will follow pricing
strategy provides general guidelines that relate to all the pricing decisions about a
single product line or company
3 main determinants on which the pricing strategy can be based (3 C’s): customer,
cost and competitor
once pricing objective and strategy are clear, decisions have to be made on the
pricing structure (step three)
Service provider has to decide:
which aspects of the service will be priced
what will be included for that price
on which unit the price will be based
if there will be a differentiation among customers
what the payment conditions will be
Price level (fourth step): the actual price that is asked for a service
Price tactics: periodic price promotions or other short term actions
The pricing of a service has to be embedded in the marketing strategy and must be
consistent with the other marketing activities relating to this service
Pricing objectives
,Key objectives:
acquiring a desired market share
maximising long-term profit
maximising short-term profit ….
The pricing objectives can be divided into two categories: short-term tactical moves
and long-term strategic moves
Choices with respect to pricing objectives are usually influenced by the dominant
form of regulation in the market. A service company can be:
subject to government regulation (f. ex railways, post offices, unis): will have to
consider the specific task in society for which they are sustained by government. Social
and political goals will influence the pricing objective. For example, realizing an
environmental goal (to reduce pollution)
subject to certain amount of self-regulation (f. ex lawyers and doctors): will try to
establish a stable market situation and fair prices.
services where the market mechanism decides (f. ex cleaning services, hotels and
catering):total free market situation pricing objectives is almost endless, primarily
influenced by the company’s strategy and objectives
Pricing strategies
Establishes a general framework for pricing decisions and determines the way in
which the price will be set
Three main determinants: Cost, competitor and customer
Cost based strategies
Marketers often set their prices in accordance with the cost of the product or service
focus entirely on the cost of providing a service to determine the price that is
asked for it
Reveal the minimum price level necessary for the company to remain profitable
Disadvantages:
if the price is based on the cost alone, then the pricing objective can only be to reach
a certain profit level, because that is an integral part of the price formula. Many other
pricing objectives exist for which consequently, cost-based pricing isn’t effective
Cost-based strategies require an estimation of the number of units likely to be sold
, service managers should also take into account the price cross-elasticity of demand:
the price cost elasticity could be important for additional services linked to a primary
service or product
Cost-based strategies assume that the cost of providing a service or product has some
thing to do with the value of the product or service: however different costs for
producing the same service, depending on efficiency
Cost-based strategies have an entirely internal focus and don’t in any way take market
considerations into account
Mark-up pricing: a fixed margin cost is added to the service’s cost to determine the
price
Target return pricing: based on the desired return on investment (ROI)
Customer-based strategies
Focuses entirely on the market
The basic concept is that the price should be commensurate with the value the
service actually delivers to the customer
Consumers define value in four different ways
value is low price
value is whatever I want in a service
value is the quality I receive for the price I pay
value is what I receive for what I give
Perceived value: the consumer’s overall assessment of the utility of a service, based on
perceptions of what is received and what is given
Chapter 9: Pricing services
Developing a framework for pricing decisions
Of the 4 P’s price receives the least attention although pricing decision has the
greatest impact on a company’s profits
Pricing behaviour affects customer satisfaction and customer loyalty which impacts
the long term profit potential
First question service marketer asks: what he or she wants to achieve with the
pricing strategy
, First step: determining the objective you want to obtain by setting a price
Second step: determining which pricing strategy the company will follow pricing
strategy provides general guidelines that relate to all the pricing decisions about a
single product line or company
3 main determinants on which the pricing strategy can be based (3 C’s): customer,
cost and competitor
once pricing objective and strategy are clear, decisions have to be made on the
pricing structure (step three)
Service provider has to decide:
which aspects of the service will be priced
what will be included for that price
on which unit the price will be based
if there will be a differentiation among customers
what the payment conditions will be
Price level (fourth step): the actual price that is asked for a service
Price tactics: periodic price promotions or other short term actions
The pricing of a service has to be embedded in the marketing strategy and must be
consistent with the other marketing activities relating to this service
Pricing objectives
,Key objectives:
acquiring a desired market share
maximising long-term profit
maximising short-term profit ….
The pricing objectives can be divided into two categories: short-term tactical moves
and long-term strategic moves
Choices with respect to pricing objectives are usually influenced by the dominant
form of regulation in the market. A service company can be:
subject to government regulation (f. ex railways, post offices, unis): will have to
consider the specific task in society for which they are sustained by government. Social
and political goals will influence the pricing objective. For example, realizing an
environmental goal (to reduce pollution)
subject to certain amount of self-regulation (f. ex lawyers and doctors): will try to
establish a stable market situation and fair prices.
services where the market mechanism decides (f. ex cleaning services, hotels and
catering):total free market situation pricing objectives is almost endless, primarily
influenced by the company’s strategy and objectives
Pricing strategies
Establishes a general framework for pricing decisions and determines the way in
which the price will be set
Three main determinants: Cost, competitor and customer
Cost based strategies
Marketers often set their prices in accordance with the cost of the product or service
focus entirely on the cost of providing a service to determine the price that is
asked for it
Reveal the minimum price level necessary for the company to remain profitable
Disadvantages:
if the price is based on the cost alone, then the pricing objective can only be to reach
a certain profit level, because that is an integral part of the price formula. Many other
pricing objectives exist for which consequently, cost-based pricing isn’t effective
Cost-based strategies require an estimation of the number of units likely to be sold
, service managers should also take into account the price cross-elasticity of demand:
the price cost elasticity could be important for additional services linked to a primary
service or product
Cost-based strategies assume that the cost of providing a service or product has some
thing to do with the value of the product or service: however different costs for
producing the same service, depending on efficiency
Cost-based strategies have an entirely internal focus and don’t in any way take market
considerations into account
Mark-up pricing: a fixed margin cost is added to the service’s cost to determine the
price
Target return pricing: based on the desired return on investment (ROI)
Customer-based strategies
Focuses entirely on the market
The basic concept is that the price should be commensurate with the value the
service actually delivers to the customer
Consumers define value in four different ways
value is low price
value is whatever I want in a service
value is the quality I receive for the price I pay
value is what I receive for what I give
Perceived value: the consumer’s overall assessment of the utility of a service, based on
perceptions of what is received and what is given
