Service Marketing Chapter Ten

10.1. Concept of value to customers

Price is what customers are willing to pay for services. How much a customer has to
Pay depends on the value he perceives in the service offer. The payment can be in many
Forms - money, barter, or return services. Price can be simply explained thus:

Price is a component of value. The consumer's perception of product quality changes

With variations in price. The consumer makes a straight-cut analogy: high price = high
Quality. This 'black box' effect becomes a boon for services as its intangibility prevents
consumers from evaluating the offer correctly.
Price becomes very communicative and
Gives a convincing indication of quality. People have no other way of convincing themselves
Of the quality of restaurants or a hospital except by the price.

Buyer's Perception of Value

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The benefits are product value, service value, personnel value and image value.
Product Value: The worth assigned to the product by the customer. For example, a customer
might choose a Philips DVD because of superior features and technology.
Service value: The worth assigned to the service by the customer. The customer chose Philips
for its guarantees, warranties, large distribution networks, retail outlets and service
Centers.
Personnel value: The worth assigned to the service-providing personnel by the customer. The
customer bought it from a Philips showroom because of the personnel's superior
Product knowledge and customer-orientation.
Image value: The worth assigned to the image of the service or the service provider by the
customer. The customer chose Philips because of the name association with quality,
Innovation, etc.
Monetary price: The actual rupee price paid by the consumer for a product; in the above
example, for the Philips DVD.
Time costs: The time the customer has to spend to acquire the service. For the customer who
wanted to buy the DVD, this would include travelling time, product inquiry at various retail
outlets, clarification, demonstration, sales and payment time at the Philips showroom as well as
installation of the DVD.
Energy costs: The physical energy spent by the customer to acquire the service. To purchase the
DVD, the customer would have had to endure travelling hassles, shopping inconvenience, by
himself or with the family etc.
Psychic costs: The mental energy spent by the customer to acquire the service, that is, worrying
and aggravation. The customer would have suffered anxiety during the selection, delivery and
installation of the DVD, especially if there were hassles. The last could happen, for instance, if
the wall paint is scratched/scraped and furniture damaged during installation.

10.2. Role of price as an indicator of service quality

Consumers cannot directly determine a service provider's quality until after the service is
rendered. Still, there may be wide variance among industries in the ease with which quality can
be evaluated post-purchase. In certain cases, quality can be evaluated fully by simple inspection
or immediate experience. Again, restaurants, carpet cleaning, and dry cleaning score well in this
regard. In such instances, the quality reputation of firms would spread fairly quickly and allow
new consumers to locate the desired combination of price and quality at minimal cost.
At the other end of the spectrum, comparative price and quality comparisons will be most
difficult where the service is complex and the consumer may not know pre-purchase precisely
which service components will be needed or post-purchase whether the service had been fully or
honestly rendered. Examples would include certain repair services for automobiles, appliances,
and electronic entertainment items.
Although consumers could determine post-purchase whether a repair had fixed the problem, they
might not know whether all of the billed services were necessary. Contrary to classic economic
theory, consumers do not always buy the lowest priced product in a category, even when the
products are otherwise similar. One behavioral explanation, supported by empirical evidence
(Leavett1954), suggests that consumers infer information (e.g., quality) from price. As result,
price appears to play two opposite roles—allocative and informational—in consumers’
purchasing decisions.

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On the one hand, higher price decreases consumer utility, because they must pay more for the
product. On the other hand, higher price may induce higher quality perceptions, which increase
utility. Intuitively, this complex relationship may lead to a non-monotonous (individual) utility
function over price, which then should create an (aggregate) demand function that is not
necessarily downward sloped.

10.3. Pricing Methods

It is through price (apart from the other elements of the marketing mix) that the firm would
generate revenue, while pricing is a process leading to policy, on the basis of which prices of
products are finalized. There are four important bases for price determination:
1. What it costs to produce a service.
2. The amount that consumers are willing to pay for it.
3. The price that competitors are charging.
4. The constraints on pricing that are imposed by government and/or regulatory bodies.

10.3.1. Cost as a Basis for Pricing

Simply put, in this method of pricing, the service marketer adds up all his costs, adds hi profit
margin and the result is the price. The skill required of the service marketer is the ability to
identify and measure the different types of costs: direct, indirect, fixed and variable, etc. The cost
structure of a service firm can be explained thus: The total cost of producing a service can be
divided into costs which are variable and those that are fixed. Variable costs increase as service
production increases; fixed costs do not change even if an additional unit of service is produced.
Fixed costs therefore cannot be attributed to any particular unit of output.
In spite of many disadvantages, there are many reasons why 'cost-plus' type pricing methods are
so widely used in the service sector:
 Essentially a simple model to follow in pricing decisions, it can be adopted by
entrepreneurs, small-scale service providers like restaurant owners and leisure and
tourism-oriented professionals like travel agents, tour-operators etc.
 Prices are easy to calculate and especially in services, where the offer has to be tailored
to the individual needs of customers, it is easier to empower price decisions for services.
 The predictive nature of the method helps the service marketer to better plan his
resources and potential.
 Cost-based pricing is adopted when the precise nature of the service that will actually be
provided is not known at the outset or its details and components, etc., are unknown. For
example, arranging for a conference or an event to bring doctors and surgeons for a
pharmaceutical company. In this case, an agreement is made that the final price will be
based in some way on costs.
 A service provider is allowed by many professional associations to increase prices
beyond those originally agreed in his estimate - on the basis of the actual costs incurred.
 Cost-based pricing does not take into account competition that a service might face at any
given time. Neither does it take into account that some customers may value the same
service more highly than others.
 It is sometimes more difficult to calculate costs in service than for goods – mainly due to
the intangibility factor. The structure of costs facing many service businesses is typically
different from goods.

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 It is easier to determine costs for previous accounting periods (historical) than to forecast
what these costs will be in the future (predictive).
Cost-based pricing can be of two types:
 Full cost or mark-up pricing
 Marginal Cost or Contribution pricing
Full Cost or Mark-up Pricing
Here prices are based on total or full cost plus the desired profit. Retailers would call this desired
profit as mark-up. The break-even analysis is a variation of this method. As elaborated before, it
does not take into account different types of costs. These costs, in addition, are affected by
changes in the volume of output or the type of output. Full cost pricing ignores consumer
demand.
Marginal Cost Pricing
A special kind of cost-based pricing occurs when service firms choose not to include their fixed
costs.

10.3.2. Competitor-based Pricing

This pricing is based on what the competitor is offering. A service firm uses this method to make
an entry in the market, finding an appropriate price bracket for its service offer without having to
go through a trial and error process - by pegging itself to the competition.
 Going rate pricing: This is used in those services where cost levels are difficult to
establish, and a going rate is preferred.
 Sealed-bid pricing: This is the system of tenders and quotations where bids are received
from service providers. Thus housekeeping, restaurant and canteen contracts, security
services, fleet operations, etc., are usually awarded on the basis of predetermined
specification fulfillment and their offer price.
 Pricing below the competition: Here the new entrant service provider will price his
offers below the competition with the full intention of increasing his market share at the
time of consideration.
 Pricing above the competition: This kind of pricing works only for premium orvery
distinctive services. But if there is a general recession, then above-the-market pricing is
unsustainable.

10.3.3. Demand-based Pricing

This is based on what the customers are prepared to pay. Different customers have different
upper-ceilings on the price that they are willing to pay for a service. The skill required for a
service marketer is a fine knowledge of consumer demand and the consumer's ability to pay
(correct identification of the early adopters, middle-majority and laggards in a market) Price
discrimination logically takes place here. The discrimination is carried out on the basis of groups
of users, points of use and types of use.
 Groups of user discrimination: Here the same service is priced for different groups of
users depending on their ability as well as willingness to pay.
 Points of use/consumption discrimination: Different prices are charged from different
points of service delivery. This is leveraging the locational advantages of the provider.
 Time-of-use discrimination: A service industry is usually open to the vagaries of demand
and seasonal demands, as it cannot be stored and resold later (perishability) and has to be
produced and consumed at the same time (inseparability).

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10.4. Strategies used by companies to price services

In developing a price strategy for a new service, two key issues need to be addressed:
1. What price position is sought for the service?
2. How novel is the service offering?
 Price Skimming Strategy
The success of a saturation pricing strategy is dependent upon a sound understanding of the
buying behavior of the target market, in particular:
 The level of knowledge, which consumers have about prices.
 The extent to which the service supplier can increase prices on the basis of perceived
added value of the service offering.
 The extent to which the service supplier can turn a casually gained relationship into long-
term committed relationship.

 Service Portfolio Pricing

A number of product relationships can be identified as being important for pricing purposes:
_ Optional additional services
_ Captive services
_ Competing services
_ Price Bundling

 Tactical Pricing
Some of the tactical uses of pricing are analyzed below:
 Tactical pricing can provide short-term competitive advantage.
 Tactical pricing can be used to remove unplanned excess supply.
 Short-term tactical pricing can be used to protect markets against new entrants.
 Discriminatory pricing with respect to time that may have been part of the strategic
 Pricing plan can be implemented by a number of tactical programmes.
 Similarly, discriminatory pricing with respect to place must be translated from a
 Strategic plan to tactical programmes.
 For discriminatory pricing between different consumer segments, the problem of
 turning a strategy into a tactical programme hinges on the ease with which segments
 Can be isolated and charged different prices.
 Tactical pricing programmes are used to motivate intermediaries.

 Pricing Strategies for Public Sector Services

The pricing of services which by their very nature require a high degree of central planning, but
which are expected to exhibit some degree of marketing orientation, present particular challenges
to marketers. It may be difficult or even undesirable to implement a straightforward price-value
relationship with individual service users for a number of reasons:
 External benefits may be generated by a service, which is difficult or impossible for the
service provider to appropriate from individual users.
 The benefits to society at large may be as significant as the benefits received by the
individual who is the immediate recipient.
 Pricing can be actively used as a means of social policy.

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 Internal Market Pricing

A number of possible solutions to the problem of internal pricing can be identified:
 If an external market exists, a 'shadow' price can be imputed to the transfer, reflecting
what the transaction would have cost if it had been bought in from outside.
 Where no external market exists, bargaining between divisional managers can take place,
although the final outcome may be a reflection of the relative bargaining strength of each
manager.
 Corporate management could instruct all divisions to trade on an ag
 Reed full cost pricing basis.
 A system of dual pricing can be adopted where selling divisions receive a market price
(where this can be identified) while the buying division pays the full cost of production.
Any difference is transferred to corporate accounts.
 A proportion of the internal service producer's fixed costs can be spread over all resource
users as a standing charge, regardless of whether they actually use the services of that
unit. This would enable the internal supplier to compete on price relatively easily, while
still allowing resource users for whom a higher standard of service is worth paying a
premium to buy in their requirements from outside.

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