Pricing of Services
Definition
It is a strategic tool that organizations use to differentiate their products from competitors and thereby gain the
competitive edge to capture market.
Pricing Models
There are two basic pricing models to work from:
• cost-plus pricing, which involves adding a mark-up to your break-even costs; and
• value-based pricing, which takes into account the value of your service to your customers. A value-based price
reflects what a customer is willing to pay.
Pricing Models: Cost-Based Pricing
Cost-based pricing involves calculating the cost of the product, and then adding a percentage mark-up to determine
price.
Features:
The latter is only used in periods of high competition as this method usually leads to a loss in the long run. This
method, although simple, does not take demand into account, and there is no way of determining if potential
customers will purchase the product at the calculated price.
Cost-plus pricing is a method used by companies to maximize their profits.
Cost-plus pricing is used primarily because it is easy to calculate and requires little information, therefore it is useful
when information on demand and costs is not easily available.
Pricing Models: Demand-Based Pricing
Demand-based pricing uses consumer demand (and therefore perceived value) to set a price of a good or service.
Demand-based pricing is any pricing method that uses consumer demand, based on perceived value, as the central
element. These include: price skimming, price discrimination and yield management, price points, psychological pricing,
bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing. Pricing factors are
manufacturing cost, market place, competition, market condition, and quality of product.
Pricing Models: Competition-Based Pricing
Competitive-based pricing occurs when a company sets a price for its good based on what competitors are selling a
similar product for.
Competitive-based pricing, or market-oriented pricing, involves setting a price based upon analysis and research
compiled from the target market. With competition pricing, a firm will base what they charge on what other firms are
charging. This means that marketers will set prices depending on the results from their research. For instance, if the
competitors are pricing their products at a lower price, then it’s up to them to either price their goods at a higher or
lower price, all depending on what the company wants to achieve.
One advantage of competitive-based pricing is that it avoids price competition that can damage the company.
Disadvantages include that businesses have to attract customers in other ways, since the price will not grab the
customer’s interest. The price may also barely cover production costs, resulting in low profits.
Difficulties associated with Pricing Models
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