Setting prices of pricing

1. SETTING PRICES FOR SERVICES

2. Introduction
• Pricing or Price is the key element in the
traditional marketing mix (the 4Ps) and also
the enhanced marketing mix (the 7 Ps).
• This is the element which earns revenue.
• This is highly critical because this is the
strategy which can make or mar the business.
• The firms must make it both ways:
– get profits for the firm
– give value to its customers

3. Effective Pricing is central to financial
success
• Marketing is the only function that brings
operating revenues into an organization
• All other management functions incur costs
• BUSINESS MODEL is the mechanism whereby,
through effective pricing:
– Sales are transformed into revenues
– Costs are covered
– Value is created

4. • Creating a viable service requires a business
model
• That allows for the costs of creating and
delivering the service plus margin profits to
be recovered through realistic pricing and
revenue management strategies

5. Pricing of services is complicated
Ever tried to understand:
• Bewildering Fee schedule of many consumer
banks or cell phone service providers ??
OR
• Fluctuating fare structure of a full service
airline ??

6. WHAT MAKES SERVICE PRICING DIFFERENT?
1. No Ownership of Services
2. Higher Ratio of Fixed Costs to Variable Costs
3. Variability of Both Inputs and Outputs
4. Many Services Are Hard to Evaluate

7. Higher Ratio of Fixed Costs to Variable
Costs
• an expensive physical facility (e.g., a hotel, a
hospital, a university, or a theatre)
• a fleet of vehicles (e.g., an airline, a bus
company, or a trucking company)
• a network dependent on company- owned
infrastructure (e.g., a telecommunications
company, an Internet provider, a railroad, or a
gas pipeline).

8. Variability of Both Inputs and Outputs
• It's not always easy to define a unit of service,
raising questions as to what should be the
basis for service pricing.
• And seemingly similar units of service may not
cost the same to produce, nor may they be of
equal value to all customers

9. Many Services Are Hard to Evaluate
• The intangibility of service performances and
the invisibility of the backstage facilities and
labour make it harder for customers to know
what they are getting for their money than
when they purchase any physical goods

10. Names of Service Pricing
• Pricing for goods is easy and straight forward,
while for services it is complicated
• varies with time, place, people, etc.
• For goods the price has a single name “PRICE”,
but for services it has several names like…

11. Service organizations use different
terms
• Universities : Tuition
• Professional firms : Fees
• Banks : Interest and service charges
• Brokers : Commissions
• Expressways : Tolls
• Utilities : Tariffs
• Insurance Companies : Premiums

12. Consumers are confused!!
• Service pricing difficult to understand
– Insurance products or hospital bills
• Risky
– Hotel reservation costs are different on three
different days
• Unethical
– Bank customers complain about some fees and
charges to be unfair

13. Objectives for establishing prices
• Generating revenues and profits
– Maximize long term revenue, profits
– Eager to reach a particular financial target
– Seeks a specific percentage ROI
– Revenue targets may be broken down by division,
geographic unit, type of service, even by key customer
segments
• Prices are set based on a good knowledge of
• Costing
• Competition
• Price elasticity
• Value perception

14. 2.Building demand and developing a
user base
• Maximizing patronage (subject to min. Level of
profits), maybe more important
• Getting a full house in a theater/ sports stadium/race track –
creates excitement ad enhances customer’s experience
• New services have trouble attracting customers
• To create impression of successful launch and
enhance image – need to attract good volume of
business from right type of customers
• Introductory discounts / contests / giveaways
• Industries with huge inv in infrastructure need to
build a critical mass of users quickly

15. The pricing Tripod
Value to Customer
Competition
Costs

16. PRICING TRIPOD ANALYSIS
• COSTS: a firm needs to recover sets a
minimum / floor price.
• CUSTOMER’S PERCEIVED VALUE: sets the
ceiling or maximum price.
• COMPETITION: determines where within the
floor-to-ceiling range the price can be set.

17. (I) VALUE BASED PRICING
• Based on the third leg of pricing tripod – Value
to the customer
• No customer will pay more for a service than
he thinks it is worth
• So marketers need to understand how
customers perceive service value in order to
set an appropriate price.

18. Understanding net value
• Perceived costs > Perceived Benefits --->
NEGATIVE NET VALUE
Perceived
benefits
Costs
incurred

19. • When customers purchase a service, they are
weighing perceived benefits vs. costs incurred
• Companies sometimes create several tiers of
service, recognizing the different trade-offs
customers are willing to make between the costs
• 4 broad expressions of customer definition of value:
– Value is low price
– Value is whatever I want in a product
– Value is the quality I get for the price I pay
– Value is what I get for what I give

20. Managing the perception of Value
• Service pricing strategies unsuccessful – lack
association between price and value
• Value is subjective
• Not all customers have expertise to assess
quality and value they receive. (credence
services)
– Marketers of services (ex strategy consulting) must
find ways to communicate time, research, expertise,
attention to detail that goes into a best practice
consulting project (invisibility of back stage)
• Example of an electrician who visits to rectify a defective
circuit

21. To manage perception of value..
• Effective communication and even personal
explanations are needed to help customers
understand the value they receive
• Customers may fail to understand the fixed
costs that business owners need to recover
(office, telephone, insurance, vehicles, tools,
fuel, support staff)

22. Reducing related costs
Costs of service = Related monetary + non-
monetary costs
(I) Monetary costs:
• Customers often incur significant financial
costs in searching for, purchasing and using
the service
– Ex: cost of going out for a movie may far exceed
the price of tickets and include expenses on travel,
parking, food and beverages

23. (II) Non-monetary costs
• Reflect the time, effort, discomfort associated
with search, purchase, use of a service
• Services high on experience and credence
attributes may also create psychological costs
such as anxiety
– Doctor visit, surgery, using daycare facility
• 4 distinct categories are:
– Time costs: today is equivalent to “money”(waiting)
– Physical costs: like fatigue, discomfort
– Psychological cost: mental effort, fear, perceived risk
– Sensory cost: unpleasant sensation to any of 5 senses

24. Defining Total User Costs

25. Trading off Monetary/Non-Monetary costs
Which clinic would you prefer if you need a chest x-ray
(assuming all three clinics offer a good technical quality)
CLINIC A CLINIC B CLINIC C
Price Rs. 450 Price Rs. 850 Price Rs. 1050
Located 1 hour away by
car
Located 15 min away by car Located next to your
office building
Next available
appointment is in 3
weeks
Next available appointment
is in 1 week
Next available
appointment is in 1 day
Hours: Monday-Friday
9 a.m. – 5 p.m.
Hours: Monday-Friday
8 a.m. – 10 p.m.
Hours: Monday-Saturday
8 a.m. – 10 p.m.
Estimated wait at clinic is
2 hours
Estimated wait at clinic is
30-45 minutes
Estimated wait at clinic is
0-15 minutes

26. • Service users can incur costs during any of the
three stages of service consumption:
– Search cost
– Purchase and service encounter cost
– Post consumption or after costs

27. Possible approaches to minimize costs
• Work with ops experts to reduce time required
to complete service purchase, delivery and
consumption
– Booking of tickets (makemytrip, yatra, goibibo,
cleartrip, spicejet, vistara, jetairways)
– hotel rooms (trivago, tripadvisor, expedia, Taj,
Radisson)
– even dinners (eazydiner, dineout, zomato, groupon)
– movies, shows (bookmyshow)

28. • Minimizing unwanted psy. Costs by redesigning
unpleasant procedures, educating customers
on what to expect, retraining staff to be
friendlier
– PSK – managed by TCS become a much more
professional setup by systematizing information
• Decreasing unpleasant sensory costs by
creating more attractive visual environment
• Suggesting ways to minimize monetary costs
– Tickets of shows carrying advice on best transport
to reach, closest metro station

29. Setting value-based prices
Value-based pricing (VBP) is about setting a price to capture the
value that a customer receives. Here are the steps:
• Identify your customer’s second best option. If your customer
won’t buy your product or service, then what would he choose?
• Determine the price of the second best option.
• List all of the ways that your offering is better than the second
best option. Estimate how much you think these differences are
worth to your customers?
• List all of the ways that the second best offering is better than
yours.How much do you think these are worth to your customers?
• To calculate the best price — take the price of the second best
option (step 2 above) plus the value of your advantages (step 3)
minus the value of the second best option’s advantages (step 4).
• Price = step 2 + step 3 – step 4

30. (II) COMPETITION BASED
PRICING

31. • Firms with relatively undifferentiated offerings
/ services need to monitor what competitors
are charging and price accordingly
• When customers perceive little / no difference
between competing offerings- choose cheapest
• Firm with lowest cost per unit assumes price
leadership
•

32. Price competition intensifies
• Increasing number of competitors
– Dunkin donuts, KFC, Starbucks, CCD, Barista, Costa
• A wider distribution of competitor
• An increasing surplus capacity in the industry

33. • Non-price-related costs of using competing
alternatives are high
• Personal relationships matter
• Switching costs are high
• Time and location specificity reduces choice
• Managers should not only look at
competitor’s prices dollar for dollar, but
should examine all related financial and non-
monetary costs
Competition-Based Pricing:
When Price Competition is Reduced

34. REVENUE MANAGEMENT
Revenue Management: What it is
and How it works

35. Maximizing Revenue from Available
Capacity at a Given Time
• Most effective in the following conditions:
– High fixed cost structure
– Relatively fixed capacity
– Perishable inventory
– Variable and uncertain demand
– Varying customer price sensitivity
• Airlines, hotels, car rental firms etc. have become
adept at varying their prices in response to price
sensitivity and needs of market segments at
different times of day, week, season

36. • Revenue management (RM) is price customization
• Sophisticated approach to managing supply and
demand under varying degrees of constraint
• Charge different value segments different prices
for same product based on price sensitivity
• Maximizing Revenue from Available Capacity at a
Given Time
• RM uses mathematical models to examine
historical data and real time information to
determine
– What prices to charge within each price bucket
– How many service units to allocate to each bucket
– Rate fences deter customers willing to pay more from
trading down to lower prices (minimize consumer
surplus)

37. Revenue Management:
• The science of maximizing profits through
market demand forecasting and the
mathematical optimization of pricing and
inventory
– Began in the airline industry
– Seats on an aircraft divided into different products
based on different restrictions
– $1000 class product: can be purchased at any time,
no restrictions, fully refundable
– $200 class product: Requires 3 week advanced
purchase, Saturday night stay, penalties for
changing ticket after purchase

38. • Many service businesses focus on strategies to
maximize revenue derived from available
capacity
– Better capacity utilization
– Reserve capacity for higher paying segments
• Managing supply and demand under varying
degrees of constraint
– Airlines, hotels, car rental firms - vary their prices
at different times of season, week or day

39. Reserving Capacity for high yield
customers
• The least price sensitive segment is the first to
be allocated capacity, paying the highest price
• Higher paying segments often book closer to the
time of actual consumption
– So firms need a disciplined approach to save capacity
for them
– Business travelers often book airline tickets, hotel
rooms and rental cars at short notice (unlike
vacationers ho may book months in advance)

40. • A well designed revenue management system
can predict with reasonable accuracy
– How many customers
– Will use a service at a specific time
– At each of several different price levels
– And then block capacity at each level – price
bucket

41. How does competitors’ pricing effect RM?
• If a firm prices too low, it will experience a
higher booking pace-cheaper seats fill up
quickly
– Means a higher share of late booking but high
fare paying customers will not be able to get their
seats confirmed fly on competing airlines
• If initial pricing is too high, firm will get too
low a share of early booking segments 
later have to offer deeply discounted “last
minute” prices to sell excess capacity

42. PRICE ELASTICITY
• The concept of elasticity describes how
sensitive demand is to changes in price
Percentage change in demand
Price elasticity =-----------------------------------------
Percentage change in price
• If a small change in price has big impact on
sales: demand is “PRICE ELASTIC”
• If a change in price has little effect on sales:
demand is “PRICE INELASTIC”

43. Designing Rate Fences

44. Rate Fences
• Inherent in RM, is the concept of “price
customization”
– Charging different prices from different customers
for the same product
– Logic is: “Have people pay prices based on the
value they put on the product”
– So, segmenting customers by their valuations-in a
sense, “build a fence” between high-value
customers and low value customers

45. • Properly designed rate fences allow customers
to self segment on the basis of service
characteristics and willingness to pay
• Help companies to restrict lower prices to
customers willing to accept certain
restrictions on their purchase and
consumption experiences

46. Key categories of rate fences
• Physical Fences:
– Refers to tangible product differences related to the
different prices
S. No. Physical / Product related
Fences
Examples
1 Basic Product - Class of travel (business/economy class)
- Size of rental car
- Size and furnishing of a hotel room
- Seat location in a theater / stadium
2 Amenities - Free breakfast at a hotel, airport pickup
- Free golf cart at a golf course
- Valet parking
3 Service level - Personal butler
- Improved food and beverage selection
- Dedicated service hotlines
- Separate check-in counter with no queue

47. Non-physical fences
Transaction
Characteristics
Time of booking or reservation
•Location of booking / reservation
•Flexibility of ticket usage
•Discounts for advance purchase
Customers making reservation
online are charged lower than
over phone
Fees/penalties for cancelling
/changing reservation
Non-refundable reservation fees
Consumption
Characteristics
•Time or duration of use •Early bird / happy hours
Buyer
Characteristics
•Frequency /volume of
consumption
•Group membership
•Size of consumer group
•Geographic location
•Member of certain loyalty tier
with the firm get priority pricing
•Child, student, senior citizen
•Group discts based on size
•Locals vs. tourists

48. PRICE
PER
SEAT
RELATING PRICE BUCKETS TO DEMAND CURVE
No. of seats demanded
1st class
Full fare economy
One week advance
Book on internet/no
changes/no refunds

49. • Using a detailed understanding of
– Customer needs
– Customer preferences
– Willingness to pay
• Revenue managers can jointly design effective
products comprising:
– Core service
– Physical product features (PHYSICAL FENCES)
– Non-physical product features (NON-PHYSICAL
FENCES)

50. Designing fairness into RM
• Design Price schedules and fences that are
clear, logical and fair
• Use high published prices and use fences as
discounts (rather than surcharges)
• Communicate consumer benefits of RM
• Use bundling to “hide” discounts
– Cruise liner includes price of air travel or ground
transportation in the package
• Take care of loyal customers

51. How customers respond to Fines and
Penalties?
• Various types
– Late fees for DVD rentals
– Cancellation charges for hotel bookings
– Charges for late credit card payments
• Lead to:
– Negative response from customers
– Switching providers
– Poor word of mouth

52. • 1. Make penalties relative to crime committed
– Is the penalty out of proportion to “crime” committed?
– Was the customer “surprised” by the penalty charged?
• So, it is important to
– Explore which amounts are seen as reasonable and
fair for a given “customer lapse”
– Fines / fees etc. to be communicated effectively
through front line staff
– E.g.: 1. potential charges for non-maintenance of
AQB, bounced cheques, late credit card payments etc.

53. • 2. Consider Causal factors and customize
Penalties:
– Perceptions of fairness were lower and negative
responses were higher when causes that led to
penalty were out of control
• E.g.: “I mailed the cheque on time-must have been a
postal delay” vs. “I forgot to mail”
– Also, customers who generally observed the rules
reacted particularly negatively if they were fined.
– So, important for service providers to waive a
penalty the first time, and communicating fee will
be charged subsequent times.

54. • 3. Focus on Fairness and manage emotions
during Penalty situations:
– Customers will perceive penalty to be unfair if it is
out of proportion compared to extra
work/damage caused by the incident
• E.g.: You can’t charge a late fee on a DVD that is more
than the rental you would have earned in that period
(Sources: Young “Sally” K. Kim and Amy K. Smith, “Crime and Punishment: Examining
Customers’ Responses to Service organizations’ Penalties,” Journal of Service
Research)

55. PUTTING SERVICE PRICING INTO
PRACTICE

56. (1) How much to charge?
• Pricing Tripod
– Costs,
– Value perception,
– competition
• Sensitivity of customers to prices (elasticity of
demand)
• Discounts to be offered
• Ethical concerns / psychological pricing points

57. (2) What should be basis for pricing?
• Based on completing a promised task (repair
of a car/ equipment)
• Based on admission to a service performance
(sports event, concert, educational program)
• Time based(an hour of a lawyer’s time)
• Based on monetary value of service delivery
(realtor charges commission as a % of Selling
price of a property)

58. (3) Who should collect payment?
• Service provider or specialist intermediaries

59. (4) Where should payment be made?
• Conveniently located intermediaries
• Mail/bank transfer

60. (5)When should payment be made?
• In advance
• Once service delivery has been complete

61. (6)How should payment be made?
• Cash
• Electronic fund transfer
• Charge Card (Debit/Credit)

62. (7)How to communicate prices?
• Relate the price to that of competing products
• Ensure price is accurate and intelligible

63. • 1. What makes service Pricing different? (2 mark)
2. The 3 important components of pricing Tripod are: (2 mark)
3. There are 4 distinct categories of non monetary costs. Name them.
(2 mark)
4. Give 1 example each of low, medium, high level of customer
participation.(1mark)
5. Write 2 lines each on: (1 marks each)
a) Revenue Management © Rate Fence
b) SSTs