MOS/U3 Topic 6 Pricing of Services: Pricing Considerations and Strategies
Once we have designed and developed the service product and its delivery, we would have to decide how to price the service for earning revenue from it. Price setting consists of six steps as described in the following sections:
- Selecting the pricing objective
Two major objectives of pricing are market penetration or market skimming. In case it is easy for competitors to emulate our business, it is advisable to go for market penetration, which means increasing the market share. This involves selling the services at a price that most customers are willing to pay. On the other hand, if the service has lot of high-technology components and cannot be easily emulated by new competitors, the marketer can go for price skimming, that is selling the services at a high price and slowly bring down the prices as competitors emerge. Businesses may also have a survival objective in the short run, i.e. they would like to earn the operating costs at the time being in order to establish the business firmly in the market, before raising prices later on. Another pricing objective could be price-quality leadership in which the marketer provides superior quality services at affordable prices which would be difficult for competitors to match.
- Determining price elasticity of demand
At the next stage, the demand for the service at various price levels is elicited through customer surveys in which customers may be asked to choose price options at which they would be willing to purchase the service. A better way of pricing various levels of services is through a marketing research technique called conjoint analysis. As part of this analysis, customers are asked to rank several sets of services with different alternatives and price levels. Through statistical analysis of the data, the part worth of various options and prices are found out and the most-preferred service-price combination is identified. The price that customers are willing to pay, form the price ceiling, i.e. the company cannot offer its services at a price above the price ceiling.
- Estimating costs
The cost of providing the service is estimated through a technique called activity based costing (ABC) in which the cost of performing various activities for delivering the service is calculated in order to arrive at the total cost of providing the service. The cost will form the price floor, i.e. the minimum price that should be requested from customers to make the business viable.
- Analysing competitors’ costs, prices and offers
The price charged by competitors for similar and alternative services are found out as these prices form the reference price with which customers are likely to compare the price of the new service. The benefits offered by the competitors and our company are also compared. Once it is ascertained that our service is superior to that of the competitors, the price of the service can be calculated as the cost of alternative services plus the additional value provided by extra benefits provided by our service. Thus, competitors’ prices help to modulate the price of our services based on what the customers are accustomed to pay for similar services, or the cost of alternative ways of fulfilling their needs.
- Selecting a pricing method
Based on the cost of delivery and competitive prices, several price points for the new service can be determined. Then the demand for each price point is established and the breakeven demand is calculated. Once, we are sure that a certain demand can be met; the price can be fixed for attracting that level of demand. It is now ascertained that the demand-price combination would be capable of achieving breakeven. The sale of services for the next three years is estimated and the profit is calculated. This will help us calculate the return on investment and to match the estimated return on investment with the returns expected in line with what the industry receives in general. It is checked that the returns are higher than the prevailing bank interest rate.
One special method of pricing is called target costing. In this method, the price that customers are willing to pay is ascertained from customer surveys and service delivery process is modified in order to ensure that the service can be delivered at a cost and price that will result in expected returns for the business.
An important method of pricing that is widely advocated is called value pricing. True economic value (TEV) is the sum of the price of the alternative means of satisfying the need and any cost savings in the hands of the customer, less, the cost of receiving the new service. Theoretically, the customer would gain even when he/she pays the value price for the new service compared to consuming the alternate service. However, the price is then modulated as per what customers are willing to pay for the service and is fixed at that level.
- Selecting the final price
The final price is selected by keeping in mind that the price and other ‘P’s of the services marketing mix must be consistent with the service concept. Low-quality-high-price or high-quality-low-price services would be inconsistent whereas a price in tune with the quality of the service, the affordability and willingness of customers to pay the price, substantial demand at the price which can be easily fulfilled by the service provider, and, a price in tune with prices of competitive and comparable offerings would be perceived to be a consistent price. The price should be such that our target market is able to purchase the services, our collaborators can make a profit and our competitors can continue to offer their services to their target customers at their price points. It is important to ensure that the price of our service is consistent with the value it provides to customers.