SM/U3 Topic 5 Pricing of Services – Objectives, Challenges, Approaches
Pricing decisions are of major importance in service marketing strategy. As with other marketing mix elements, the price of a service should be related to the achievement of marketing and organisational goals and should be appropriate for the service organisation’s marketing program.
Service pricing principles and practices tend to be based on principles and practices used in pricing goods. As with goods, easy generalisations about pricing are difficult to make. There is as much diversity in the service sector as in the goods sector.
The great variety of environments in which service pricing decisions are made and the diversity of pricing practices which may apply, is partly reflected in the many different terms used to describe the prices of services.
Characteristics of Services and their Influence upon Service Prices
The characteristics of services as with all Products will influence prices set in markets. The influence of these characteristics will vary according to the type of service and market situation under consideration. They are however an added consideration when examining the traditional main forces influencing price; costs, competition and demand. Some impacts of these services characteristics include these five categories:
(a) Service perishability, the fact that service may be difficult (though not impossible) to be stored and that fluctuations in demand cannot be met as easily through using inventory, has price implications. Special price offers and price reductions to use up spare capacity may be used and marginal pricing may be more commonplace. This may happen in markets like airline travel and package holidays. Constant use of these forms of pricing may lead to increasing customer sophistication; buyers may deliberately hold off from purchasing certain services with the expectations that price reductions will occur. Sellers for their part may try to compensate for this effect by offering advantageous reductions on orders for services placed early. Again the holiday tour market exhibits some of these forces at work.
(b) Customers may be able to delay or postpone the performance or use of many services. Alternatively they may be able to perform certain services for themselves. These features can lead to keener competition amongst the sellers of services. They can also encourage a greater degree of price stability in certain markets, in the short term.
(c) Apparent Intangibility has many price implications. First-time users may have great difficulty understanding what they get for their money but this may be influenced by the material content of the service product. The higher the material content, the more will prices set tend to be based on costs and the greater the tendency towards more standard prices. The smaller the material content the more customer orientated and the less standard will prices be.
Service product intangibility also means that services provided may be more easily varied than physical products. Thus service level, service quality and service quantity can be adjusted to meet particular customer requirements. Prices may ultimately be determined by negotiation between buyer and seller.
(d) Where service products are fairly homogeneous (e.g. car washes, dry cleaners) then pricing may be highly competitive. On the other hand regulatory agencies may discourage price cutting through prescribed fees and charges (e.g. trade associations or government agencies). The more unique a service then the greater the discretion of the seller to vary price according to what buyers in the market are prepared to pay. In such situations price may be used as a quality indicator and the reputation of the individual or organisation offering the service may give considerable price leverage.
(e) The inseparability of service from the person providing it may place geographic limits or time limits on markets that can be served. Equally buyers of services may search for service provision within certain geographic or time zones. The degree of competition operating within these limits will influence prices charged.
Top eight specific problems of pricings. The problems are:
- Pricing Over the Life Cycle of the Product
- The rate of Market Growth
- The Erosion of Distinctiveness
- The Significance of Cost
- Post-Skimming Strategies
- Mixed Strategies
- Pricing Products in Decline
Methods of Pricing Services
There are few schemes available which deal with pricing practices in services markets. Below is one of the more popular. Services organisations may use:
(i) Cost-Based Pricing
(a) Profit orientated: aiming at a minimum profit target. Prices fixed by professional and trade associations belong to this category. If entry is severely restricted, prices will be related more to the customer’s ability and willingness to pay and less to costs.
(b) Government-controlled prices: aiming at consumer protection by fixing prices on a cost-plus-a-modest-margin basis.
(ii) Market-orientated pricing
(a) Competitive: Either accepting the going rate or maintaining or increasing market share by an aggressive pricing policy.
(b) Customer oriented: Prices set with regard to consumers’ attitudes and behaviour. Quality and costs of services may be varied to remain in harmony with prices.
In service businesses it is often difficult to establish, for cost purposes, what a “unit” of service is, let alone to calculate its cost. Particular difficulties occur with highly intangible services where people are the chief element of cost. For example it may be difficult to measure the time spent in performing a service; also overhead allocation may be problematic. Yet it is difficult to develop a pricing strategy for a service business without some clear idea of costs; if only to establish how costs act as a constraint on the lower limit of price discretion available to the price maker. People-intensive services like professional services have to develop more accurate methods of identifying and allocating costs to overcome the problems of costing in such service businesses, i.e.
- The product is difficult to describe and measure;
- Costs are primarily people costs;
- Other costs (e.g. rent, travel) are people-related costs;
- People are more difficult to cost than machines.
Many of the tactical price techniques used to sell tangibles can be used to sell intangibles. In both cases the particular tactics used are dependent upon the kind of service involved, the target market and general conditions prevailing in that marketplace at the time (e.g. supply shortages therefore possible over-demand for service products). Some of the frequently used pricing tactics in services markets are now considered. They are:
(a) Differential or flexible pricing;
(b) Discrete pricing;
(c) Discount pricing;
(d) Diversionary pricing;
(e) Guarantee pricing;
(f) High price maintenance pricing;
(g) Loss leader pricing;
(h) Offset pricing;
(i) Price lining.