1 / 29

The Art of Pricing: Factors Influencing Customer Price Sensitivity

This chapter explores the various factors that influence customer price sensitivity in the context of pricing services, including perceived substitutes, unique value, switching costs, difficult comparison, price-quality effect, expenditure effect, end-benefit effect, shared-cost effect, fairness effect, and inventory effect. It also discusses the viability of price discrimination as an alternative pricing strategy.

jimmiebennett
Download Presentation

The Art of Pricing: Factors Influencing Customer Price Sensitivity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 7The Pricing of Services

  2. THE ART OF PRICING • Pricing policy is the last stronghold of medievalism in modern management… [Pricing] is still largely intuitive and even mystical in the sense that the intuition is often the province of the big boss (Dean, 1947).

  3. THE ART OF PRICING • Pricing is approached in Britain like Russian roulette--to be indulged in mainly by those contemplating suicide (Chief Executive, 1981).

  4. Figure 7.1 Buyer’s Perception of Value Product value Service value Total customer value Personnel value Image Value Buyer’s perception of value Monetary cost Time cost Total customer cost Energy cost Psychic cost Source: Philip Kotler, Marketing Management, 9th ed. (Englewood Cliffs, NJ: Prentice-Hall), 1997, p. 37.

  5. DEMANDCONSIDERATIONS • Demand tends to be inelastic • Cross price and income elasticities need to be examined • Price discrimination is a viable alternative

  6. Perceived-substitutes Unique value Switching costs Comparison effect Price-quality effect Expenditure effect End-benefit effect Shared-cost effect Fairness effect Inventory effect FACTORS INFLUENCING CONSUMER PRICE SENSITIVITY

  7. PRICE SENSITIVITY FACTORS • Perceived Substitute Effect • few search attributes • providers often lack resources and marketing expertise • limited product mix

  8. PRICE SENSITIVITY FACTORS • Unique Value Effect • conveying “uniqueness” is difficult • provider may need to educate the market • uniqueness is often short-lived

  9. PRICE SENSITIVITY FACTORS • Switching Costs • higher levels of perceived risk • uncertainty involved in changing providers • consequences associated with a bad outcome

  10. PRICE SENSITIVITY FACTORS • Difficult Comparison Effect • high number of experience attributes • inherent heterogeneity

  11. PRICE SENSITIVITY FACTORS • Price-Quality Effect • price acts as a quality indicator when consumers: • believe that quality differs among providers • believe that low quality imposes greater consequences • lack other sources of objective information

  12. PRICE SENSITIVITY FACTORS • Expenditure Effect • amount of expenditure relative to consumer household income.

  13. PRICE SENSITIVITY FACTORS • End-benefit Effect • the more price sensitive consumers are to the cost of the end-benefit, the more sensitive they will be to purchases that contribute to the end-benefit. • Price bundling adds value to the consumer’s end-benefit.

  14. PRICE SENSITIVITY FACTORS • Shared-cost Effect • consumer price sensitivity decreases as the shared-costs with third parties increase.

  15. PRICE SENSITIVITY FACTORS • Fairness Effect • fairness is typically assessed by comparing the price to: • previous prices paid for similar services • prices paid for similar services under similar circumstances • the benefit gained • assessing “service” fairness is difficult

  16. PRICE SENSITIVITY FACTORS • Inventory Effect • consumers are able to protect themselves from future price increases by building inventories.

  17. PRICE SENSITIVITY(CONCLUSIONS) • Consumers of professional services tend to be less price sensitive. • Need to identify perceptions of key sensitivity factors across service industries • Key factors may be useful for differentiation purposes • Providers may reinforce or alter beliefs pertaining to key factors.

  18. DEMANDCONSIDERATIONS • Price discrimination is a viable alternative

  19. CRITERIA FOR EFFECTIVEPRICE DISCRIMINATION • Different groups of consumers must have different responses to price. • Different segments must be identifiable, and a mechanism must exist to price them differently. • Individuals in one segment who have paid a low price should not be able to pass those savings on to other segments.

  20. CRITERIA FOR EFFECTIVE PRICE DISCRIMINATION • The segment should be large enough to make it worthwhile. • Costs should not exceed the incremental revenues obtained. • Customers should not be confused.

  21. COSTCONSIDERATIONS • Price is sometimes not know until after the service has been produced • Cost-oriented pricing is more difficult • activity-based costing breaks down the organization into a set of activities, and activities into tasks, which convert materials, labor, and technology into outputs. • High fixed cost to variable cost ratio • Economies of scale tend to be limited

  22. CUSTOMERCONSIDERATIONS • Price tends to be one of the few search clues available. • More likely to use price as a quality cue • The relationship between price and information may be U-shaped. • Consumers are less certain about reservation prices

  23. COMPETITIVECONSIDERATIONS • Comparing prices is more difficult • Self-service is a viable alternative

  24. PRODUCTCONSIDERATIONS • Many different names for price • Consumers are less able to stockpile by taking advantage of discount prices • Product-line pricing is more difficult • Less likely to use odd-pricing • Price discounting tends to be less common

  25. LEGALCONSIDERATIONS • Opportunity exists to engage in ethical misconduct and excessively charge consumers for services.

  26. EMERGING SERVICE PRICING STRATEGIES • Satisfaction-based pricing • primary goal is to reduce the amount of perceived risk. • benefit-driven pricing--charges customers for services actually used as opposed to overall membership fees. • flat-rate pricing--customer pays a fixed price and the provider assumes the risk of price increases and overruns.

  27. EMERGING SERVICE PRICING STRATEGIES • Relationship Pricing • primary objective is to enhance the firm’s relationship with its targeted consumers. • long-term contracts--offers price and nonprice incentives for dealing with the same provider over a number of years. • pricing bundling--marketing two or more services as a single package for a single price.

  28. EMERGING SERVICE PRICING STRATEGIES • Efficiency Pricing • primary objective is to appeal to economically-minded consumers by delivering the best and most cost-effective service for the price. • Cost-leader pricing

  29. SERVICES PRICING:FINAL THOUGHTS • The price should: • Be easy for customers to understand • Represent value to the customer • Encourage customer retention and facilitate the customer’s relationship with the providing firm • Reinforce customer trust • Reduce customer uncertainty

More Related