Pricing in Service Industry

1. Pricing in Service Industry By Vandana Sachdeva andPrabhleen Sarna

2. PRICE-A value that will purchase a definitequantity, weight, or other measure of a good or service PRICING is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product.

3. “A price is not merely a function of costs and margins…” Costs + Margins = PRICE …it is an expression ofVALUE

4. Minimize OptimizeMaximize Costs + Margins = PRICE VALUE • Product performance Usefulness & Quality • Image / Aspirations Brand Equity • Availability Distribution Strategy • Service Before/During & After sales • Production costs • Indirect costs • Advertisingcosts • Distribution costs • Manufacturer’s margin • Distributor’smargin • Seller’s margin

5. PRICE - One of the 4 P’s of Marketing Mix

6. When should a firm set price for the first time? When. . . • It develops a new product • It introduces its regular product into a new distribution channel or geographical area • It enters bids on new contract work (as in Industrial Sale)

7. SIGNIFICANCE OF PRICING • This is the only element in the marketing mix that brings in the revenues. All the rest are costs. PROFIT=(PRICE X QUANTITY SOLD) – TOTAL COST • Price communicates the value positioning of the product. • Price has a psychological impact on consumers and hence marketers can use it symbolically.

8. OBJECTIVES OF PRICING • Profit maximization in the short term • Profit optimization in the long run • Price Stabilization • Facing competitive situation • Maintenance of market share • Capturing the Market • Entry into new markets • Ability to pay

9. FACTORS AFFECTING PRICING DECISIONS Internal Factors External Factors

10. INTERNAL FACTORS • Marketing Objectives • Positioning • Target Group • Marketing Mix Strategy • 4 P’s • Costs • Fixed & Variable • Management Approach • Responsibility • Perspective

11. Market Pure Competition Monopolistic Competition Oligopolistic Competition Pure Monopoly Demand Elastic / Inelastic Competition Competitors’ offers Competitiors’ reactions Economy Buying power Government Influence Laws & Regulations EXTERNAL FACTORS

12. HOW SERVICE PRICES DIFFER FROM GOODS PRICES (Customers Perspective) • Customer knowledge of service prices: • Service variability limits knowledge • Providers are unwilling to estimate prices • Individual customer needs vary • Collection of price information is overwhelming • Prices are not visible • Role of non-monetary costs: • Time costs • Search costs • Convenience costs • Psychological costs • Price as an indicator of service quality

13. What Do Customers Know about the Prices of Services? Banking? Wedding Advisor? Hospital? Nutritionist?

14. Customers Will Trade Money for Other Service Costs = or or Time Psychic Costs Effort

16. Cost-Based Pricing • Cost-Plus PricingProduct Cost + Standard Mark-Up = Price • BE Analysis & Target Profit Pricing A necessary survival tool

17. Buyer-Based Pricing • Perceived ValueConsider buyers’ perceptions of value NOT the cost

18. Competition-Based Pricing • Basing prices on competitors’ prices • Premium Pricing • Going-Rate Pricing • Discount Pricing

19. Three Basic Price Structures and Difficulties Associated with Usage for Services PROBLEMS: 1. Small firms may charge too little to be viable 2. Heterogeneity of services limits comparability 3. Prices may not reflect customer value PROBLEMS: 1. Costs difficult to trace 2. Labor more difficult to price than materials 3. Costs may not equal value Cost-Based Competition-Based Demand-Based PROBLEMS: 1. Monetary price must be adjusted to reflect the value of non-monetary costs 2. Information on service costs less available to customers, hence price may not be a central factor

20. The Pricing Challenge Setting right price is a crucial decision to the profitability of services and of all the decisions of marketing mix, pricing decisions are hardest to make. It is the most challenging decision the business must take. The marketer may decide to follow any strategy that suits best for their services and earn revenues. Revenues PRICE Generates

21. Price Change • Reaction of Customers:Choose a substitute / Forgo the purchase • Reaction of Competitors/responding to competitor’s price change: • Maintain price • Maintain price and add value • Reduce price • Increase price and quality • Launch a low price fighter

22. Customer’s Perceived Value Value = Quality ÷ Price • Value is low Price. • Value is what they want in a service. • Value is the quality they get for the price. • Value is all that I get for all that I give

23. Price Quality Strategies Quality Price

24. Pricing Strategies

25. Penetration Pricing

26. Market Skimming

27. Value Pricing

28. Loss Leader

29. Psychological Pricing

30. Going Rate (Price Leadership)

31. Tender Pricing

32. Price Discrimination

33. Destroyer Pricing/Predatory Pricing

34. Absorption/Full Cost Pricing

35. Marginal Cost Pricing

36. Contribution Pricing

37. Target Pricing

38. Cost-Plus Pricing

39. Influence of Elasticity

40. Discounts and Allowances • Cash Discount • Trade Discount • Early payment • Seasonal Discount • Bulk purchase (Quantity Discount) • Commission • Other Allowances

41. Thank you all for your co-operation!