Marketing Services and the Customer Experience

Pricing

Marketing Services and the Customer Experience
Study unit 10

Services vs goods: customer issues

Customers may not know final price until service provision is complete
Customers use price as a proxy for quality
More difficult to compare prices across competitors

Services vs goods: provider issues

Intangibility means cost-based pricing is difficult
Generally, higher fixed costs
Limited economies of scale
Consumers under-estimate price of complex services

(Hoffman et al., 2002)

Pricing objectives

Price to…

Maximise profit

Build market share

Cover costs

Encourage trial

Fully utilise capacity

Establish positioning

(Avonlitis et al., 2005)

Provider costs

Fixed costs
costs that a supplier would incur even if no services were sold
Variable costs
the costs associated with serving an additional customer

Generic pricing approaches

Cost-based
Competition-based
Value-based

(Shipley and Jobber, 2001)

Cost-based pricing

Most common method is ‘full cost’ or ‘cost-plus’
Made up of variable costs per unit sold, plus contribution to fixed costs, plus mark-up
Appealing because it ensures all costs are covered and allows for a profit
BUT
Ignores demand
Ignores customer-perceived value
Ignores competition

Competition-based pricing

Use competition as an anchor for your price
Typical in industries where customers perceive little difference between competitors
BUT
Ignores customer-perceived value
Not viable for smaller firms to match larger firms

Value-based pricing

Price according to customer-perceived value (benefits minus costs)

BUT
Value is subjective
Not all customers have expertise to assess value
Customer costs are more than just monetary

Pricing strategies

Marginal pricing
Differential pricing
Discriminatory pricing

Marginal pricing

Use where fixed costs are high and variable costs low
Uses up spare capacity
BUT
Danger that fixed costs will never be covered
Devalues perception of service
Lowers price expectation

Differential pricing

Offer a differentiated service to different user groups and price accordingly:
class versus standard class
Premium versus standard hotel room
Seat location in theatre

Discriminatory pricing

Different price for same or similar service. Discriminate by…
User group
Location of consumption
Time of consumption/demand
Time/channel of booking

Pricing tactics

Real time (dynamic) pricing: algorithms calculate and adjust based on demand
Promotional pricing: short term discounts
Relational pricing
Bundling and unbundling

(Kienzler and Kowalkowski, 2017)

Pricing in expert/credence services

Referred to as discretionary services because the time allocated to producing the service is at the discretion of the service provider (difficult to say when the job is complete).
Techniques include:
Commission
Flat fee
Hourly rate
Performance-based
Reverse (e-)auction
(Tong and Rajagopalan, 2013)

References

Avlonitis, G., Indounas, K. and Gounaris, S. (2005) Pricing objectives over the service life cycle: Some empirical evidence. European Journal of Marketing, 39 (5/6), 696-714.
Hoffman, D., Turley, L., and Kelley, S. (2002) Pricing retail services. Journal of Research. 55 (12), 1015-1023.
Kienzler, M. and Kowalkowski, C. (2017) Pricing strategy: A review of 22 years of marketing research. Journal of Research, 78, 101-110.
Shipley, D. and Jobber, D. (2001) Integrative pricing via the pricing wheel. Industrial Marketing Management. 30 (3), 301-314.
Tong, C. and Rajagopalan, S. (2013) Pricing and operational performance in discretionary services. Production and Operations Management. 23 (4) 689-703.