Chapter 6
The Pricing of
Services
Chapter Objectives
• Discuss the concept of perceived value as it pertains to comparing
total customer cost to total customer value.
• Understand the special considerations of service pricing as they
relate to cost, demand, customer, competitor, profit, product, and
legal considerations.
• Discuss the pros and cons of using cost-based pricing in service
pricing decisions.
• Discuss the circumstances under which price segmentation is most
effective.
• Explain satisfaction-based, relationship, and efficiency approaches
to pricing and provide examples of service firms that are using each
of these pricing strategies.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Opening Vignette:
Pay What You Can Restaurants
• The “Pay What You Can” movement began at Salt Lake City’s One
World Café more than 12 years ago
• Denver is now home to three such restaurants
• Customers can pay for their meals with cash or labor, or nothing at all
• The business model is simple:
– Feed all customers, regardless of their ability to pay
– Ask those who can afford it to contribute a little more to help others
• There are no set prices on the menu
• These restaurants bring together people from all walks of life, rather
than only the poor
• Entrepreneurs around the country are considering opening these
restaurants
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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)
• Pricing is approached in Britain like Russian
roulette—to be indulged in mainly by those
contemplating suicide (Chief Executive, 1981)
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Figure 6.1:
Buyer’s Perception of Value
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Figure 6.2: Unique Differences
Associated with Service Prices
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Cost Considerations
• Service pricing is often not finalized until after provision
– Consumers may not know the exact amount they will be charged
until after the service is performed
• Cost-oriented pricing is more difficult for services
– Cost of goods sold is either a small or nonexistent portion of total
cost
– Labor needs are challenging to forecast accurately in many
service settings
• Many services are typically characterized by a high fixedto variable-cost ratio
• Service economies of scale tend to be limited
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Demand Considerations
• Demand for services tends to be more
inelastic
• Cross-price elasticity considerations need
to be examined
• Price discrimination is a viable practice to
manage demand and supply challenges
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 6.3: Factors Influencing
Customer’s Price Sensitivity
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Criteria for an Effective Price
Segmentation Strategy
1. Different groups of consumers must have different responses to
price
2. The different segments must be identifiable, and a mechanism must
exist to price them differently
3. No opportunity should exist for people in one segment who have
paid a low price to sell their tickets to those in other segments
4. The segment should be large enough to make the exercise
worthwhile
5. The cost of running the price segmentation strategy should not
exceed the incremental revenues obtained
6. The customers should not be confused by the use of different prices
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Customer Considerations
• Price tends to be one of the few cues
available to consumers during prepurchase
• Service customers are more likely to use
price as a cue to quality
• Service consumers tend to be less certain
about reservation prices
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Competitive Considerations
• Comparing prices of competitors is more
difficult for service customers
• Self-service is a viable competitive
alternative
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Profit Considerations
• Price bundling makes the determination
of individual prices in the bundle of
services more complicated
• Price bundling is more effective in a service
context
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Product Considerations
• Compared to the goods sector, there tends to be many
different names for price in the service sector
• Consumers are less able to stockpile by taking advantage
of discount prices
• Product-line pricing tends to be more complicated
– For example, beginner, intermediate, and expert level options for
sports equipment are generally prices at different price points to
reflect the different levels of buyer and seller expertise
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Legal Considerations
• The opportunity for illegal pricing practices
to go undetected is greater for services
than goods
– To consumers, the issue is one of fairness and
dual entitlement
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Figure 6.4: Satisfaction-Based, Relationship,
and Efficiency Pricing Strategies
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Satisfaction-Based Pricing
• The primary goal is to reduce the amount of perceived
risk associated with the service purchase and appeal to
target markets that value certainty
– Service guarantees are quickly becoming a popular way of
attracting customers
– Benefit-driven pricing: a pricing strategy that charges customers
for services actually used as opposed to overall “membership”
fees
– Flat-rate pricing: a pricing strategy in which the customer pays a
fixed price and the provider assumes the risk of price increases
and overruns
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Relationship Pricing
• The primary objective is to enhance and expand
the firm’s relationship with its targeted consumers
– Long-term contracts: offer prospective customers
incentives for dealing with same provider over a
number of years
– Price bundling: the practice of marketing two or more
services in a single package at a single price
– Mixed bundling: price-bundling technique that allows
consumers to either buy Service A and Service B
together or purchase one service separately
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Efficiency Pricing
• The primary objective is to appeal to
economically minded consumers who are
looking for the best price
– Example: Southwest Airlines
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Adaptive Pricing
• The idea is to vary product attributes to appeal to a
variety of customers and their ideas of value
• Common adaptive-pricing strategies include:
– Altering the product size
– Utilizing new distribution channels (online versus brick and
mortar)
– Requiring purchase minimums
– Price versioning (“good,” “better,” and “best” quality)
– A la carte pricing (unbundled offerings)
– Promotional pricing (two-for-one deals)
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Some Final Thoughts
on Pricing Services
• The price should:
– Be easy for consumers 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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.