Setting a Price for the Service Rendered Price

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Setting a Price for the Service Rendered

Setting a Price for the Service Rendered

Price Labels (or Names) Vary • You might pay: • A commission to a

Price Labels (or Names) Vary • You might pay: • A commission to a stockbroker • A membership fee to a fitness club • A finance charge to a credit card company • A premium to an insurance firm • A fare for transportation • Rent for housing • A rate for telephone services Copyright © Houghton Mifflin Company. All rights reserved. 2

Why Do Service Prices Vary? • Perishability • Yield management systems Copyright © Houghton

Why Do Service Prices Vary? • Perishability • Yield management systems Copyright © Houghton Mifflin Company. All rights reserved. 3

Yield Management in Services • The objective of yield management is to maximize profits

Yield Management in Services • The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities. Copyright © Houghton Mifflin Company. All rights reserved. 4

Copyright © Houghton Mifflin Company. All rights reserved. 5

Copyright © Houghton Mifflin Company. All rights reserved. 5

Pricing Objectives • Profit-oriented objectives • stress generating high returns on the service’s investments

Pricing Objectives • Profit-oriented objectives • stress generating high returns on the service’s investments in resources and labor. • Volume-oriented objectives • stress processing large numbers of customers or their possessions. Copyright © Houghton Mifflin Company. All rights reserved. 6

Copyright © Houghton Mifflin Company. All rights reserved. 7

Copyright © Houghton Mifflin Company. All rights reserved. 7

Pricing Approaches • Cost-based approach • focuses on the price floor: the minimum price

Pricing Approaches • Cost-based approach • focuses on the price floor: the minimum price that covers all costs of producing the service. • Customer-based approach • focuses on the price ceiling: the maximum price customers are likely to pay. • Competition-based approach • establishes the service’s price in relation to the competition. Copyright © Houghton Mifflin Company. All rights reserved. 8

The Relationship Between Service Price and Value • Value is an assessment of the

The Relationship Between Service Price and Value • Value is an assessment of the benefits of a service versus the costs associated with it. • Cost-benefit analysis • Price/demand elasticity Copyright © Houghton Mifflin Company. All rights reserved. 9

Basic Pricing Anchors • Price floor - the marketer’s minimum • Costs and profits

Basic Pricing Anchors • Price floor - the marketer’s minimum • Costs and profits • Price ceiling - the customer’s maximum • Perceived value vs. needs (necessity vs. discretion) • Price benchmarks - the competitors’ prices • Comparability indicators Copyright © Houghton Mifflin Company. All rights reserved. 10

Basic Pricing Decisions • Levels and approach • Why? Market share, patronage or profit

Basic Pricing Decisions • Levels and approach • Why? Market share, patronage or profit • Bases • What basis? Hourly, flat fee, contingency fee? • Collection • How and when? Before, during, after Copyright © Houghton Mifflin Company. All rights reserved. 11

Calculating Service Costs • Cost determinations • Formula for calculating price Copyright © Houghton

Calculating Service Costs • Cost determinations • Formula for calculating price Copyright © Houghton Mifflin Company. All rights reserved. 12

Variable Costs are… Expenses that are uniform per unit of output within a relevant

Variable Costs are… Expenses that are uniform per unit of output within a relevant time period As volume increases, total variable costs increase Copyright © Houghton Mifflin Company. All rights reserved. 13

THERE ARE TWO CATEGORIES OF VARIABLE COSTS 1. Cost of Goods Sold 2. Other

THERE ARE TWO CATEGORIES OF VARIABLE COSTS 1. Cost of Goods Sold 2. Other Variable Costs Copyright © Houghton Mifflin Company. All rights reserved. 14

Variable Costs – Cost of Goods Sold § Covers materials, labor and factory overhead

Variable Costs – Cost of Goods Sold § Covers materials, labor and factory overhead applied directly to production Copyright © Houghton Mifflin Company. All rights reserved. 15

Other Variable Costs Expenses not directly tied to production but vary directly with volume

Other Variable Costs Expenses not directly tied to production but vary directly with volume Examples include: § Sales commissions, discounts, and delivery expenses Copyright © Houghton Mifflin Company. All rights reserved. 16

Fixed Costs Expenses that do not fluctuate with output volume within a relevant time

Fixed Costs Expenses that do not fluctuate with output volume within a relevant time period They become progressively smaller per unit of output as volume increases No matter how large volume becomes, the absolute size of fixed costs remains unchanged Copyright © Houghton Mifflin Company. All rights reserved. 17

THERE ARE TWO CATEGORIES OF FIXED COSTS 1. Programmed costs 2. Committed costs Copyright

THERE ARE TWO CATEGORIES OF FIXED COSTS 1. Programmed costs 2. Committed costs Copyright © Houghton Mifflin Company. All rights reserved. 18

Fixed Costs – Programmed Costs Result from attempts to generate sales volume Examples include:

Fixed Costs – Programmed Costs Result from attempts to generate sales volume Examples include: § Advertising, sales promotion, and sales salaries Copyright © Houghton Mifflin Company. All rights reserved. 19

Fixed Costs – Committed Costs required to maintain the organization Examples include nonmarketing expenditures,

Fixed Costs – Committed Costs required to maintain the organization Examples include nonmarketing expenditures, such as: § rent, administrative cost, and clerical salaries Copyright © Houghton Mifflin Company. All rights reserved. 20

Relevant and Sunk Costs Copyright © Houghton Mifflin Company. All rights reserved. 21

Relevant and Sunk Costs Copyright © Houghton Mifflin Company. All rights reserved. 21

Relevant Costs are… Future expenditures unique to the decision alternatives under consideration. Expected to

Relevant Costs are… Future expenditures unique to the decision alternatives under consideration. Expected to occur in the future as a result of some marketing action Differ among marketing alternatives being considered In general, opportunity costs are considered relevant costs Copyright © Houghton Mifflin Company. All rights reserved. 22

Sunk Costs are… The direct opposite of relevant costs. Past expenditures for a given

Sunk Costs are… The direct opposite of relevant costs. Past expenditures for a given activity Typically irrelevant in whole or in part to future decisions Examples of sunk costs: Past marketing research and development expenditures Last year’s advertising expense Copyright © Houghton Mifflin Company. All rights reserved. 23

Sunk Cost Fallacy When marketing managers attempt to incorporate sunk costs into future decisions,

Sunk Cost Fallacy When marketing managers attempt to incorporate sunk costs into future decisions, they often fall prey to the Sunk Cost Fallacy – that is, they attempt to recoup spent dollars by spending even more dollars in the future. Example: Continuing to advertise a failing product heavily in an attempt to recover what has already been spent on it. Copyright © Houghton Mifflin Company. All rights reserved. 24

Copyright © Houghton Mifflin Company. All rights reserved. 25

Copyright © Houghton Mifflin Company. All rights reserved. 25

Cost Calculations in Pricing a Service P = TC + NP where TC =

Cost Calculations in Pricing a Service P = TC + NP where TC = FC + SC + VC P TC NP FC SC VC price; total costs; net profit; fixed costs; shared costs; variable costs. Copyright © Houghton Mifflin Company. All rights reserved. 26

Price Bundling and Other Strategies • Price bundling means linking several service offerings or

Price Bundling and Other Strategies • Price bundling means linking several service offerings or features into one attractive price to give different customer segments a packaged service offering. Copyright © Houghton Mifflin Company. All rights reserved. 27

Copyright © Houghton Mifflin Company. All rights reserved. 28

Copyright © Houghton Mifflin Company. All rights reserved. 28

Pricing Considerations • Positioning • price/quality relationship • Portfolio mix • segments differ in

Pricing Considerations • Positioning • price/quality relationship • Portfolio mix • segments differ in price sensitivity • Demand/capacity • demand management tool • Membership • affinity benefits Copyright © Houghton Mifflin Company. All rights reserved. 29

Pricing Considerations • Customization • higher priced tailored versions • Price bundling • combination

Pricing Considerations • Customization • higher priced tailored versions • Price bundling • combination prices • Participation • lower price for customer effort Copyright © Houghton Mifflin Company. All rights reserved. 30