Setting a Price for the Service Rendered Price
- Slides: 30
Setting a Price for the Service Rendered
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 Mifflin Company. All rights reserved. 3
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
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
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 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 • 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 • 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 Mifflin Company. All rights reserved. 12
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 Variable Costs Copyright © Houghton Mifflin Company. All rights reserved. 14
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 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 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 © Houghton Mifflin Company. All rights reserved. 18
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, 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 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 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, 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
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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 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
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 prices • Participation • lower price for customer effort Copyright © Houghton Mifflin Company. All rights reserved. 30
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