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Unit 11: Pricing of Services
Introduction Notes
You must have heard a famous line that says, nothing in this world is free. You have to pay a
price to buy products and services. Price is one of the most critical elements of the marketing
mix for services - both for profit as well as not-for-profit firms. It is the only marketing mix
variable which generates revenue; all others product, promotion and place/distribution are
cost drivers.
Pricing is also one of the tactical tools least understood by the marketer. It is the most flexible of
all marketing tools (mixes), and can be changed even at the retail level. Pricing decisions have
far reaching implications for the organisations profits, market share, sales and social appeal.
Pricing in case of services is more difficult than in case of products. If you were a restaurant
owner, you can charge people only for the food that you are serving. But then who will pay for
the nice ambience you have built up for your customers? Who will pay for the band you have for
music? Thus, these elements have to be taken into consideration while deciding the prices of
your food.
In this unit, we will do a detailed study of the pricing strategies of services.
11.1 Concept of Value and Price in Services
Price is what customers are willing to pay for services. How much a customer has to pay
depends on the value he perceives in the service offer. The payment can be in many forms -
money, barter, or return services. Price can be simply explained, thus:
Price = quantity of money received by service provider/quantity of service received by the
buyer
!
Caution Price is a component of value. Most of us refer to price as value but they are not
the same.
The consumers perception of product quality changes with variations in price. The consumer
makes a straight-cut analogy: high price = high quality. This black box effect becomes a boon
for services as its intangibility prevents consumers from evaluating the offer correctly. Price
becomes very communicative and gives a convincing indication of quality. People have no
other way of convincing themselves of the quality of restaurants or a hospital except by the
price. That is how Nordstrom, the famous Seattle-based retailer, could differentiate itself from
others by offering high-end services and could successfully position itself as an up-market value
added.
Did u know? Stella Artois, which makes premium lager beer, slogans its high price as a
virtue: Reassuringly expensive.
Value is the ratio of perceived benefits of the service to be purchased to price and other added
costs. Travelling time, hassles, energy costs, and psychic costs are some examples of added costs.
The customer has to endure monetary and other costs for the service. Guarantees, warranties,
home delivery, quality, brands et al are examples of value as they are indicative of potential
benefits in an offer. In sum, the benefits are product value, service value, personnel value and
image value.
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