Page 208 - DMGT510_SERVICES_MARKETING

Unit 11: Pricing of Services

11.4 Pricing Approaches Notes

It is important for a service management student to know the difference between price and
pricing. While pricing is strategic, an activity under taken by the top management to decide the
way revenue would come, price is tactical, a one-time decision affecting the whole organisation
over a period of time. Price is the end result of pricing, which ends in a figure printed on the
price-tag or label. It is through price (apart from the other elements of the marketing mix) that
the firm would generate revenue, while pricing is a process leading to policy, on the basis of
which prices of products are finalized.

There are four important bases for price determination:
1. What it costs to produce a service.
2. The amount that consumers are willing to pay for it.
3. The price that competitors are charging.

4. The constraints on pricing that are imposed by government and/or regulatory bodies.

11.4.1 Cost as a Basis for Pricing

Simply put, in this method of pricing, the service marketer adds up all his costs, adds his profit
margin and the result is the price. The skill required of the service marketer is the ability to
identify and measure the different types of costs: direct, indirect, fixed and variable, etc. If the
marketer makes any error in identification or measurement of a particular type of cost input,
then it is going to affect his profitability - and he may not even know about it. Worse, he may not
know which service component is contributing to profits and which is not.
The cost structure of a service firm can be explained thus:

The total cost of producing a service can be divided into costs which are variable and those that
are fixed. Variable costs increase as service production increases; fixed costs do not change even
if an additional unit of service is produced. Fixed costs therefore cannot be attributed to any
particular unit of output.

In spite of many disadvantages, there are many reasons why ‘cost-plus’ type pricing methods
are so widely used in the service sector:
Essentially a simple model to follow in pricing decisions, it can be adopted by

entrepreneurs, small-scale service providers like restaurant-owners and leisure and
tourism-oriented professionals like travel agents, tour-operators, etc.
Prices are easy to calculate and especially in services, where the offer has to be tailored to

the individual needs of customers, it is easier to empower price decisions for services.
The predictive nature of the method helps the service marketer to better plan his resources

and potential. He does not have too many variables affecting his plan outlay and therefore
can look forward to realistic forecasts. With cost-oriented pricing method, the service
marketer, like a travel agent, has a better knowledge of his earnings and expenditures.
Cost-based pricing is adopted when the precise nature of the service that will actually be

provided is not known at the outset or its details and components, etc., are unknown.

Example: Arranging for a conference or an event to bring doctors and surgeons for a
pharmaceutical company. In this case, an agreement is made that the final price will be based in
some way on costs.

LOVELY PROFESSIONAL UNIVERSITY 203