Page 209 - DMGT510_SERVICES_MARKETING

Services Marketing

Notes  A service provider is allowed by many professional associations to increase prices beyond
those originally agreed in his estimate - on the basis of the actual costs incurred.
Measured against these advantages, there are many problems for a service marketer to price his
services on the basis of historical costs:

Cost-based pricing does not take into account competition that a service might face at any

given time. Neither does it take into account that some customers may value the same
service more highly than others.
It is sometimes more difficult to calculate costs in service than for goods – mainly due to

the intangibility factor. The structure of costs facing many service businesses is typically
different from goods.
It is easier to determine costs for previous accounting periods (historical) than to forecast

what these costs will be in the future (predictive).
Cost-based pricing can be of two types:
Full cost or mark-up pricing

Marginal Cost or Contribution pricing

Full Cost or Mark-up Pricing

Here prices are based on total or full cost plus the desired profit. Retailers would call this desired
profit as mark-up. The break-even analysis is a variation of this method. As elaborated before,
it does not take into account different types of costs. These costs, in addition, are affected by
changes in the volume of output or the type of output. Full cost pricing ignores consumer
demand.

Marginal Cost Pricing

A special kind of cost-based pricing occurs when service firms choose not to include their fixed
costs.

Example: A student in a computer training school during the exam seasons, a customer
in a Goa hotel during the monsoon, a visitor to EsselWorld theme park during the rainy season
or a diner in a restaurant is charged not on the basis of total unit cost of producing the offer, but
only the additional costs which result directly from servicing that additional customer.
This is normally used when most of the service firm’s output has been sold at a full price that has
recovered its fixed costs - but in order to keep its workforce engaged during the slack season, the
firm reduces its price. In this way it manages to cover its variable costs.

Those service industries with low short-term supply elasticity and high fixed costs, like BPOs,
use marginal cost pricing extensively.

Task Enlist the value and costs involved in purchase of a sports club membership.

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