Costs Involved in Service Pricing

There are the following costs involved in service delivery:

1. Monetary Costs: There will be fixed, variable, and financial costs associated with the production of the services along with the profits and they will determine how much the service organizations will charge from their customers:

  1. Variable Costs: These are the costs that mainly include direct materials, direct labor, and consumables. They have a certain percentage of contribution to each unit of product or service.
  2. Fixed Costs: These are the costs incurred on sales promotion and distribution costs, employee costs, marketing costs of advertising, etc. These costs are indirectly involved in the price of the product/service.
  3. Financial Costs and Profits: These costs are associated with depreciation, interest, and return on investments.

2. Non-Monetary Costs: In the case of some particular services, it is very important to engage customers in delivering the services. This will have one more aspect of the pricing of services.

This will require the customer to bear one more additional non-monetary costs apart from the normal monetary cost which he is going to pay for availing of the services.

This may require the customer to feel sensory displeasure (unpleasant smells, excessive heat, uncomfortable seating), have some psyche costs (mental efforts, feeling of inadequacy or fear) face some physical discomfort (in a self-service departmental store), or to waste time. Non-monetary costs usually include:

i. Time: While using the services, the customers are required to invest the time. Time here portrays the time spent by the customer to wait for the service delivery.

For example, the waiting time in public health care units is relatively more than in private health care units. The waiting time which is required to receive the service is likely to be expanded as a service provider has no control over a large number of customers and the total time involved in serving each customer.

ii. Search Effort: It means the time and efforts put by the customers in searching for the location of the service provider.

For example, a student who wants to take tuitions in Physics has to search for the best teacher. He/she cannot find teachers in shops, and there is no display of tuition fee of teachers and it is quite difficult to compare two teachers with each other.

Thus there will be an intensive search for these kinds of services. Thus, the time and effort put by the student in searching for the right teacher can be regarded as the search effort.

iii. Convenience: It is easier to obtain products than to obtain services. The goods are intensively distributed and offered to the customers on a wide scale.

But it is not the same in the case of services due to perishability and intangibility. It is not possible to distribute the services as widely as products. In order to obtain services, customers are required to reach the service provider.

iv. Psychic Costs: In the majority of the cases, psychological discomforts are associated with the services.

For example, it is mentally puzzling to go to a dentist. The following questions are involved while doing so; will I make sense? What will happen? Does the dentist know what to do? Will I act like a fool?

Thus, while using or buying the services, it is the psychic cost that the customers have to experience. While deciding the price of the service, the managers should avoid a number of games.

It is quite important for the managers to keep in mind that apart from the monetary value which will be paid by the customers, the service also costs physical and psychic discomfort, efforts, and time sacrifices.

In fact, price represents only one of the factors which a customer has to pay.

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