Pricing Strategies for Services

Various methods of service pricing are as follows:

Service Pricing Approaches

1. Cost-Based Pricing: The most important variable, as well as the basis of pricing a particular product, is the production cost of that product.

Costs may be of different kinds like total cost, the variable cost, fixed cost, marginal cost, average cost, etc. These costs must be critically analyzed in order to set a product’s price.

The cost of production, i.e., the total cost incurred in facilitating the service, determines the price of the services. Cost-based prices are determined through the specific accumulation of the accounting data.

2. Competitor-Based Pricing: There can be tough competition among the service providers who are offering identical services, fulfilling similar requirements, or offering varied services.

The competitor-based pricing approach suggests that the service provider should set its price in accordance with the other market players.

A large number of companies carefully analyze the price structure of the competitors before setting their service’s price-

Firms formulate premeditated policies and choose a competitive market for selling their services. When a company prices its services using this method, it has four pricing options:

i. Going Rate Pricing: In this method, the competitor’s price is taken as the benchmark to set the price of the service.

A firm follows this approach either when it is new in the market or when an already established firm launches new service in the existing market. This type of pricing is suitable for markets with severe competition.

ii. Pricing below the Competition: When a company sets the price of its service lower than the level of competition, i.e., below the price that the competitor is charging for a similar service, it is called ‘pricing below the level of competition.’

This method is effective in markets where customers equate to price. It is implemented by firms that are new in the market.

iii. Pricing above the Competition: When a company sets the price of its service upper than the level of competition, i.e., above the price that the competitor is charging for a similar service, it is called ‘pricing above the level of competition’ or ‘premium pricing.’

This is done to depict a better quality service by the company. This pricing policy can be implemented only by firms that have a good reputation in the market (as then- image is that of a quality producer in the customer’s mind). This makes them the market leader.

iv. Sealed-Bid Pricing: This is the system of tenders and quotations where bids are received from service providers. The sealed bid is another competitive pricing method followed by firms.

There are numerous projects, government purchases, and industrial marketing activities where suppliers are called to submit their quotations to get the tender.

The prices that are quoted show the cost incurred by the company and what it understands about competition.

3. Demand-Based Pricing: The fundamental aspect of the demand oriented pricing is that the cost involved does not have an impact on the profits but on demand.

This method, contrary to cost-based pricing, begins by finding out the price that the consumer market intends to pay for the service.

Then, a backward estimation of the level of cost and profit (that the organization can afford due to that price) is undertaken.

Following methods are used to determine the customer demand-based pricing:

i. ‘What the Traffic Can Bear’ Pricing: Using this method, the seller charges the customer with the maximum possible price that they will pay willingly under the present situation.

This method is far from being sophisticated and is followed by retail traders and a few manufacturers.

ii. Skimming-based Pricing: Skimming pricing is the commonest pricing method. In this method, the companies, by selling at premium prices, fulfill their desire of skimming the market.

iii. Penetration-based Pricing: Contrary to skimming pricing, penetration-based pricing focuses on keeping the prices low compared to current competitors.

Market penetration cm- gaining initial market share in an intensely competitive market, the main objective of this pricing method.

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