To put service pricing into practice, service marketers need to consider several points to have a well thought out pricing strategy. These points are as follows:
1. Total Amount of Pricing: Realistic decisions on pricing are critical for financial health. The task begins with determining the relevant costs, which set the relevant “floor” price.
The second step is to establish a “ceiling” price for specific market segments. This involves assessing market sensitivity to different prices, which reflects both the overall value of the service to prospective customers and their ability to pay.
Competitive prices provide the third input. The wider the gap between the floor and ceiling prices, the more room there is for maneuvering.
If a ceiling price is below the floor price, the manager has several choices. One alternative is to recognize that the service is non-competitive, in which case it should be discontinued.
The other is to modify it in ways that differentiate it from the competition and add value for prospective customers. This makes it competitive at a higher price.
Finally, a specific figure must be set for the price that customers will be asked to pay.
2. Basis for Pricing: To set a price, managers must define the unit of service consumption. Basis of pricing may include:
- Completing a specific service task, such as repairing a piece of equipment,
- Cleaning a jacket, or cutting a customer’s hair,
- Entry to service performance, such as a conference, film, concert, or sports event,
- Using an hour of a lawyer’s time,
- Occupying a hotel room for a night, or
- Renting a car for a week.
Some service prices are tied to the consumption of physical resources like food, water, or natural gas.
Rather than charging customers an hourly rate for occupying a table and chairs, restaurants put a sizeable mark-up on the food and drink items consumed.
There are some other bases of pricing, which are given below:
i. Price Bundling: Some products require a mixture of tangible and intangible elements.
Many hospitals and restaurants fall in the middle of the continuum because they rely on expensive equipment or facilities and skilled personnel to deliver a product.
If people prefer to avoid making many small payments, price bundling may be preferable – and it is certainly simpler to administer.
However, if practice customers dislike being charged for product elements they do not use, itemized pricing price may be better.
Bundled prices offer guaranteed revenue from each customer while giving users a clear idea in advance of how much the bill will be. By contrast, unbundled pricing provides customers with flexibility.
ii. Discounting: To attract the attention of prospective buyers or to boost sales during a period of low demand, firms may discount their prices, often publicizing this price cut with coupons or an advertising campaign.
Marketers of subscription services, such as cable television, internet service, cellular telephone service, or credit cards, often employ a strategy of offering the service at a discount – or even free of charge – for an introductory or a promotion period.
Selective price discounting targeted at specific market segments can help to fill capacity that would otherwise go unused.
3. Collection of Payment: Sometimes, firms choose to delegate the provision of supplementary services like billing to an intermediary.
Although the original supplier pays a commission, using a third party may still be cheaper and more efficient than performing those tasks itself.
Commonly used intermediaries include travel agents who make hotel and transportation bookings; ticket agents who sell seats for theatres, concert halls, and sports stadiums; and retailers who sell services ranging from prepaid phone cards to home and equipment repair.
4. Place of Payment: Payment for many services is collected at the service facility just before or immediately following service delivery.
When consumers purchase a service well in advance of using it, there are obvious benefits to using intermediaries that are more conveniently located or allowing payment by mail (airports, theatres, and stadiums, e.g., are often situated some distance from where potential customers live or work.)
A growing number of service providers now accept credit cards for telephone bookings and sales over the internet.
5. Timing of Payment: Two basic options are to ask customers to pay in advance (e.g., an admission charge, airline ticket, or postage stamps) or to bill them on completion of service delivery (e.g., restaurant bills and repair charges).
Occasionally a service provider may ask for an initial payment in advance of service delivery, with the balance being due later (e.g., management consulting).
This approach is also quite common with expensive repair and maintenance jobs, especially when the firm – often a small business with limited working capital – must buy materials upfront.
6. Mode of Payment: Service businesses must decide on the types of payments they will accept. Although cash is a simple payment method, it raises security problems and is not always convenient for customers (especially for large purchases).
Checks are convenient for customers, but sellers need to develop controls to discourage invalid payment. Credit cards are convenient and have the advantage of being accepted worldwide, regardless of currency.
Businesses that refuse to accept such cards increasingly find themselves at a competitive disadvantage.
7. Communicating Prices to the Target Markets: The final task is to decide how the organization’s pricing policies can best be communicated to its target markets.
People need to know the price for some product offerings well in advance of purchase. They may also need to know how, where, and when that service is payable.
This information must be presented in ways that are intelligible and unambiguous so that customers will not feel misled.
Customers expect salespeople and service representatives to be able to give prompt, accurate responses to queries about pricing, payment, and credit.
Finally, when the price is presented in the form of an itemized bill, marketers should ensure that it is both accurate and intelligible.