Chapter 8 Setting a Price for the Service

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Objectives 1. To examine why service prices vary so much 2. To explore yield management in services 3. To explain the role of pricing objectives in service organizations 4. To analyze the challenge of establishing value for a service offering 5. To show service costs may be calculated 6. To explore price bundling strategies for services 7. To examine additional pricing considerations Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|2

Outline I. III. IV. V. Introduction Why Do Service Prices Vary? Yield Management in Services Pricing Objectives and Approaches The Relationship Between Service Price and Value VI. Calculating Service Costs VII. Price Bundling VIII. Additional Pricing Considerations IX. Summary and Conclusion Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|3

Introduction • Price labels vary; You might pay: – – – – A commission to a stockbroker A membership fee to a fitness club A finance charge to a credit card company A premium to an insurance firm A fare for transportation Rent for housing A rate for telephone services Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|4

Why Do Service Prices Vary? • Inseparability and perishability characteristics of services • Creative ways to maximize revenues and reduce costs per customer served Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|5

Yield Management in Services • The objective of yield management is to maximize profits from the fixed operating assets – labor, equipment, and facilities • The inherent trade-off between price and demand makes yield management a difficult strategy for services marketer Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|6

Pricing Objectives and Approaches • Profit-oriented objectives stress generating high returns on the service’s investments in resources and labor • Volume-oriented objectives stress processing large numbers of customers or their possessions Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1|7

Pricing Objectives and Approaches (cont’d) • A cost-based approach focuses on the price floor: the minimum price that covers all costs of producing the service • A customer-based approach focuses on the price ceiling: the maximum price customers are likely to pay • A competition-based approach establishes the service’s price in relation to the competition Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 10

The Relationship Between Service Price and Value • Value is an assessment of the benefits of a service versus the costs associated with it. – Cost-benefit analysis – Price/demand elasticity Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 11

Calculating Service Costs • Cost determinations – – – Direct costs Indirect costs Fixed costs Variable costs Allocated overhead costs Shared costs Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 12

Calculating Service Costs (cont’d) • Formula for calculating price – P = TC + NP and TC = FC + SC + VC Where: • P=Price • TC=Total Costs • NP=Net Profits • FC=Fixed Costs • SC=Shared Costs • VC=Variable Costs Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 13

Price Bundling • Price bundling links several service offerings or features into one attractive price to give different customer segments a packaged service offering. Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 15

Web Sites • The Broadmoor (http: //www. broadmoor. com), p. 111 • Forbes (http: //www. forbes. com/), p. 111 • AAA (http//: www. AAA. com/), p. 111 • Travel+Leisure Magazine (http: //www. trave-landleisure. com/), p. 111 • Zagat (http: //www. zagat. com/), p. 111 • Holiday Inn (http: //www. sixcontinentshotels. com), p. 111 Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 20

Web Sites (cont’d) • Motel 6 (http: //www. motel 6. com), p. 111 • United Airlines (http: //www. united. com), p. 124 • Northwest Airlines (http: //www. nwa. com), p. 124 • American Airlines (http: //aa. com), p. 124 • Delta Airlines (http: //www. delta. com), p. 124 • Marriott (http: //www. marriott. com), p. 129 Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 21

Web Sites (cont’d) • Snap. Fish (http: //www. snapfish. com), p. 124 • Shutterfly (http: //www. shutterfly. com), p. 124 • Picasa (http: //picasa. google. com), p. 124 • Flickr (http: //www. flickr. com), p. 124 • Photobucket (http: //www. photobucket. com), p. 124 • Smug. Mug (http: //smugmug. com), p. 124 Fisk/Grove/John-4 e, Copyright © Cengage Learning. All rights reserved. 1 | 22