Lecture 6: Pricing the service

Summary

This video covers the complexities of pricing services, focusing on factors like value creation, cost considerations, and demand fluctuations. It highlights the unique challenges of pricing in service marketing, where time costs, social costs, and financial costs play a key role. The speaker also discusses strategies such as peak pricing, loyalty rewards, and competitor-based pricing. Elasticity of demand, psychological costs, and legal considerations are also explored, emphasizing how service providers can optimize pricing strategies to balance profitability, customer satisfaction, and market competition.

Takeaways

• 💡 Pricing a service requires understanding its value to the consumer and the costs associated with providing it.
• 🕒 Services are perishable and time costs are significant as they are created and consumed simultaneously.
• 💼 The type of costs involved in services can include labor, consumables, and the time available for service consumption.
• 🤝 Service encounters can be standardized or personalized, affecting both perceived value and social costs.
• 💸 Financial costs encompass the core service, tangible aspects, processes, and supplementary services.
• 🧠 Psychological costs relate to cognitive distance, or the difference between consumer expectations and experiences.
• 📈 Objectives in pricing can vary from increasing sales or market share to focusing on yield or profitability.
• 🔗 Demand considerations are crucial; services can exhibit elastic or inelastic demand based on price responsiveness.
• 🏢 Competitors' pricing strategies can influence a service provider's approach, whether to match or differentiate.
• 📊 Pricing strategies may include loss leaders, cost considerations for market share, or peak pricing during high-demand periods.

Q & A

What is the first step in pricing a service?

The first step in pricing a service is to determine its value to the consumer by understanding the associated costs and the impact of consumer demand on these costs.

How does consumer demand affect service costs?

As consumer demand increases, service costs also go up. For example, in industries like airline travel or hotels, higher demand leads to higher costs.

What are some types of costs associated with providing services?

The main types of costs include time costs, labor costs, consumables (e.g., supplies in hotels or airplanes), social costs (such as delivering personalized services), and financial costs (core service costs and supplementary services).

Why are services considered perishable, and how does this impact pricing?

Services are perishable because they are created and consumed simultaneously. This means that service providers must consider the time available to deliver the service, and unutilized service time leads to lost revenue, influencing pricing strategies.

What are social costs, and how do they affect service pricing?

Social costs arise from providing a more personalized service, which can create higher perceived value but at a greater cost to the provider. However, in some cases, a less personalized service may reduce costs.

How do psychological costs influence consumer decisions in service industries?

Psychological costs involve cognitive dissonance between consumer expectations and experiences. These costs can affect decisions, such as concerns about flight delays, which impact the perceived value and satisfaction of using a service like airlines.

What role do competitors play in pricing services?

Competitors can influence pricing strategies. Some service providers may price their services similarly to competitors offering similar services, while others differentiate by positioning themselves as low-cost or high-quality providers.

What is elastic demand in the context of service pricing?

Elastic demand occurs when demand is highly responsive to price changes. If a service price increases, the demand decreases significantly, and vice versa. Inelastic demand refers to situations where price changes have little impact on demand.

What are loss leader strategies, and how are they used in service pricing?

Loss leader strategies involve offering services at a low or no cost (e.g., free consultations or software demos) to attract consumers to try the service and potentially purchase more later, thereby increasing overall business.

How do peak pricing and niche provider pricing strategies differ?

Peak pricing involves charging higher prices during periods of high demand, like holidays, while niche provider pricing involves setting higher prices for specialized services with lower volume but greater value.