Service Marketing - Marketing Mix in Services Marketing - 2 , Study notes of Business Administration

Download Service Marketing - Marketing Mix in Services Marketing - 2 and more Study notes Business Administration in PDF only on Docsity! 4. Pricing basis, objectives and approaches Price is the only marketing mix element that produces revenue. All others represent cost. A pricing mistake can lead to business failure, even when all other elements of the business are sound. A price is an expression of value. The value rests in the usefulness and quality of the product itself, in the image that is conveyed through advertising and promotion, in the availability of the product through wholesale and retail distribution systems, and in the service that goes with it. A price is the seller‘s estimate of what all of this is worth to potential buyers, recognizing the other options buyers will have for filling the need the product is intended to satisfy. To the extent that the product or service finds markets and is profitable at given price levels, it provides a viable economic base for building and maintaining a business. In the competitive marketplace, pricing is a game. The struggle for market share focuses critically on price. Pricing strategies of competing firms, therefore, are highly interdependent. The price one competitor sets is a function not only of what the market will pay but also of what other firms charge. Prices set by individual firms respond to those of competitors; they also are intended often to influence competitors‘ pricing behaviour. All of marketing comes to focus in the pricing decision. A way to think about making a pricing decision is that price should be set somewhere between what the product costs to make and sell and its value to the customer. If price exceeds the perceived value of the product to pot ential purchasers, it has no market. If the price is below what the product costs to produce, the business cannot survive for very long. Where a price should be set between cost and customer value is a strategic decision. This decision is more difficult in the case of services than products. It is because of the key differences between customer evaluation of pricing for services and goods. For instance, customers often have inaccurate or limited reference prices for services. Monroe (1989) describes reference price as a price point in memory for a good or a service, and can consist of the price last paid, the price most frequently paid, or the average of all prices customers have paid for similar offerings. But many consumers are quite uncertain about their knowledge of the prices of services and the reference prices they hold in memory for services are not as accurate as what they hold in memory for products. This difference can be explained by the following factors: F 0 A 7 Service heterogeneity limits knowledge. The intangible nature of the services gives the service firms great flexibility in the configurations of services they offer. It leads to complex and complicated pricing structures. For example, consider a health insurance plan. F 0 A 7 Service providers are unwilling to estimate prices. The fundamental reason in many cases is that they do not know themselves what the services will involve until the process of service delivery. So a prior estimation is very difficult. For example, consider medical diagnosis and treatment. F 0 A 7 Individual customer needs vary. As a result, uniform pricing may not be feasible. For example, consider the legal services. F 0 A 7 Price information is overwhelming in services. In most cases, there are not list prices because of the reasons mentioned above. As a result, price comparison becomes difficult. F 0 A 7 Prices are not visible and they may be hidden or implicit. For example, consider the financial services. In few cases, many customers do not see the price at all until after they receive certain services. Another unique characteristic of services is the role of non-monetary costs (like time costs, search costs and psychological costs) in the evaluation of whether to buy a service. Most services require direct participation of the consumer and thus consume real time. Time becomes a sacrifice made to receive service in multiple ways. Also, waiting time for a service is usually longer and less predictable than waiting time to buy goods. Search costs (i.e. the effort invested to identify and select among desired services) are also higher for services than for physical goods. The most difficult non- monetary costs are the psychological costs incurred in receiving some services. Fear of not understanding (say, in the case of an insurance claim), fear of reject ion (say, in the case of a bank loan) and fear of uncertainty (say, the fear of being charged more than other consumers) constitute psychological costs that customers experience as sacrifices when purchasing and using services. When quality is demand and competition is not likely to lead to the best price. Hence markup pricing only works if that price actually brings in the expected level of sales. Advantages: (1) It covers all the costs (2) It is designed to provide the target rate of margin (3) It is generally a rational and widely accepted method (4) It is an easy to comprehend and simple method Disadvantages: (1) The cost calculations are based on a predetermined level of activity. If the actual level of activity varies from this estimated level, the costs may vary, rendering this method unrealistic. (2) If the costs of the firm are higher than its competitors, this method would render the firm passive in relation to price. (3) Another drawback is that sometimes the opportunity to charge a high price is foregone. (4) It ignores the price elasticity of demand. (5) The cost-based pricing would not be helpful for some of the objectives or tasks like market penetration, fighting competition and so on. (6) It imparts an in-built inflexibility to pricing decisions. 4.1.2 Value-based approach This approach uses the buyers‘ perceptions of value, not the seller‘s cost, as the key to pricing. The non-price variables in the marketing mix are used to build perceived value in the buyers‘ minds and set price to match the perceived value. Any firm using perceived-value pricing must learn the value in the buyers‘ minds for different competitive offers. Using a technique called trade- off analysis (to identify those service features that add more value than they cost), the customer‘s willingness to pay for a service can be determined. If the seller charges more than the buyers‘ perceived value, its sales will suffer. Many firms overprice their products, resulting in poor sales. Other firms underprice. Underpriced products sell well, but they produce less revenue than they would if the firm raised its price to the perceived-value level. When consumers discuss value, they may use the term in different ways. What constitutes value may be highly personal and hence vary from one customer to another. Zeithaml and Bitner (1996) categorize value as follows and describe the pricing approaches that are suited to these value definitions: 1. Value is low price – When monetary price is the most important determinant of value to a customer, the firm focuses mainly on price. The appropriate pricing approaches are: a. Discounting – To communicate to price-sensitive buyers that they are receiving value, service firms offer discounts or price cuts. b. Odd pricing – To make buyers perceive that they are getting a lower price, the services are priced just below the exact/round amount (i.e. Rs.99 instead of Rs.100) c. Synchro-pricing – It is the use of price to manage demand for a service by using customer sensitivity to prices. (For example, Internet service providers charge for the connection time during day when the demand is peak and offer it free during the night when the demand is less). d. Penetration pricing – New services are introduced at low prices to stimulate trial and widespread use. For example, a mobile phone service provider may offer a new feature such as ‗Voice sms‘ at a low ‗introductory‘ price for quick penetration. 2. Value is whatever I want in a product or service – When the customer is concerned principally with the ‗get‘ components of a service, monetary price is not of primary concern. The service is valued by the desirable intrinsic attributes it possesses and priced accordingly. The appropriate pricing approaches are: a. Prestige pricing – It is used by service firms who offer high quality or status services. Customers of these firms actually value the high price because it represents prestige or a quality image. For example, consider a Golf club membership. b. Skimming pricing – This is a strategy in which new services are introduced at high prices with large promotional expenditures. Many customers are more concerned about obtaining the service than about the cost of the service. 3. Value is the quality I get for the price I pay – When the customer primarily considers quality and monetary price, the task of the