PRICING OF SERVICES
PRESENTED BY: HIMANSHU GUPTA SASHANK.V.V.N VIPUL SRIVASTAVA
WHAT IS PRICING
Pricing is the function of determining
product value in monetary terms by the marketing management of a company before it is offered to the target consumer for sale
Objectives of Pricing decisions
1. To maximize the profits
2. Price stability 3. Competitive situation
4. Achieving a Target-return
5. Capturing the market 6. Ability to pay
7. Long-run welfare of the firm
8. Margin of profit to middlemen
Pricing techniques
These techniques include :
Cost
based pricing Demand based pricing Competition based pricing Affordability based pricing
Cost-based pricing
Cost-based pricing is where the price includes the cost of ingredients and cost of operating the business. Used in services like advertising, contracting etc. Price = Direct Cost + Overhead Cost + Profit Margin
This method can be sub-classified as : i. Cost plus pricing ii. Full cost pricing iii. Target profit pricing iv. Marginal cost pricing
Cost-based pricing
(i) Cost plus pricing Under this method, a fixed percentage of profit is added to the cost. This fixed percentage of profits could be the manufacturers profit, wholesaler's profit and the retailers profit.
Cost-based pricing
(ii) Full cast pricing It is also called absorption cost pricing and uses standard costing techniques. In it, total cost is computed by adding the variable and fixed cost incurred in the product manufacturing, administration and selling. On the total cost, the required margin of profit is added.
Cost-based pricing
(iii)Target profit pricing
It is also known as rate of return pricing. It is similar to full cost pricing but is different from it in some respects. In it also the total cost is computed in the same manner and a required margin of profit is added. This required margin of profit is arrived at on a rational approach by keeping in mind the return on investment criteria rather than done arbitrarily as in full cost pricing method.
Cost-based pricing
(iv) Marginal cost pricing The marginal cost pricing aims at maximizing the contribution towards fixed cost. The marginal cost will include all the direct variable cost of the product. In addition, portion of the fixed costs is also realized.
CHALLENGES
Costs are difficult to trace as cost based pricing involves defining the units in which a service is purchased Thus services are sold in terms of input units (like hours) rather units of measured output Labor is more difficult to price than material Actual service costs mat misrepresent the value of the service to the customer Used in industries in which cost can be estimated in advance like, advertising, construction
Demand based pricing
Demand based pricing is a system where the price is based on the customer demand or need for the product. If the product is unique or innovative, a value-based price may help create a demand for the product or service. Example Show time in multiplexes, happy hours in restaurants, midnight buffets. Etc The following method belong to the category of demand based pricing: i. Skimming pricing ii. Penetration pricing
Demand based pricing
(i) Skimming pricing
Skimming pricing aims at high price and high profits in the early stage of marketing. As the word skimming indicates, this method literally skims the market in the first instance through high price and subsequently settles down for a lower prices. The method is very useful in the pricing of new products, especially the ones that have a luxury or specially element.
Demand based pricing
(ii) Penetration pricing It is opposite of the skimming pricing. It is intended to help the product penetrate into markets to hold a position. This can be done only by adopting a low price in the initial period or till such time the product is finally accepted by customers.
This method of pricing is desirable under the following conditions : 1. When sales volume of the product is very sensitive to price. 2. When a large volume of sales is to be effected. 3. When stability of price is required.
CHALLENGES
Monetary price must be adjusted to reflected the value of non-monetary costs Information on service costs may be less available to customers, making monetary price not as salient indicator to quality
Competition based pricing
This pricing method is useful when the product is homogeneous and market is highly competitive. Under this method, the company tries to maintain the price of its products more or less at par with its competitors price. EX: Fitness clubs, Driving classes, Computer classes etc. This pricing method includes : i. Premium pricing ii. Discount pricing iii. Going rate pricing iv. Tender pricing
Competition based pricing
(i) Premium pricing Premium pricing means pricing above the level adopted by competitors. (ii) Discount pricing Discount pricing means pricing below the level adopted by competitors.
Competition based pricing (iii) Going rate pricing
it means matching competitors pricing. (iv) Tender pricing
In this method the sellers tries to base the price of bid on the basis of the competitors price. It is more applicable to industrial products and the products or services purchased and contracted by institutional customers. Such customers usually go by competitive bidding through sealed tenders or by quotations.
CHALLENGES
Small firms may charge too and not make margins high enough to remain in business Heterogeneity of services across and within providers makes it difficult to compare
ThanQ
