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MKT 723 (71)
Chapter 17

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MKT 723
Armand Gervais

Chapter 17 – Pricing of Services Service organizations use a naïve approach to pricing without regard to underlying shifts in demand, the rate that supply can be expanded, prices of available substitutes, consideration of the price-volume relationship or availability of future substitutes. Three Key Ways that Service Prices are Different for Consumers Customer Knowledge of Service Prices Reference price - Price point in memory for a good or service. Can consist of last paid price, frequently paid price, or average price. If one cannot readily produce a price for a service out of memory, there are many reasons for this difference.  Service Variability Limits Knowledge – Firms can offer an infinite variety of combinations leading to a complicated pricing structure.  Providers are Unwilling to Estimate Prices – Until the service is performed, an accurate estimate cannot be given.  Individual Customer Needs Vary – Costs vary amongst customers. In the example of a hairdresser, longer hair would cost more than shorter hair.  Collection of Price Information is Overwhelming in Service – With services, in order to compare prices, customers must visit location by location in order to gather relevant information. With this, customers feel overwhelmed. In this case, promotional pricing may not be as meaningful to customers who don’t know what price they should pay originally. Secondly, promotional pricing may become the new reference point for the customer.  Prices are not Visible – A requirement for the existence of customer reference prices is price visibility; the price cannot be hidden or implicit. The Role of Nonmonetary Costs Demand is also a function of nonmonetary costs.  Time Costs – Most services require direct participation of the consumer, and thus, consume time. Because service providers can’t control the number of customer or wait time, customers expend time to receive the service.  Search Costs – Effort invested to identify/select amongst services.  Convenience Costs – If customers have to travel to a service. The cost becomes greater the further travelled.  Psychological Costs – Fears of not understanding, rejection, outcomes, etc. Price as an Indicator of Service Quality Under certain events, when quality may be hard to detect or price varies, customers m
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