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
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
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