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Pricing Objective and Pricing Methods in the Service Sector

Pricing Objective and Pricing Methods in the Service Sector. George F. Avlonitis and Kostis A. Indounas Presented by Haseok Lim. Objective. To examine the pricing objectives pursued along with the pricing methods adopted by service organizations.

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Pricing Objective and Pricing Methods in the Service Sector

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  1. Pricing Objective and Pricing Methods in the Service Sector George F. Avlonitis and Kostis A. Indounas Presented by Haseok Lim

  2. Objective • To examine the pricing objectives pursued along with the pricing methods adopted by service organizations. • To investigate whether the pricing objectives pursued are associated with the pricing methods adopted.

  3. Previous Works • No previous research has investigated the extent to which the pricing objectives pursued are associated with the pricing methods. • Pricing Objectives and Pricing Methods

  4. Previous Works – Pricing Objectives • Table 1 Summarizes the fundamental pricing objectives – Channon, 1986; Cannon and Morgan, 1990; Bonnici, 1991; Payne, 1993; Palmer, 1994; Bateson, 1995; Drake and Llewellyn, 1995; Woodruff, 1995; Ansari, 1996; Hoffman and Bateson, 1997; Langeard, 2000.

  5. Previous Works – Pricing Methods • Oxenfeldt (1983) defined pricing methods as the explicit steps or procedures by which firms arrive at pricing decisions. • Pricing of services falls into three catagories: cost-based method, competition based and demand based.

  6. Previous Works – Pricing Methods • Cost Based Methods: • Cost plus method (Schlissel, 1977; Goetz, 1985; Zeithaml, 1985; Ward, 1989; Palmer, 1994; Payne, 1993; Bateson, 1995; Zeithaml and Bitner, 1996). • Target return pricing (McIver and Naylor, 1986; Meidan, 1996). • Break-even analysis (Channon, 1986, Lovelock, 1996) • Contribution analysis (Schlissel and Chasin, 1991; Bateson, 1995). • Marginal pricing (Palmer, 1994).

  7. Previous Works – Pricing Methods • Competition Based Methods • Pricing similar to competitors or according to the market’s average prices (Channon, 1986; Payne, 1993; Palmer, 1994; Woodruff, 1995; Zeithaml and Bitner, 1996). • Pricing above competitors (Bonnici, 1991; Meidan, 1996, Zeithaml and Bitner, 1996; Mitra and Capalla, 1997; Langeard, 2000). • Pricing below competitors (Payne, 1993; Palmer, 1994; Zeithaml and Bitner, 1996). • Pricing according to the dominant price in the market (Kurtz and Clow, 1998).

  8. Previous Works – Pricing Methods • Demand Based Pricing • Perceived Value Pricing prices (Channon, 1986; Lovelock, 1996; Zeithaml and Bitner, 1996; Hoffman and Bateson, 1997). • Value Pricing (Cahill, 1994) • Pricing according to the customer needs (Bonnici, 1991; Ratza, 1993).

  9. Methodology • Service sectors were investigated in Greece • Banks, insurance companies, transportation and shipping companies, airline companies, information technology companies, and medical services. • These service sectors represents B2B, B2C • In 2000, according to ICAP’s Directory, the number of companies in the sectors in question was 1,495. • The sample was reduced to 558 companies, and due to change in address or the closedown, the original sample was reduced to 464 companies.

  10. Methodology • The companies were notified by a letter saying the objectives of the study and a week later, a telephone call was made to each company to examine the possibility of participating the study. • From 464 companies, 170 companies (36.7%) agreed to participate • Appointment was made and interviews were conducted.

  11. Methodology • Ten-page questionnaire. • Before using the questionnaire for data collection, a detailed pretest based on personal interviews among two academics and ten practitioners was undertaken in order to increase its validity. • Pricing Objectives • List of 28 pricing objectives and were asked to indicate using 1 to 5 scale. • Pricing Methods • List of 12 pricing methods and were asked to use binary scale. (O and 1)

  12. Results – Pricing Objectives • Pricing Objectives • Factor Analysis was performed (Table III). • Three most important are related to customers: maintenance of the existing customers, attracting of new customers, and the satisfaction of customer needs. (Table III) • Other important objects were the cost coverage, the creation of a prestige image for the company, its long-term survival and the service quality leadership. • Objectives related to profit, sales and market share are less important

  13. Results – Pricing Objectives • Least important objective was discouragement of new competitors entering into the market. • Companies tend to regard the qualitative objectives as being more significant than the quantitative ones. • Other researchers (Meidan and Chin, 1995; Morris and Fuller; 1989, Schlissel, 1977) said the profit related objectives are considered as being the most important ones.

  14. Results - Pricing Methods • Pricing Methods • Cost plus method and the pricing according to the market’s average prices.

  15. Results - Pricing Methods • Logistic regression analysis with the Maximum Likelihood Ratio Method was carried out. • Used to examine to the impact of pricing objects set on the pricing methods in the study are categorical variables while the pricing objectives are continuous variables. • Nine logistic regression analysis were examined, and four were found to be statistically significant. • Target return pricing

  16. Results – Target Return Pricing • The fundamental aim of the target return pricing method is to yield the target return on the firm’s potential investment and achieve satisfactory profit and sales.

  17. Results – Average Market Prices • The possibility of adopting it increases when the objectives that are pursued are associated with the competitors and the customer. • Service quality-related objectives and maximization of profits and sales reduced the probability of pricing according to market prices.

  18. Results Dominant Market Price Pricing Below Competitors

  19. Conclusion • Companies were pursuing qualitative rather than quantitative objectives with an emphasis being placed on attracting new customers, maintaining the existing ones and satisfying their needs.

  20. Managerial Implications • Managers responsible for pricing decisions within their firms is to move away from simplistic cost plus formulas and treat pricing from a customers point of view. • Customer Orientation • Managers need to continuously pay attention to competitors pricing behavior to make sure they stay in the market.

  21. Future Research • This research was based in Greece, thus, future research must be in other countries. • Future research may investigate the impact of the context of the organization and the impact of environmental variables such as the sector of operation, the market structure. • Investigate the impact that different pricing objectives and methods have on the achievement of corporate objectives.

  22. Limitations • Increased heterogeneity associated with cross-sectional samples due to the fact that they induce negative effects on the quality of the findings.

  23. Work Cited • Avlonitis, G. J. and Indounas, K. A. (2005). Pricing objectives and pricing methods in the services sector.The Journal of Services Marketing, 19 (1), 47. Retrieved March 23, 2008, from ABI/INFORM Global.

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