Understanding Non-Monetary Costs and Pricing Strategies in Service Industries

1. Pricing issue in services • At the end of this module the learning outcomes are • What is the concept of Nonmonetary Costs? • Various types of Nonmonetary costs • What are the methods to price services?

2. Suggested readings • Services Marketing by Zeithmal and Bitner • Chapter 16, 2nd edition

3. Pricing issues in Services More complicated than goods You go to retail shop All items prices displayed Compare and choose

4. In services Go to physician / doctor Will he provide standard prices Cardiologist versus general physician Prices depend on ailment General physician could be Rs 50 Cardiologist could be Rs 500 Do you negotiate here with a doctor?

5. The Role of Nonmonetary costs What sacrifices are to be made when buying and using a service Time costs Search cost Psychic costs These are also considered and become critical

6. Types of Nonmonetary costs • Time costs • Search costs • Convenience costs • Psychological costs

7. Time costs • Services require consumer participation • Consumer spend time • Time an important factor • Consulting doctor • Watching movie • Consulting doctor • Time varies from patient to patient

8. Waiting time is LONGER AND LESS PREDIC TABLE in services than goods • By pass surgery • Customer willing to wait for six months to get the surgery done from the physician of their choice

9. 2. Search Costs • Time taken to select your service provider • Higher for services than goods • Service prices • Rarely displayed on shelves • Do doctors display their prices • Customized • Comparison very difficult • Consumers spend time in searching for right option

10. 3. Convenience Costs • Customer convenience • Doctor attending patient • At customer’s premises • At Doctor’s premises • Will it cost same? • Customer premises will be higher? • Added convenience • Doctors spend more time • Charge for the same

11. 4. Psychological Costs • Most difficult to understand • Why you buy insurance • Fear of death • Fear of car damage • Fear of house damage • What cost to pay • Very difficult

12. Methods to price services • Three types of pricing strategies • Cost-based pricing • Competition based pricing • Demand based pricing

13. Cost Based Pricing • Simple • Price =Fixed cost + variable cost + profit margin • Difficulty in estimating costs • Goods • Costs easy to determine • Material costs

14. Services • How should doctor estimate costs • No use of material • Based on TIME consumed • Similarly • Lawyers • Chartered Accountants • Architects • Mostly hourly basis as it is the easiest way to measure

15. Cost Based Pricing • Used where costs are easier to estimate • Add profits • Estimate prices

16. 2. Competition based pricing • Based on what competitors charge • Not necessarily identical prices • Used when • standard services across industries • Internet service providers • VSNL, MTNL, Mantraonline

17. Oligopoly situation – few players • Cellular service providers • Vodafone, Airtel, Idea • Not allow a any seller to have a distinct advantage

18. 3. Demand based pricing • Based on customers rather than sellers and competitors • What customers are willing to pay? • Take care of nonmonetary costs • If service involve • High time • High inconvenience • High search • High psychic costs • Price has to compensate for the increase in non-monetary costs

19. Why airtime charges are coming down? • To create additional demand for cellular • 1995 – Airtime rate Rs 10/minute (average) • 2002 – Airtime rate Rs 2/minute (average) • Booms in Sales • 250 million cellular subscribers

20. Example • Automobile loan –from Punjab National Bank versus ABN Amro Bank • Punjab National Bank • Go to branch • Long procedure • Formalities • Guarantor • Nonmonetary costs are high

21. ABN Amro Bank • Come to your residence • Relatively simple procedure • No need for a guarantor • Non monetary costs are low • You will be willing to pay higher rate of interest to • ABN-AMRO bank because of lower non-monetary • costs