Due to the many special considerations surrounding the pricing of services, traditional pricing strategies such as penetration pricing, competitive pricing, and premium pricing may not be suitable. In other words, they offer little benefit to service customers or service providers. Therefore, we will take a look at emerging alternative service pricing strategies.
Need for Alternative Service Pricing Strategies
Existing pricing strategies, comprising for instance competition-based pricing and cost-based pricing, are often not perfectly suitable for services. For example, competitive pricing has led to disappearing profit margins in many service industries like car rental, airlines and health insurance.
At the core of the pricing problem is a lack of understanding of the special considerations in the pricing of services and how consumers use and benefit from the services they are purchasing. Since this is often much simpler in the case of tangible goods, alternative service pricing strategies are required.
Three Alternative Service Pricing Strategies
In the following, we will investigate three alternative service pricing strategies, which find increasing application across different service industries. These are summarized in the table below.
Alternative Service Pricing Strategies
Satisfaction-Based Pricing
The primary goal of satisfaction-based pricing is to reduce the amount of perceived risk associated with the service purchase. It can be achieved through offering guarantees, benefit-driven pricing, and flat-rate pricing.
Service guarantees are becoming increasingly popular and do therefore belong to the quickly emerging alternative service pricing strategies. The guarantee assures customers that if they are less than satisfied with their purchase, they can invoke the guarantee and obtain a partial or full refund to offset their dissatisfaction with the service firm. Offering service guarantees signals to customers that the firm is committed to delivering quality services and confident in its ability to do so.
Customers often believe that a firm offering service guarantees would not do so unless it was confident in its ability to deliver. In instances where competing services are priced similarly and options to differentiate one service provider to the next are few, the service guarantee offers a significant advantage.
Relationship Pricing
The primary objective of relationship pricing is to enhance the firm’s relationship with its targeted consumers. For example, in the banking industry, relationship pricing strategies can be utilized to further nurture the relationship between the bank and its existing checking account customers by offering special savings accounts, deals on safe deposit boxes, and special rates on certificates of deposit.
Two types of relationship pricing techniques include long-term contracts and price bundling. Long-term contracts offer prospective customers price and non-price incentives for dealing with the same provider over a number of years.
Since most service organizations provide more than one service, the practice of bundling services has become more common. Price bundling, broadly defined, refers to the practice of marketing two or more services in a single package at a single price. Common bundling examples include hotels offering weekend packages that include lodging, meals, and entertainment options at an inclusive rate, and online travel sites that include air travel, car rental, and hotel accommodations for one single price.
In general, services are concerned with mixed bundling, which enables consumers to either buy Service A and Service B together or purchase one service separately. The simplest argument for bundling is based on the idea of consumer surplus: Bundling makes it possible to shift the consumer surplus from one to another service that otherwise would have a negative surplus (i.e., would not be purchased). Moreover, mixed bundling offers customers a better value than purchasing services separately.
Efficiency Pricing
The three alternative service pricing strategies are completed with efficiency pricing. The primary goal of efficiency pricing is to appeal to economically minded consumers who are looking for the best price.
Efficiency pricing focuses on delivering the best and most cost-effective service available for the price. To achieve that, operations must be streamlined, and innovations that enable further cost reduction should become part of the operation’s culture. The leaner the cost structure, the more difficult it is for new competitors to imitate the company’s success. Understanding and managing costs are the fundamental building blocks of efficiency pricing.