SERVICES MARKETING : CHAPTER – 4

Positioning And Pricing Of Services

POSITIONING & DIFFERENTIATION

Definition & Concept :

Positioning & Differentiation is the third logical step after the (1) Market Segmentation, (2) Market Targeting, (commonly known as STP – segmenting, targeting & positioning). In short :

1. Segmenting is dividing the whole market into uniform, manageable & profitable units,

2. Targeting is choosing a single or a few of these units & focusing on them,

3. Positioning is occupying a relative position in the minds of customers with respect to other service providers/competitors. Differentiation is slightly different but very close to positioning – making the service offered something distinct or with some distinctive advantage from other offerings.

4. Definitions : The following definitions are very close and both are complementary and supplementary to each other.

a. Positioning is defined as the process of establishing and maintaining a distinctive place in the market for an organisation and/or its products/services offerings. This is the creating of a distinct place in the minds of a customer, or the perception of a customer w.r.t. other companies or their products/services.

b. Differentiation is defined as a company seeking to serve and creation of a different advantage or a competitive edge, that will enable the firm to serve the target market more effectively than the competitor.

Positioning Strategies :

According to Michael Porter, there are three basic positioning alternatives, like (1) as a product / service differentiator, (2) as a low cost leader, and (3) as a niche market offerer. He suggested that the marketer should be specialist for a few strategies rather than a generalist for several strategies. The strategies can be based on several attributes as :

1. Attribute Positioning : Based on a single attribute or feature of a service, like Malayala Manorama- no.1 in circulation, Allahabad Bank- the oldest bank, etc.

2. Benefit Positioning : Based on some benefit the customer derives using a particular service, like some new generation private banks offering ATMs & internet banking, etc.

3. Use/Application Positioning : Positioning as the best for a particular service application, like SBI offering education loans, etc.

4. User Positioning : Based on the requirements of some specific target groups, like India positioning itself as the destination of tourists seeking inner peace of mind, etc.

5. Competitor Positioning : This service is positioned primarily against a particular competitor, like IIPM positioning itself against IIMs – dare to think beyond IIMs.

6. Category Positioning : Positioning as a leader of a particular category, so that it becomes synonymous with that service, like Xerox means photocopying, Essel Word means family holiday entertainment, etc.

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7. Quality/Price Positioning : On the basis of quality standard at a particular price, like Oberoi hotels offer high class service at a high price range, other budget hotels offering decent minimum comfortable stay & service with all modern amenities (but not luxury) for affordable prices, etc.

Marketers should be careful about their positioning strategies to prevent certain situations :

1. Some brands are over-positioned when the segment is too narrow for the offer and many potential customers fail to notice,

2. Some brands are under-positioned when the customers fail to notice any distinctive edge,

3. Some brands communicate conflicting features / benefits to create a confusion,

4. Some brands offer irrelevant or redundant features / benefits,

5. Some brands offer promises which the customer doubt whether the marketer can deliver.

Value Chain in Services :

The concept of value chain management was first given by Michael Porter in 1985. The idea was that the company is not merely a collection of men, machinery, money, material, but a whole system with interrelated activities to create or enhance “value” with message (communications). And for services, this should be used for gaining a competitive advantage. Again according to Porter, the entire activities of a firm is grouped into two major areas – primary (core) and secondary / support (non-core). Today’s companies concentrate on the core activities and outsourcing the other activities, so that the value of the core products / services increase and the cost for others decreases.

Differentiation :

According to the definition, differentiation is providing a special or competitive advantage to the service over that of the competitors, in any attributes, price, quality, benefit, features, delivery, etc. The customers must feel that the service offered by the company is something special or superior to others, and thereby perceive the service & the company as a favourable & respectable image in their mind. For this all the elements of the marketing mix play a role. Effective differentiation should have the following criteria :

1. Important : Customers in the target group attach some value & importance to the services offered by the company,

2. Distinctive : Customers feel that the services offered by the company has some speciality, advantage, difference, uniqueness, etc. as compared to that of the competitors,

3. Superior : Customers feel that the services offered by the company is superior to the rest in all respect,

4. Communicable : The ease with which the company communicates with the customers regarding their service offer,

5. Pre-emptive : The differentiation is such that it can’t be easily copied or duplicated or equalled,

6. Affordable : Customers should be able to pay for the difference willingly,

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7. Profitable : The company should maintain its profitability or profits in offering the difference, or in other words it should be profitable.

Role of Positioning in Marketing Strategy :

Positioning of products is easier than services positioning, because of intangible nature of the services. So the marketer has to be careful to apply the right marketing mix – the 3 additional Ps in proper context.

Steps in Developing A Positioning Strategy :

First the marketing research should be done to ascertain the target market, current positioning the competitors relative positioning. Then the following strategies may be adopted :

1. Determining levels of positioning : The company should decide at what level it’s going to position its services. It can choose single level or multiple level, like LICI.

2. Identification of Attributes : The company should decide the service attributes for target market segment, like :

a. Class : Like hotels offering swimming, sauna bath, health club, Joga, etc.

b. Uses : Attaching a major benefit to the original service, like investment option to insurance schemes.

c. Price : Delivered value to price ratio should be high, like MBA in IIMs, XLRI, XIMB, etc.

d. Users : Meant primarily for a narrow group, like Disneyland for children & fun loving young people.

e. Rational & Emotional Benefits : Some times customers choose to be rational, and some other times emotional, and sometimes both.

3. Location of Attributes on positioning map : This a highly graphical representation of the positioning by different service providers on the basis of one or a few or several attributes. This can be done separately for each segment. Then the marketer can decide where to position its services.

4. Evaluating positions options : Ries & Trout have given some ideas for services positioning :

a. Strengthening present position with competitors : Here the company simply enhances the major attributes, like efficiency, etc., of the services offered by it, without having a direct conflict with the market leader and without trying to change the positioning

b. Identifying an unoccupied market position : Here the company tries to position its services where there is no competition or where the market is not tapped.

c. Repositioning the competitors : Doing something drastic or changing several major services features, customer relationship, brand image, company policies to try to gain a separate positioning in the target segment

5. Implementing the position : This simply the implementation of the marketing mix :

a. The Service : The types of services aimed at the target segments,

b. The Price : Accurately & differently prices for different types of services,

c. The Location : The service delivery places,

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d. The Promotion : The promotional messages & activities, Ads, etc. should clarify the image of the services & the company,

e. The People : The class & quality of the service personnel offering a perception in the minds of a customer,

f. The Process : he actual process, technological advancements, refined methods of services delivery.

PRICING THE SERVICES

Introduction :

Pricing or Price is the key element in the traditional marketing mix (the 4Ps) and also the enhanced marketing mix (the 7 Ps). This is the element which earns revenue. This is highly critical because this is the strategy which can make or mar the business. The firms must make it both ways –the price must (1) get profits for the firm, & (2) give value to its customers.

For goods the price has a single name “Price”, but for services it has several names like, tariff, fees, commission, brokerage, consideration, service charge, rent, fare, rate, toll, premium, contribution, interest, coupon rate, tuition, honorarium, salary, bribe, cut, tip, package, allowance, subscription, assessment, remuneration, wages, retainer (fee), taxes, etc. Pricing for goods is easy & straight forward, while for services it is complicated, may be controlled by several authorities, varies with time, place, people, etc.

Key Characteristics of Pricing in Services :

The following are the different perceptions in the minds of customers regarding the price of a service :

1. Price is a measure of quality in services : The price has a direct relationship with the quality. It is the most prominent where the levels of the same types of service are differentiated by price like, air tickets, rail tickets. It’s the least prominent between two service providers offering the same types of services in different times, at different places, for different people, with different contents. Thus on the whole, the customers take the pricing as a thumb rule or yardstick for quality & content of services. Price is an attraction and a repellent simultaneously. Because in the absence of anything visible or tangible, the price is the only indicator. So pricing must be done critically.

2. Non-monetary costs & prices : More often, the customers incur several non-monetary costs while consuming a service. Thus demand is function of not only monetary price but also non-monetary prices. These can be the following :

a. Time costs : Most services requires direct involvement of the consumers, which consumes real time, and this includes the waiting time too. Today virtually all services require spending of time to consume services. Assuming two services having same monetary price, but having say different wafting periods are different in total/overall pricing.

b. Search costs : It’s the cost involved in finding out which service to go for. For goods it’s easy, just compare the benefits/features with the price tags. But for services, one needs to experience to know the details & generally no price tags of services are available. Another area of cost increase if the search for brand in services.

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c. Convenience costs : If the customer is inconvenienced to avail or consume any services, like travelling, putting an effort, rescheduling other activities, sacrificing some other activities or time, etc., then this is known as the convenience cost (or perhaps more accurately the cost of inconvenience).

d. Psychological costs : This is perhaps the most painful & frustrating experience or non-monetary costs, like fear of not understanding (insurance schemes), rejection (bank loans), uncertainty (high cost, servicing), etc. Some customers are not comfortable going thro’ certain hassles of the service consumption process, like dropping cheques in drop boxes, paying thro’ internet by giving credit card no.s, etc.

Pricing Objectives :

The pricing policy must be based on the firm’s objectives, policies, concerning revenues, profit, patronage, market share, market penetration, etc.

1. Survival : When the firm is not doing well in terms of capacity, competition, change in consumers’ requirements, this is the only objective. The firm covers whole of VC & a part of FC. This is short term objective. In the long run the firm must learn to add value to its services, or else, face extinction.

2. Present profit maximisation : The firm sets a price that will maximise its current profit without changing the service attributes. They determine the market demand for alternative prices & choose the price where the return, cash flow or current profit is the maximum. This is a medium to short term measure. In the long run the firm may not do well.

3. Present revenue maximisation : Some companies want to maximise their profit by increasing the market share by reducing the price or setting a low price. They believe that this will lead to a higher sales volume, lower unit cost of production & a long term profit. The conditions favouring this situations are (1) the market is highly price sensitive & a low price stimulates market growth, (2) production & distribution cost fall with accumulated production experience, and (3) low price discourages actual & potential competition.

4. Prestige : Some companies like putting their services in the premium category by charging a high price, which they think creates an image of class/prestige in the customers’ view. Ex., Oberoi, Sheraton Hotels.

5. Product quality leadership : Some firms like to maintain their position as a quality leader by having a higher price tag. The quality of service involves higher cost, which justifies the price.

Approaches to Pricing Services :

Having set the pricing objectives, the firm has to do the pricing proper. For the services the pricing can be done in the three major structures based on (1) cost, (2) demand, & (3) competition. The firm can adopt any one or more structure with an appropriate proportion in combination. They are :

1. Cost Based Pricing : As the name suggests, the company finds out the costs – direct & indirect, profit margin, etc. and decides the price. We have the basic formula for cost as :

PRICE =

FIXED (OVERHEAD OR INDIRECT) COSTS + VARIABLE (DIRECT) COST + PROFIT

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a. Cost-plus pricing : This is the simplest method of pricing – the total cost is ascertained & a mark-up added. It’s easier for goods, but not so for services. But by past experience & knowledge of estimates, one can decide the cost, then mark-up, then a contingency amount which will make the price.

b. Fee for services : This pricing strategy is adopted by most of the professionals. Their fees are based on the no. of hours they put in their effort. This system has a drawback too – (1) the record keeping can’t be done accurately, (2) for the same result an experienced & a novice may have the same fee, and if not then resentment takes place in the minds of customers.

2. Market Oriented Pricing or Demand Based Pricing : As the name suggests the pricing is based on the demand behaviour of the customers, i.e., setting prices consistent with customer perception of value – prices which customers will pay for the services rendered. Some are given below :

a. Market Skimming : Market skimming is offering high value or unique services by the service providers for a higher price. This happens where there are no competitors, and later when competitors come in the prices may be reduced.

b. Penetration Pricing : This is to some extent the opposite of market skimming. The initial or introduction price is kept at a low level so that it helps in market penetration. Slowly the value offer increases & if the demand remains the prices can be enhanced. This is appropriate in the following conditions, and care must be taken not to set at too low a price, lest the normal enhancement will look unacceptable :

i. Sales volume of the services are sensitive to the price,

ii. It is possible to achieve economies in unit costs by operating at large volumes,

iii. A service which faces threats of strong potential competition, soon after introduction,

iv. There are no class buyers willing to pay a higher price to avail the service.

c. Price Discrimination : This is also known as differential pricing, which is applied more often. The major deciding factors are:

i. Place : For the customers who have a sensitivity to location, like cinema circles, different rows of concerts, etc.

ii. Time : At different times of the day or any period, say peak & off-peak hours of internet surfing, telephone service, etc.

iii. Quantity : For volume purchase, say for assurance for future purchases by the customers the company offers a lower price. By this the firm locks or ascertains the future business volume.

iv. Incentives : This is usually given to the regular or more frequent users in the form of incentives, discounts, etc.

d. Discounts : Discounts, price cuts or mark-downs are very important & popular in the pricing of services & goods. These are offered on some occasions, like festive seasons, to a specific category of customers, and may be in the lean seasons, etc. It attracts customers and the sales volume increases.

3. Competition Based Pricing : This is another approach of pricing which relate to the pricing made by the competitors. That doesn’t always mean the prices to be the same as the competitors’. But the knowledge of their costs & pricing, and the customer expectations acts as a starting point. This is applied in mostly two

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situations – (1) When the services are standard across the providers, (2) in oligopolies where there are a few large service providers.

a. Price Signalling : This phenomenon occurs when there is a high concentration of sellers in the market. Here the prices offered by one seller is matched by others to avoid any low-price advantage to any seller. Ex., in airline industries or mobile phone service if any provider drops the fares or call rates others follow too.

b. Price Matching / Going rate pricing : This is adopted for playing safe in a mature market, by pricing at the same level, like taxi service, internet café, etc.

c. Destroyer Pricing : It is setting such a low price that it can’t be matched by any competitor, without loss. This is mostly used for driving the competition from the market. The firm adopting this strategy should be very careful in setting the price such that it doesn’t suffer loss, and also if the competitors are strong enough, the firm itself may be driven out of business.

d. Price Bidding / Closed Bid Pricing : This strategy is mostly adopted by the construction, building, manufacturing services and involves sending biddings to the buyer, which the buyer chooses according to its best requirement.

4. Problems encountered in these pricing systems : The following table give a list of problems :

No.

Cost Based (Problems)

Demand Based (Problems) Competition Based (Problems)

1. Costs are difficult to trace.

Monetary price must be adjusted to reflect the value of non-monetary costs.

Small firms may charge too little to be viable.

2. Labour is more difficult to price than materials.

Information on service costs is less available to customers, hence price may not be a central factor.

Heterogeneity of service limits comparability.

3. Costs may not equal value.

Price may not effect customer value.

a. Cost Based (Problems) : The one special problem in cost based pricing is the unit in which a service is purchased, the unit price is a well defined idea, but is a vague concept in services. Hence most of the professional services are sold by not the output unit but the input unit, like consultancy services are priced by the no. of hours the professional have put in.

i. Costs are difficult to trace : Costs are difficult to trace or calculate in service business, particularly where multiple services are provided by the firm.

ii. Labour is more difficult to price than materials : A major component of cost is employee time rather than material cost, and value of people’s time particularly non-professional time, is not easy to calculate or estimate.

iii. Costs may not equal value : Actual service costs may under-represent the value of the service to the customer. The same service given against different context/back drop has different value attached to it even though it needs same time & effort.

b. Demand Based (Problems) :

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i. In case of services the non-monetary costs & benefits must be factored into the calculation of perceived value to the customer. When services require inconvenience, time, search & psychological costs, the monetary price must be adjusted to compensate.

ii. Information on service costs may be less available to customers, making monetary price not a large or salient factor in initial service selection.

c. Competition Based (Problems) :

i. Small firms may charge too little and are not able to make margins high enough to remain in business.

ii. Heterogeneity of services across and within providers makes this approach complicated and limits comparability, where the service providers charge in wide variation.

iii. Price may not effect customer value : Some experts say that such wide variation is difficult to compare across providers and may not effect customer value.

Incorporating Perceived Value Into Service Pricing :

One of the most appropriate ways to price services is on the basis of the perceived value of the services in the minds of customers. Now the important point is what is value in customers’ view ? And how to create value in the services so that customers like it. In general “value” is what you get minus what you pay, or what you get divided by what you pay. But again how to quantify in terms of money what you get. This is highly subjective and varies widely.

1. Definition of Perceived Value : According to the concept of utility “Perceived value” is defined as the consumer’s overall assessment of the utility of a service based on perceptions of what is received and what is given. Customers will make a purchase decision on the basis of perceived value, and not just to minimise the money paid. The following gives an account of the break-up of the “give & get” components of value into manageable pieces that can be useful to quantify value :

2. Incorporating perceived value into service pricing : It’s the buyer’s perception of total value that prompts the willingness to pay a particular price for service. The most important thing the company must do – often a difficult thing – is to estimate the value to customers of the company’s services. The value may be perceived differently by different people which is a complex function of rational (objective) & emotional (subjective) reasons. The following steps will guide the company to estimate value systematically :

a. Elicit customer definitions of value in their own words & terms, allowing for the full range of components.

b. Help customers articulate their expressions of value by identifying their value definition, key abstract benefits sought, and abstract dimensions of quality that are relevant to them.

c. Capture requirement information at the concrete level – linking them with the key benefits they indicate so that the definition becomes actionable.

d. Quantify the monetary & non-monetary value to customers.

e. Establish a price based on the value of the service to customers.

3. Application : When the services are for the end consumer, most often service providers will discover that they can’t afford to give each individual exactly the

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bundle of attributes he or she values. They will, however attempt to find one or more bundles that address segments of the market. On the other hand, when services are sold to businesses (or to end customers in case of high end services), the company can understand and deliver different bundles to each customer.

Value Strategies In Pricing of Services :

On the basis of explanations & discussions of the above section, several pricing strategies can be decided as follows :

1. Satisfaction based pricing : This pricing method adopted by the companies to remove all the uncertainties from the minds of consumers :

a. Service guarantees : Some companies give assurances to the service consumers regarding the quality of services, like domino’s pizza home delivery, a minimum rate of return for LIC policies, etc. This assures the consumers to a great deal.

b. Benefit driven Pricing : This kind of pricing is charged on the basis of the benefits derived out of the service, and not any other expenses. Ex., paying for the copier machine according to the no. of sheets copied, and not its establishment or maintenance expenses.

c. Flat Rate Pricing : This method is adopted where the service is labour intensive & costs are inefficiently managed. The price is flat, i.e., without any frills or changes. This is best in following situations :

i. The company has a competitive flat rate to attract customers,

ii. It should have an efficient costing system that provides a cushion for unanticipated costs,

iii. It has very good relationship with customers so that it gets more opportunities that might have been incurred in a service interaction.

2. Relationship Pricing : For a long term relationship, these prices are fixed, so that the customers keep coming to the service provider. In today’s world of high competition, and presence of several equally worth competitors, the pricing has to be critical, else, the competitor may wean away the firm’s customers. The following are a few strategies :

a. Long Term Contracts : Firms entering into long term contract with its customers with a price mutually agreed on, or a continued discounts, to retain the customers. The absence of price rise, and presence of discounts will bind the customers for a longer period.

b. Price Bundling : Companies sometimes offer more than one service to the customers for a combined price, which is normally less than the total price. The company saves time & effort as well as the customers who don’t have to look for the other services elsewhere.

3. Efficiency Pricing : This pricing is made on the basis of estimating & monitoring of the costing of services, and continuously improving on it. Thus the efficiency of the service delivery is increased and finally transferring any cost/price benefit to the customer

4. Convenience Pricing : This kind of pricing gives emphasis to the convenience of the customers in the process of consuming services, like home delivery of pizza & groceries, home pick-up of candidates for driving training, etc.

Issues in Pricing of Services :

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Pricing is critical for any company doing business for profit. It can make or mar a business. There are several factors that influence pricing – both internal & external. These are given below :

1. Costs of Production & Break-even Analysis : By doing break-even analysis the company can find out what are the minimum level of sales required to break-even.

2. Demand Levels : The company should ascertain the demand levels, like current demand, potential demand, fluctuations in demand and the factors responsible for it, customers’ spending patterns, general economic trends, etc.

3. Competitor Pricing : Firms should find out the pricing done by the competitors and the price sensitive areas. Accordingly, pricing can be set.

4. Marketing Mix : The other elements of the marketing mix have a positive influence on price, and the price must be indicative of the value it promises to deliver. In case of high price - high value offer, there should be proper communication between the company & customers.

5. Regulatory Factors : Govt. policies, guidelines of other regulatory bodies have direct impact on the pricing situation. The company should adhere to the relevant regulations. Ex., IRDA for insurance companies, TRAI for mobile service providers, etc.

6. Positioning : Correct or accurate positioning of services is also important, and a matching price may be charged. If the customers can perceive this rightly then they are willing to pay the desired price for the services.

© Himansu S M / Written Sep-2006, Published Feb-2010

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