Retail Pricing for Service Retailers
Have you ever wondered while booking tickets for a movie or going for hair cut, how easy or difficult it is for service retailers to set up the price tag on their services for each customer which provide right indication about their services and also make profitable business for themselves.
The importance of pricing decisions is growing because today’s customers are looking for good value when they buy merchandize and services. “Value” is the relationship of what the customer gets to what the customer has to pay for it. Many types of customer are price sensitive where on the other hand, others are willing to pay extra as long as they are convinced that they are going to get worth of their money in terms of product quality or service.
It’s much more complicated to set up the pricing for services than pricing for goods. At basic level, both includes retailers’ and service providers’ manufacturing and operating costs but for services its difficult to factor the operating cost for each individual service. There are 3 broad reasons which further complicate the matters for service retailers:
Inability to match supply and demand:
First, it’s difficult to match supply and demand fluctuations in services rather than goods. For example, any retailer selling shoes can always keep minimum inventory of shoes to meet any surge in demand over the weekend or holiday seasons but service provider retailers such as hair cutting saloon or Movie theaters have more difficulties in meeting fluctuations in demand. Saloons are limited by number of hair stylist in the shop and theatres have constraints of number of seats. If more people want to go for movies on the weekend, there is very little theatres can do than to turn them away. They need to come up with other strategies like buy 1 ticket and get 1 at 50% on Monday/Tuesday to even out some of the fluctuations over the week.
To determine the accurate reference point for Price:
Reference price point is point in customer’s memory for good or bad service, price for the service last paid and customer’s own subconscious threshold on the price which he is willing to pay.
It’s much easier to compare prices of goods like Shoes, shirts which only wary in color, size and material. All these attributes can be seen, felt and measured and hence comparison of such merchandize is easier as customer can easily recall the last price he has paid for similar item and how good it turned out or how long it lasted. Now compare this with pricing of tickets of 2 movie halls. Both halls can offer variety of services and facilities (type of Movie, no. of shows, ambience, parking etc.) in any combinations and add to it the location complexity and it leads to complicated pricing structure. This pricing is also different for different needs, Halls can offer different price for group or family bookings, advance bookings, e-booking etc.
To properly compare the pricing of tickets of 2 halls, consumer has to gather awful lot of data which can be overwhelming and leaves very vague price reference point for customer to judge the value of services. This strategy benefits the service retailer (e.g. movie hall) as customer can compare price with same retailer only. Retailers can always keep changing the combinations of services by marginally changing the price and keep their business profitable.
Quality of Service:
As services are intangible and not produced on factory assembly line, customers are going to take price of services as indication of service cost and quality of service. Customers generally look for cues to assess the service quality such as Brand Name, company’s advertising to showcase belief in the brand, customers are likely to choose these cues over price but in other situations, when quality is hard to detect or price varies a great deal in the same class, customers will take price as indication of quality, e.g. Price of room for 2 hotels in the same vicinity.
Another factor that increases the price as quality indicator is risk involved in service. In high risk situations like medical emergencies or legal aid, customers will look for price as quality indicator. When in need of Lawyer or Doctor, customer won’t be looking for cheapest one in the town.
Conclusion:
Because customers depend on price as cue to quality and price sets expectation of quality, service prices must be determined carefully. Retailers need to keep track of demand and supply equation of their services and quickly adjust the prices to attract customers and keep their business profitable. This may include some strategic partnerships with retailers whose services are complimentary to their own, e.g. Hotel chains tying up with luxury cab services for airport transfers.
In addition to being chosen to cover costs or match competitors, prices must indicate the appropriate quality signals. Pricing too low can lead to inaccurate reference points (considered too cheap) of the services. Pricing too high can set expectations too high which may be hard to meet during delivery. Retailers should always seek customer feedback, results of market survey, competition and self analysis and very importantly, corporate vision about the market positioning of the company while revising their pricing strategy.
