Pricing
Customers find service prices difficult to determine and compare. You cannot put physical price tags on services. The fact that services can be delivered in many different configurations makes the task even more difficult. For example, try finding out a rate on a home mortgage. The combinations of terms (5, 15, 20, 30 years), amount of down payment, points you are willing to pay (percentage ofthe loan amount paid as a fee to the mortgage originator), and myriad other options are nearly infinite. Try the same exercise with life insurance policies. Therefore, it is important to simplify your pricing policy as much as possible to eliminate customer confusion.
More than with physical goods, price is often used as an indicator of service quality.
This is because service quality is more difficult to ascertain. Thus, the pricing of services must be consistent with the overall strategy for the product. For example, if you decide to drop the price of your service but attempt to maintain a premium brand image through your communications and other elements of the service operation, customers will become confused or skeptical: If you are so good, why are you so cheap? Although consistency between the strategy and price is important for all products, in service businesses where purchasing is driven so heavily by perceptions, it is critical.
In service industries the role of the reference price is very Un:;>onant. As described in Chapter 9, a reference price is an internal standard ag;:;lr.<;t \\~1:ich observed prices are compared. Reference prices are based on both past experience in a product category (internal reference prices) and observed prices in the marke,?lace I external reference prices). Not only is price information more difficult to collee;: ;or senices, but the large number of product alternatives can make price comparisons impossible. For example, for competing automobile insurance policies, the deductibles or other aspects of the policies are often slightly different, making exact price comparisons difficult. When a customer cannot use observed prices easily to make a purchase decision, internal reference price becomes more important as a way of simplifying the process.
To illustrate these two service pricing principles, several years ago, the author decided to have the gutters of his house cleaned before the winter rains hit. Obtaining prices for such services is time-consuming because it entails waiting at home for the (uncertain) arrival of the service providers. Two companies gave bids, one much higher than the other. With little experience to draw upon, I calculated a reference price based simply on what seemed to be reasonable. Both bids were below this price, so they both remained in the running for the work. I then chose the higher of the two, figuring that the lower-priced company would skimp on the work somehow .
