Answer to Question 1
E
Answer to Question 2
When it comes to buying services, customers have a difficult time determining quality prior to purchase. Consequently, service pricing is critical because it may be the only quality cue that is available in advance of the purchase experience. If the service provider sets prices too low, customers will have inaccurate perceptions and expectations about quality. If prices are too high, customers may not give the firm a chance. In general, services pricing becomes more important-and more difficult-when:
- Service quality is hard to detect prior to purchase.
- The costs associated with providing the service are difficult to determine.
- Customers are unfamiliar with the service process.
- Brand names are not well established.
- The customer can perform the service themselves.
- Advertising within a service category is limited.
- The total price of the service experience is difficult to state beforehand.
Most services suffer from the challenges associated with determining costs because intangible expenses such as labor, insurance, and overhead must be taken into account. When the firm offers services that customers can do for themselves-such as lawn maintenance, oil changes, or house painting-it must be especially mindful of setting the correct price. In these instances, the firm is competing with the customer's evaluation of his or her time and ability, in addition to other competing service providers.
Setting prices for professional services (lawyers, accountants, consultants, doctors, and mechanics) is especially difficult because they suffer from a number of the conditions in the list above. Customers often balk at the high prices of these service providers because they have a limited ability to evaluate the quality or total cost until the service process has been completed. The heterogeneous nature of these services limits standardization; therefore, customer knowledge about pricing is limited. Heterogeneity also limits price comparison among competing providers. The key for these firms is to be up-front about the expected quality and costs of the service. This is often done through the use of binding estimates and contractual guarantees of quality.
Due to the limited capacity associated with most services, service pricing is also a key issue with respect to balancing supply and demand during peak and off-peak demand times. In these situations, many service firms use yield management systems to balance pricing and revenue considerations with their need to fill unfilled capacity. Yield management allows the service firm to simultaneously control capacity and demand in order to maximize revenue and capacity utilization. This is accomplished in two ways. First, the service firm controls capacity by limiting the available capacity at certain price points. Second, the service firm controls demand through price changes over time and by overbooking capacity. These activities ensure that service demand will be consistent and that any unused capacity will be minimized. These practices are common in services characterized by high fixed costs and low variable costs, such as airlines, hotels, rental cars, cruises, transportation firms, and hospitals. Because variable costs in these services are quite low, the profit for these firms directly relates to sales and capacity utilization. Consequently, these firms will sell some capacity at reduced prices in order to maximize utilization.
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