pricing objectives

Establishing monetary pricing objectives 

Pricing strategy must be a clear understanding of the organization’s objectives. There are three basic categories of pricing objectives open to a service organization. These are;

A.    Revenue oriented objectives: Private sector firms are profit-seeking organizations. Within certain limits, they attempt to maximize the surplus of income over expenditures. Managers responsible for public and nonprofit service organizations, by contrast, are more likely to be concerned with breaking even or keeping the operating deficit within acceptable bounds. Determining the cost of the pricing equation can be difficult. We’ll look at three different types of costs;

·         Fixed costs: Fixed costs are those that would continue (at least in the short run) to be incurred even if no services were provided. This “institutional overhead” is likely to include such elements as building rent, depreciation, utilities, taxes, insurance, administrative salaries, and wages of contract employees who cannot be laid off at short notice, security, and cost of capital.

·         Semi-variable cost: Semi-variable cost is those that are related to the number of customers served or volume or services produced by the organization. Included are operating costs such as incremental utilities, cleaning at service delivery sites, and wages and salaries incurred in paying overtime or hiring additional personnel.

·         Variable costs: Variable costs are those associated with making an additional sale—such as a new loan at a bank, a single seat in a train or theater, a room in a hotel, or one more repair job.

B.    Operations Oriented Objectives: Some organizations seek to match demand and supply so as to ensure optimal use of their productive capacity at any given time. Hotels, for instance, seek to fill their rooms, since an empty room is an unproductive asset. Similarly, professional firms want to keep their staff members occupied, airlines want to fill empty seats, and repair shops try to keep their facilities, machines, and workers busy. When demand exceeds capacity, however, these organizations may try to increase profits and ration demand by raising price.

C.    Patronage oriented: Not all service organizations suffer from a short-term capacity constraint. New services, in particular, often have trouble attracting customers. Introductory price discounts may be used to stimulate trial, sometimes in conjunction with promotional activities such as contests and giveaways. Firms wishing to maximize their appeal among specific types of customers need to adopt pricing strategies that recognize differential ability to pay among various market segments.

Formulating pricing strategy 
By now it should be clear that determining pricing strategies in a service organization requires making decisions on a range of different issues. These, in turn, must be based on both a clear understanding of the organization’s objectives and sound information on a range of relevant inputs.

a.     How much should be charged for this service?

·         What costs is the organization attempting to recover? Is the organization trying to achieve a specific profit margin or return on investment by selling this service?

·         How sensitive are customers to different prices?

·         What prices are charged by competitors?

·         What (discounts) should be offered from basic prices?

·         Are psychological pricing points (e.g. $4.95 versus $5.00) customarily used?

b.    What should be the basis of pricing?

·         Execution of a specific task.

·         Admission to a service facility.

·         Units of time (hour, week, month, year).

·         Percentage commission on the value of the transaction/

·         Physical resources consumed.

·         Geographic distance covered.

·         Weight or size of object serviced.

·         Should each service element be billed independently?

·         Should a single price be charged for a bundled “package”?

c.     Who should collect payment?

·         The organization that provides the service

·         A specialist intermediary (travel or ticket agent, bank, retailer etc.).

·         How the intermediary should be compensated for this work—flat fee or percentage commission?

d.    Where payment should be made?

·         The location at which the service is delivered.

·         A convenient retail outlet or financial intermediary (e.g. bank).

·         The purchaser’s home (by mail or phone).

e.     When should payment be made?

·         Before or after delivery of the service.

·         At which times of day.

·         On which days of the week.

f.     How should payment be made?

·         Cash (exact change or not).

·         Token (where can these be purchased?)

·         Stored value card.

·         Check (how to verify).

·         Electronic funds transfer.

·         Charge card (credit or debit).

·         Credit account with service provider.

·         Vouchers.

·         Third-party payment (e.g. insurance company, government agency)?

g.    How should price be communicated to the target market?

·         Through what communication medium? (Advertising, signage, electronic display, sales people, customer service personnel).

·         What message content (how much emphasis should be placed on price).