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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Smart Price Strategy for Service Products

Smart Price Strategy for Service Products

HONG Sun-Young

Sept. 11, 2012

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Originally released on July 26

Consumer access to a raft of shopping information makes pricing decisions especially challenging to service companies

who operate in an environment of increasing commoditized offerings. Yet many service providers are still using such standardized rule-of-thumb pricing methods by simply relying on past experiences without due consideration of price attributes of service products. When a recession hits, a consider number of companies roll back prices to boost their profitability but negative repercussions could emerge if the price adjustments are not accompanied with systematic strategies.

There are four characteristics of services which separate it from physical goods and need to mesh with pricing strategies. First, a service is perishable; its value eventually will expire if unused. Second, most services that involve high investment costs such as hotel rooms can only be offered in limited quantities with low variable costs. Third, demand may fluctuate sharply over various periods of time. Lastly, consumer perceptions about acceptable prices and the value they place on a service vary widely.

Taking into account these characteristics, this study suggests four pricing strategies that enable service companies to boost profitability while being more attuned and receptive to the customer willingness to pay for their services.

Price discrimination segments consumers into groups based on non-demographic factors such as price sensitivity and consumption patterns. As many customers become more sensitive to price during recessions, it is necessary to adopt a price discrimination strategy for price-sensitive customers. ② 'Dynamic Pricing is a strategy to smooth out demand fluctuations by examining past sales and anticipating future demand. ③ Service bundling or partitioning combines a product that has a low margin cost with other products and selling the bundle as one economical product refers to a strategy that divides or integrates total service price factor. The strategy helps optimize the profits from the products on hand. ④ Finally, consumer-driven pricing is a strategy that let consumers suggest the price they want to pay for a service based on their own value judgment of the service, and of course, their provider sells it at that price if acceptable. This strategy characteristically enables service companies to try a new pricing policy that goes far beyond existing models.

A recessionary period naturally heightens the price sensitivity of consumers. Nevertheless, service providers should regard it as a sound, strategic opportunity to shore up their profitability. They can enhance both consumer trust and loyalty levels by persuasively suggesting differentiated values of their services and price justification with a systematic and consistent pricing policy. Also, in order to strengthen their pricing capabilities, the culture of looking at a pricing policy from a strategic dimension to facilitate long-term corporate growth, not from a tactical level for short-term profit seeking, should be embedded in their own company.

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