Pricing Objective and Pricing Methods in the Service Sector

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Pricing Objective and Pricing Methods in the
Service Sector

• George F. Avlonitis and Kostis A. Indounas
• Presented by Haseok Lim

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Objective

• To examine the pricing objectives pursued along
  with the pricing methods adopted by service
  organizations.
• To investigate whether the pricing objectives
  pursued are associated with the pricing methods
  adopted.

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Previous Works

• No previous research has investigated the extent
  to which the pricing objectives pursued are
  associated with the pricing methods.
• Pricing Objectives and Pricing Methods

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Previous Works Pricing Objectives

• Table 1 Summarizes the fundamental pricing
  objectives Channon, 1986 Cannon and Morgan,
  1990 Bonnici, 1991 Payne, 1993 Palmer, 1994
  Bateson, 1995 Drake and Llewellyn, 1995
  Woodruff, 1995 Ansari, 1996 Hoffman and
  Bateson, 1997 Langeard, 2000.

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Previous Works Pricing Methods

• Oxenfeldt (1983) defined pricing methods as the
  explicit steps or procedures by which firms
  arrive at pricing decisions.
• Pricing of services falls into three catagories
  cost-based method, competition based and demand
  based.

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Previous Works Pricing Methods

• Cost Based Methods
• Cost plus method (Schlissel, 1977 Goetz, 1985
  Zeithaml, 1985 Ward, 1989 Palmer, 1994 Payne,
  1993 Bateson, 1995 Zeithaml and Bitner, 1996).
• Target return pricing (McIver and Naylor, 1986
  Meidan, 1996).
• Break-even analysis (Channon, 1986, Lovelock,
  1996)
• Contribution analysis (Schlissel and Chasin,
  1991 Bateson, 1995).
• Marginal pricing (Palmer, 1994).

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Previous Works Pricing Methods

• Competition Based Methods
• Pricing similar to competitors or according to
  the markets average prices (Channon, 1986
  Payne, 1993 Palmer, 1994 Woodruff, 1995
  Zeithaml and Bitner, 1996).
• Pricing above competitors (Bonnici, 1991 Meidan,
  1996, Zeithaml and Bitner, 1996 Mitra and
  Capalla, 1997 Langeard, 2000).
• Pricing below competitors (Payne, 1993 Palmer,
  1994 Zeithaml and Bitner, 1996).
• Pricing according to the dominant price in the
  market (Kurtz and Clow, 1998).

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Previous Works Pricing Methods

• Demand Based Pricing
• Perceived Value Pricing prices (Channon, 1986
  Lovelock, 1996 Zeithaml and Bitner, 1996
  Hoffman and Bateson, 1997).
• Value Pricing (Cahill, 1994)
• Pricing according to the customer needs (Bonnici,
  1991 Ratza, 1993).

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Methodology

• Service sectors were investigated in Greece
• Banks, insurance companies, transportation and
  shipping companies, airline companies,
  information technology companies, and medical
  services.
• These service sectors represents B2B, B2C
• In 2000, according to ICAPs Directory, the
  number of companies in the sectors in question
  was 1,495.
• The sample was reduced to 558 companies, and due
  to change in address or the closedown, the
  original sample was reduced to 464 companies.

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Methodology

• The companies were notified by a letter saying
  the objectives of the study and a week later, a
  telephone call was made to each company to
  examine the possibility of participating the
  study.
• From 464 companies, 170 companies (36.7) agreed
  to participate
• Appointment was made and interviews were
  conducted.

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Methodology

• Ten-page questionnaire.
• Before using the questionnaire for data
  collection, a detailed pretest based on personal
  interviews among two academics and ten
  practitioners was undertaken in order to increase
  its validity.
• Pricing Objectives
• List of 28 pricing objectives and were asked to
  indicate using 1 to 5 scale.
• Pricing Methods
• List of 12 pricing methods and were asked to use
  binary scale. (O and 1)

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Results Pricing Objectives

• Pricing Objectives
• Factor Analysis was performed (Table III).
• Three most important are related to customers
  maintenance of the existing customers, attracting
  of new customers, and the satisfaction of
  customer needs. (Table III)
• Other important objects were the cost coverage,
  the creation of a prestige image for the company,
  its long-term survival and the service quality
  leadership.
• Objectives related to profit, sales and market
  share are less important

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Results Pricing Objectives

• Least important objective was discouragement of
  new competitors entering into the market.
• Companies tend to regard the qualitative
  objectives as being more significant than the
  quantitative ones.
• Other researchers (Meidan and Chin, 1995 Morris
  and Fuller 1989, Schlissel, 1977) said the
  profit related objectives are considered as being
  the most important ones.

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Results - Pricing Methods

• Pricing Methods
• Cost plus method and the pricing according to the
  markets average prices.

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Results - Pricing Methods

• Logistic regression analysis with the Maximum
  Likelihood Ratio Method was carried out.
• Used to examine to the impact of pricing objects
  set on the pricing methods in the study are
  categorical variables while the pricing
  objectives are continuous variables.
• Nine logistic regression analysis were examined,
  and four were found to be statistically
  significant.
• Target return pricing

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Results Target Return Pricing

• The fundamental aim of the target return pricing
  method is to yield the target return on the
  firms potential investment and achieve
  satisfactory profit and sales.

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Results Average Market Prices

• The possibility of adopting it increases when the
  objectives that are pursued are associated with
  the competitors and the customer.
• Service quality-related objectives and
  maximization of profits and sales reduced the
  probability of pricing according to market
  prices.

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Results

• Dominant Market Price

• Pricing Below Competitors

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Conclusion

• Companies were pursuing qualitative rather than
  quantitative objectives with an emphasis being
  placed on attracting new customers, maintaining
  the existing ones and satisfying their needs.

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Managerial Implications

• Managers responsible for pricing decisions within
  their firms is to move away from simplistic cost
  plus formulas and treat pricing from a customers
  point of view.
• Customer Orientation
• Managers need to continuously pay attention to
  competitors pricing behavior to make sure they
  stay in the market.

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Future Research

• This research was based in Greece, thus, future
  research must be in other countries.
• Future research may investigate the impact of the
  context of the organization and the impact of
  environmental variables such as the sector of
  operation, the market structure.
• Investigate the impact that different pricing
  objectives and methods have on the achievement of
  corporate objectives.

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Limitations

• Increased heterogeneity associated with
  cross-sectional samples due to the fact that they
  induce negative effects on the quality of the
  findings.

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Work Cited

• Avlonitis, G. J. and Indounas, K. A. (2005).
  Pricing objectives and pricing methods in the
  services sector.The Journal of Services
  Marketing, 19 (1), 47. Retrieved March 23, 2008,
  from ABI/INFORM Global.