Introduction
A pricing method in relation to services is defined as the procedure that an entity follows in order to arrive at a decision on the prices of its or service(s) (Avlonitis and Indounas 48). The term ‘pricing method’ is synonymous to ‘pricing model’, except for the fact that ‘pricing method’ is used more in referring to the procedure followed in arriving at the price while ‘pricing model’ is used more in reference to the price structure relating the price of a service to the quantity of service offered. The two terms are, however, very closely related and are mostly used interchangeably.
The services sector has seen major changes in the recent past, with improvement in technology and increase in competition, particularly in emerging industries that rely on technology such as business process outsourcing (Goolsby), managed information technology services (Devery) and cloud computing (Cloudtweaks). This has caused entities in the service sector to change their pricing methods from the traditional cost and target based pricing to new innovative pricing methods to ensure they stay in business and remain competitive. This paper identifies and discusses the more recent pricing methods in use today.
Pricing Methods in the Services Sector
Subscription based pricing method
This is a pricing method that is used in almost all industries. In the software industry, the method is used in pricing software packages. Traditionally, software companies sold their software to consumers with a one-off sale which granted perpetual ownership of the software to consumers. Consumers could get software support perpetually. This has proved unsustainable because the cost of the software could not cater for the support services and updates for software perpetually.
This method was therefore replaced by the subscription method which requires consumers to purchase the license to a software product for a limited amount of time and renew their subscription if they withes to continue enjoying the software services (NetMBA.com). A good example of a company that uses this pricing method is Kaspersky with its one year subscription to its anti-virus and internet security products. Some companies such as Microsoft have, however, stuck to the old model of the one-off sale.
In other industries such as managed IT services, the subscription may be periodic but pegged on specific criteria such as subscription per device or per user (Devery).
Elastic pricing method
This pricing method is also known as ‘pay as you use’ (Cloudtweaks). In this method, prices are charged based on the quantity of service consumed by the customer. The service is broken down into ‘units’ to which a price is set. It utilizes an accrual method which produces a bill to the customer. The method is used in pricing most utility services including telephone and cloud computing.
Tiered-level pricing method
This is a pricing method that is used mainly in technology services and outsourcing. The prices are classified based on volume of service consumed (Bryan on Business). An example is bandwidth pricing in cloud computing and web hosting. Service price is classified based on the amount of bandwidth that a customer consumes. A typical tiered bandwidth pricing would have the a small bundle of bandwidth costing a specific price per quantity consumed, then another bundle costing less per quantity consumed and so on, with the possibility of an ‘unlimited’ bundle as the largest quantity at the lowest price (Cloudtweaks). This pricing method is adopted in order to increase the sales of services by making customers believe that price reduces with an increased consumption.
Scenario-based pricing
This is a pricing technique that takes into account the specific conditions of a particular engagement with a customer. The method is mostly used in consultancy and legal services (Bryan on Business). The typical situation would involve a client being charged for the fixed costs proportionate to the amount and complexity of their work, and costs of the specific engagement, plus a premium whose level would be determined by the level of experience of the service provider. The method focuses away from what the service is to more of how the service is being delivered to the client (Bryan on Business).
Psychological pricing method
This is a pricing method that attempts to make use of knowledge in consumer psychology to set prices. The method is applied through identification of price indicators such as service quality, the consumer’s perception of a ‘fair price’ and common price points (NetMBA.com). The price indicators are a product of an already existing customer mindset, so it is the responsibility of the business to identify customer expectations and perceptions on both price and quality and then set the price of the service accordingly. This means that the entity must find an optimum price to take care of customer perceptions and to cover operational costs.
Competitive pricing method
This is a pricing method that takes into account the price level and structure of providers of alternative services (Avlonitis and Indounas 49). The method is applicable across all industries. Producers of services may choose to use one of four competitive pricing method techniques; pricing the service at the same level as competitors if the price is relatively similar, pricing the service above competitors to make the customer perceive the service to be of higher quality, pricing the service below competitors to create price-driven demand and pricing the product based on the price of the market price leader (Avlonitis and Indounas 49).
The method may also peg price on competitor quality where an entity prices a service based on the competitors’ price for the same quality level. If this strategy is used, it is referred to as value-based pricing (Indounas 88).
Spot pricing method
This is a pricing method that is in use mainly in the cloud computing industry. The method is a derivative of the demand and supply theory which states that price is relative to demand and supply, with price rising with high demand or low supply and price falling with high supply or low demand. Providers of services usually charge a price for the service that is dictated by the conditions in the ‘spot market’ (Cloudtweaks). When demand for the service is high, the price rises and when demand is low, the price drops. This method is ensures that the entity remains competitive relative to the market conditions, thus ensuring it generates constant interest to consumers in the market.
Conclusion
The pricing strategies that have come up recently are either an improvement on previous pricing techniques or a new invention necessitated by the nature of the service being provided. Ultimately, the goal of all these pricing methods is to ensure the entity remains competitive in a market that sees a great improvement in technology and an increased customer demand to the service providers to reduce prices.
Works Cited
Avlonitis, George J. and Kostis A. Indounas. “Pricing objectives and pricing methods in the services sector.” Journal of Services Marketing. (2005): 47–57. Emarketing. Web.
Bryan on Business. “How to Set a Fixed Pricing Model for your Business (Part II)” Bryan on Business. 2012. Web.
Cloudtweaks. “Cloud Computing: Cloud Pricing Models – Part 4.” Cloudtweaks. 2012. Web.
Devery, Quinn. “Managed IT Services Pricing Models.” Paranet.com. 2012. Web.
Goolsby, Kathleen. “Outsourcing Experts Discuss New Flexible Pricing Models Outsourcing Center. 2011. Web.
Indounas, Kostis. “Successful industrial service pricing.” Journal of Business & Industrial Marketing. 24.2 (2009): 86–97. Emerald Insight. Web.
NetMBA.com. “Pricing Strategy.” NetMBA.com. 2010. Web.