Capture and Communicate Value in the Pricing of Services

The pricing of services in the United States is a mess. Consider these examples:

  • In 1992, Congress enacted the Cable Act to rein in prices in the cable television industry. This legislation, prompted by widespread consumer dissatisfaction with price increases and poor service, gave broad regulatory powers to the Federal Communications Commission and local communities. Although the sweeping 1996 telecommunications bill phases out price regulation for cable television beyond a basic “broadcast tier,” concerns persist about whether the industry can be trusted with pricing freedom. By 1994, two years after the Cable Act had been enacted, the FCC had received 10,600 complaints dealing with cable rates.1
  • In 1994, a Gallup survey of 1,000 bank customers found that 49 percent believed that bank fees were too high. Moreover, 20 percent indicated that they had changed banks recently, primarily because of poor customer service, followed closely by fees and interest rates.2
  • In 1990, a Maritz Marketing Research national consumer poll indicated that 61 percent of the respondents thought the automobile insurance industry needed more regulation to ensure fair practices and prices. Subsequent research shows that many automobile insurance customers believe they are being ripped off and resent what they perceive to be price gouging and false promotional promises.3 In 1988, California voters approved the controversial Proposition 103, which regulates pricing and profits in the industry. The California Supreme Court upheld the law in 1994; the U.S. Supreme Court upheld it in 1995.
  • In 1992, a Brookings Institution study, commissioned by Aetna Life & Casualty Company, concluded that hourly billing for legal services leads to unnecessary, more expensive work.4 Many corporate clients are currently fighting this practice. Companies such as Walt Disney, Citicorp, and Merck have adopted guidelines that limit hourly fees and reimbursable charges and standardize billing formats. General Motors has developed a database that tracks litigation and determines average expenses for handling different matters. GM questions law firms whose fees exceed the averages and sometimes insists that fees be reduced. Dow Chemical’s on-line computer monitoring system “looks for people billing who weren’t approved to work on the case, looks for hourly rates that weren’t consistent, and looks for duplicate billing.”5 Some companies are hiring outside auditors to monitor their legal bills for improper or inaccurate charges.<

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References

1. For a discussion of these and related issues, see:

Electronic Media, 21 March 1994, p. 1;

New York Times, 11 November 1993, p. A1; and

Wall Street Journal, 19 November 1993, p. B9; 2 February 1966, p. B1.

2. USA Today, 9 October 1995, Money section.

3. A. Parasuraman, L.L. Berry, and V. Zeithaml, “Understanding Customer Expectations of Service,” Sloan Management Review, volume 33, Spring 1991, pp. 39–48.

4. Business Week, 17 August 1992, p. 108.

5. Business Week, 6 September 1993, p. 62.

6. V.A. Zeithaml, A. Parasuraman, and L.L. Berry, “Problems and Strategies in Services Marketing,” Journal of Marketing, volume 49, Spring 1985, pp. 33–46.

7. For a general discussion of the issues involved in pricing services, see:

K.B. Monroe, “The Pricing of Services,” in The Handbook of Services Marketing, eds. C. Congram and M. Friedman (New York: Amacom, 1990); and

M.R. Schlissel and J. Chasin, “Pricing of Services: An Interdisciplinary Review,” The Service Industries Review, volume 11, July 1991, pp. 271–286.

8. T. Levitt, “Marketing Intangible Products and Product Intangibles,” Harvard Business Review, volume 59, May–June 1981, pp. 94–102;

R. Thaler, “Towards a Positive Theory of Consumer Choice,” Journal of Economic Behavior and Organization, volume 1, March 1980, pp. 39–60;

R. Thaler, “Mental Accounting and Consumer Choice,” Marketing Science, volume 4, Summer 1985, pp. 199–214; and

B.E. Kahn and R.J. Meyer, “Consumer Multiattribute Judgments under Attribute-Weight Uncertainty,” Journal of Consumer Research, volume 17, March 1991, pp. 508–522.

9. For an excellent discussion of search and experience goods, see:

P. Nelson, “Information and Consumer Behavior,” Journal of Political Economy, volume 78, March–April 1970, pp. 311–329.

Issues related to credence goods are discussed in:

R. Darby and E. Karni, “Free Competition and the Optimal Amount of Fraud,” Journal of Political Economy, volume 81, April 1973, pp. 67–86.

10. V.A. Zeithaml, “How Consumer Evaluation Processes Differ between Goods and Services,” in Marketing of Services, eds. J.H. Donnelly and W.R. George (Chicago: American Marketing Association, 1981), pp. 186–190.

11. R. Recchi, “It’s the Math, Stupid,” Knight-Ridder News Service, 25 September 1993.

12. Business Week, 6 September 1993, p. 63.

13. M.J. Bitner, “Servicescapes: The Impact of Physical Surroundings on Customers and Employees,” Journal of Marketing, volume 56, April 1992, pp. 57–71.

14. For a discussion of the importance and profit implications of pricing decisions, see:

G.E. Smith and T.T. Nagle, “Financial Analysis for Profit-Driven Pricing,” Sloan Management Review, volume 35, Spring 1994, pp. 71–84;

H. Simon, “Pricing Opportunities — And How to Exploit Them,” Sloan Management Review, volume 33, Winter 1992, pp. 55–65; and

M.V. Marn and R.L. Rosiello, “Managing Price, Gaining Profit,” Harvard Business Review, volume 70, September–October 1992, pp. 84–94.

For a comprehensive examination of pricing decisions, see:

T.T. Nagle and R.K. Holden, The Strategy and Tactics of Pricing(Englewood Cliffs, New Jersey: Prentice Hall, 1995);

K.B. Monroe, Pricing: Making Profitable Decisions (New York: McGraw-Hill, 1990); and

H. Simon, Price Management (New York: Elsevier Science Publishers, 1989).

For an integrative review of research on value and its relationship with price and quality, see:

V.A. Zeithaml, “Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence,” Journal of Marketing, volume 52, July 1988, pp. 2–22.

15. “Reach out and Confuse Someone,” Services Marketing Today, June 1995, p. 4.

16. T.T. Nagle, “Pricing as Creative Marketing,” Business Horizons, volume 26, July–August 1983, pp. 14–19.

17. D.H. Maister, “The New Value Billing,” The American Lawyer, volume 16, May 1994, p. 40.

18. L.L. Berry, On Great Service: A Framework for Action (New York: Free Press, 1995).

19. For more details, see:

J.E. Morris, “Two Pioneers Make Their Fixed-Fee Deal Work,” The American Lawyer, volume 15, December 1993, p. 5.

20. L.L. Berry, “Relationship Marketing,” in Emerging Perspectives on Services Marketing, eds. L.L. Berry, G.L. Shostack, and G. Upah (Chicago: American Marketing Association, 1983), p. 25.

21. F.F. Reichheld, “Loyalty-Based Management,” Harvard Business Review, volume 71, March–April 1993, pp. 64–73.

22. J. Guiltinan, “The Price Bundling of Services: A Normative Framework,” Journal of Marketing, volume 51, April 1987, pp. 74–85.

For buyers’ responses to price incentives in bundle offers, see:

M.S. Yadav and K.B. Monroe, “How Buyers Perceive Savings in a Bundle Price: An Examination of a Bundle’s Transaction Value,” Journal of Marketing Research, volume 30, August 1993, pp. 350–358.

23. For additional details about the ABC approach, see:

R. Cooper and R.S. Kaplan, “Measure Costs Right: Make the Right Decisions,” Harvard Business Review, volume 66, September–October 1988, pp. 96–103.

24. Wall Street Journal, 2 November 1995, p. A4.

2 Comments On: Capture and Communicate Value in the Pricing of Services

  • Orlando E. Contreras | August 19, 2010

    I am a professor in the UIS (Universidad Industrial de Santander) and currently making a reserch about Colombian Banking Fees.

    That is why, I would like to get the paper called:

    Capture and Communicate Value in the Pricing of Services
    By Leonard L. Berry and Manjit S. Yadav
    July 15, 1996

    It would be a great help to my academic work. Is it posible to obtain a digital copy of it?

    Thanks a lot.

    Regards,
    Orlando E. Contreras

  • Sean M. Brown | August 19, 2010

    Prof. Contreras,

    You may purchase a single copy of this article (in PDF form) using the “Buy Articles and Permissions” link near the top of this page. We also offer a yearly premium subscription which includes access to PDFs of all articles in the online archive.

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    If you would like a review copy for considering inclusion in teaching materials, email smr-help@mit.edu, we would be happy to send you a copy.

    Regards,

    Sean M. Brown
    Manager, Online
    MIT Sloan Management Review

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