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Exclusive value and the pricing of services.

The price customer will pay can depend on the ability to alter the customer's perceptions

Introduction

This is the second of a two-paper series focusing on the pricing and sale of services. The first paper, "Important factors in the sale and pricing of services", appeared in Management Decision, Vol. 33 No. 7.

Important issues influence the pricing of services. High margins often result from the customer's perceptions of "exclusive value"[1]. Consequently the price the customer will pay can depend on your ability to alter the customer's perceptions affecting exclusive value.

The exclusive value principle is one important factor determining the value of the service to the customer. A company that understands the exclusive value domain can deliver increased customer satisfaction. Success at this allows higher prices and/or a greater volume. Managing the price-volume trade-off carefully will yield a higher aggregate contribution margin.

Success depends on understanding and making decisions within the context of the customer's psychic domain. First, there will be a brief review of background information, then a sketch of the concept of exclusive value as well as "critical factors" in psychic space.

Background

A brief review of key factors related to exclusive value will support our continued discussion. Perceived value has its origin in utility and psychic space, the relationship depicted as in Figure 1.

Since utility in terms of pricing normally implies conscious recognition of value, we only include perceived utility value. On the other hand, in the psychic region both perceived (conscious) and unperceived (unconscious) forces influence human behaviour and, in turn, acceptable price. The difference between perceived and unperceived psychic value is that perceived psychic value implies the customer consciously recognizes a contribution to value within his or her psychic domain. Unperceived implies the customer has added an increment to perceived value without conscious evaluation or recognition of the addition to psychic satisfaction.

Increasing conscious factors as well as changing an unconscious to a conscious factor normally reduces the risk of service delivery, increases perceived need fulfilment, and justifies the appropriateness of service price. In addition, psychic and utility space can interact, a point we discuss later.

Psychic factors represent those influences contributing to the customer's perception of value which are in addition to the "pure" utilitarian value of the service. For example, a "no-brand" and one of the major public accounting firms may perform a service equally well and the customer may perceive this equality in terms of utility. Nevertheless, a willingness to pay more for an audit by the firm having name recognition then falls into the psychic value factor.

For services, psychic factors often contribute a high proportion of total value. Their importance prompts summary comments about the psychic factor component. Psychic factors are:

* Internal: represent factors of importance independent of the opinions, influences, approval, suggestions of others. Some factors may be perceived, others real. Whether real or imagined, the forces still may be influential.

* External: represent factors of importance because of opinions, influences, approval, suggestions, interaction, and interpersonal relations of, or with, others. Factor forces may be real or perceived. Even if only perceived, the forces still may be influential.

Table I provides sample factors of influence for the psychic domain. Recognizing whether a customer is weighted heavily externally ("an external") or internally ("an internal") with respect to certain psychic factors is important in the sale and delivery of services and pricing The next section includes examples.

[TABULAR DATA I OMITTED]

Exclusive value principle

High margins on services often stem from the customer's perception of exclusive value. The exclusive value principle recognizes the customer's perception of value is attributable to both utilitarian and psychic factors. However, the exclusive value proportion of total perceived value stems from psychic dimensions. To illustrate, two equally talented hair stylists could provide physically identical hair styling However, the customer may perceive the service by one as superior, for a host of reasons associated with the delivery of service. The conversation, mannerisms, tone of voice, sincerity, and numerous other factors, can cause the customer to perceive a superior hair styling from one stylist. Such perceptions will bring a generous tip, return of the customer, and a willingness to pay a higher price. Factors altering the reference and value perception domain of the customer beyond utility evaluation are psychic factors. Psychic factors give rise to psychic value. Important variables within the psychic region of the mind provide opportunity to create (or destroy!) favourable service and pricing opportunities.

For example Mary Osgood is a potential client. Ms Osgood has heavy external weighting. A possible approach with Ms Osgood might be as follows: "We know selecting a beautician is important and there is always uncertainty in one's mind. `Upper Crust' is fortunate to have clients such as Mrs Henderson (chairman of the membership committee, country club), and Ms Carla Winslow (local TV news anchor) as regular clients. We hope you will let us make you a happy customer and allow us to use your name as a reference".

Ms Osgood would value having her hair styled where Ms Henderson and Ms Winslow go. The chance that her name may be used by others in conjunction with Mrs Henderson's and Ms Winslow's names is appealing to Ms Osgood. Ms Osgood would probably enjoy (value) replying to a comment about her hair: "I find Upper Crust does a wonderful job. I like Carla Winslow's hair so much and she goes to Upper Crust". Ms Osgood's friends in conversation also are probably "externals". Ms Osgood's conversations probably alter the perceptions of her friends. To the extent that this is true, Ms Osgood has provided the "psychic reach". Psychic effects result in incremental customers who will perceive greater value and pay greater prices. Pleasing Ms Osgood in delivery of excellent services at a premium price offers derivative value in the promise of free and effective advertising

Critical factors

Within the psychic realm, some factors are potentially so important that we term them critical factors. Critical factors have several features[2]. A factor is critical if its: presence or absence will amplify or diminish the way the individual weighs and values the influence of other factors that contribute to value perceived by the customer. Thus the presence or absence of customer satisfaction with respect to a single critical factor influences the way the customer weighs satisfaction with respect to other factors. The presence or absence of a factor can prompt, inhibit, or block the sale. For example, inadvertently embarrassing the customer or displaying a disrespect for his or her beliefs may "kill" the sale and eradicate any possibility of future business. Figure 2 depicts the effect of a critical factor in the context of air travel.

Critical factors can be very important in creating and sustaining exclusivity. In addition, adding a critical factor can result in the psychic domain influencing the perceived utility of a service and perceived value and price.

Psychic-utility influence can increase acceptable price by magnifying the customer's perceptions of the utility of a product. The influence of the psychic on perceived utility falls into two categories: utility-based and psychic-based increments to perceived utility.

(1) Utility-based increments to perceived utility. Psychic domain factors may result in the customer evaluating more closely the utility of the service and the customer may increase perceived utility. Such an increment to utility, and in turn, to acceptable price originates in the customer's recognition of increments in actual utility of the service. Before the psychic caused the customer to focus on the utility of the service, the customer overlooked elements of utility. For example, in the psychic domain the customer has strong desires for the service. He or she seeks "justification" for buying the service by examining the utility aspects of the service. The customer uses the added recognized utility to justify the purchase.

(2) Psychic-based increments to utility. Focusing on the utility of a service can influence how a customer values the service in psychic space. An examination of the utility aspects of the service can result in a greater awareness of psychic factors of importance to the customer. An increment to perceived utility arises from the feedback effect of psychic forces. The customer does not recognize any increased utility. However, psychic factors cause the customer to use utility as justification for buying the service. For example, for psychic reasons a customer wants a "`pick-up-truck". He "justifies" the purchase on the basis of utility factors such as the ability to carry cargo in the truck, even if he would probably seldom or never transport cargo.

Furthermore, failing to recognize and manage critical factors can result in high levels of risk with respect to the customer-company relationship, pricing, service delivery, and customer satisfaction.

Exclusive value premiums, risks value

Figure 3 summarizes the important relationships between an exclusive value premium, pure utilitarian value, market price, margin, risk, and firm value. In addition, we identify specific factors to consider in the pricing and marketing of service. To be sure, in some instances the customer's perceived product value will be tied to perceptions about service.

Although one must show more sensitivity and delicacy in attempting to alter the psychic space influence on price, one can successfully create exclusive value premiums. Carefully cultured, exclusive value premiums often are enduring. Psychic space provides strong forces influencing human behaviour. Using these forces to advantage yields a powerful effect in terms of allowing for higher pricing of services. Similarly, a disregard or poor management of exclusive value premiums strategies can yield disastrous effects on the sales and pricing of services.

It is relatively easy for competing vendors to replicate and offer equal utility in services. Consequently, obtaining a higher price by differentiating in terms of utility is difficult. For example, competing airlines may offer service in terms of pure utility with departures within minutes of yours, and currently at the same price. One can attempt to offer greater utility by, for example, offering more leg-room. The competitive response is predictable: others offer more leg-room. Many actions to alter utility are replicable. In contrast, customer loyalty earned and anchored in psychic space affords opportunities to sustain and grow sales as well as some protection from competitor response.

Altering perception of value and price

Changes in perceived value traceable to altering the customer's perceptions in the psychic space may yield pricing opportunities and may insulate one from a competitors' limitations. Thus efforts to garner increased returns from higher prices are frequently more productive if one capitalizes on psychic factor contributions to value. Second, if successful, one may have lowered risk as a result of "psychic binding". Psychic binding occurs if customer loyalty is anchored in psychic space. An array of factors characterize psychic space. The customer determines exclusive value within this space. The following are relevant:

* Factors vary by individual. Some passengers always go first class. In contrast, one must lure others to first class.

* The importance of factors may vary across time. A passenger is tired and may be willing to pay for an upgrade to first class.

* The presence or absence of a factor may influence how other factors are "weighed" by the customer in value assessment. A passenger did not get a choice of entree because she was sitting in the back of first class. Though graciously served, she does not value the other amenities of first class as highly as she otherwise would have done -- even though she might have chosen the entree she "had to take".

* There may exist a "kill factor". The presence or absence of this one contributing element may cause the customer to avoid your service regardless of price. For example, the customer may extrapolate the indifferent attitude or a rude comment of one employee to all employees. Regrettably, the customer may not return to give you a chance to demonstrate that the employee's behaviour was an isolated case.

As a consequence, the ability to price services to obtain high margins and to attract and keep customers may well depend on one's ability to sense and influence factors of import in the psychic domain of the customer. Understanding and recognizing the factors influencing different potential customers can allow one to:

* Identify market segment(s) of interest; for example, rather than try to influence a broad market, use resources to influence those particular people who would buy a first-class ticket.

* Maximize the favourable attributes of the product or service as perceived by the customer; for example, on a previous flight the attendant noted in a database used by today's attendant that Mr Hill does not drink alcoholic beverages and prefers tomato juice on ice. The result: "Mr Hill, may I bring you tomato juice on ice or would you prefer something else today?"

Affecting perception of the value of service

Here are specific guidelines useful in altering perceptions of value and price.

(1) Segment perceived value into two categories:

* Utility. The pure utility value of the service,

e.g., flying the customer from Dallas to

Munich.

* Psychic. Precisely determine the customer's important psychic factors.

(2) Assess "needs", purposes, expectations, perceived or real, known or unknown.

(3) Determine preferences.

(4) Detect and cope with uncertainties.

(5) Sense and disarm any unrealistic expectations. One wants to avoid disappointments.

(6) Determine whether there are any "power buttons".

(7) Assist the customer in recognizing needs, needs match, value, and the relationship between value and price.

(8) Review with the customer the specific elements of service that will be delivered.

(9) Utilize psychic factors to amplify perceived value and to trigger the purchase decision. (10) Develop a strategy and plan to deliver customer needs. (11) Deliver full value or exceed customer expectations. (12) Monitor delivery and learn from customer's reactions. (13) Review delivery and value received with customer.

Capitalizing on the exclusive value principle

Extracting maximum benefits by realizing the exclusive value premium may entail one or more steps. The Appendix provides sample scenarios which illustrate several important factors in this process. General guidelines for developing a strategy entail:

* Identifying the market segments having great weights.

* Isolating the factors of greatest importance (image, status, entitlement, survival, health) in each segment.

* Evaluating the importance of external and internal weights in the psychic dimension.

* Evaluating the sensitivity of purchasers to external stimuli in the product-service choice.

* Identifying the services that will bring the greatest level of satisfaction to the customer. Also, you must be aware of the "degree" or anchor point on the psychic dimension. The Appendix provides sample factors.

* Developing and executing a strategy that maximizes the exclusive value premium and in turn, your contribution margin.

* Delivering the service and in the process enhancing the value perceived by the customer.

* Reviewing and learning how to improve the process.

Customer expectations

Many variables affect the formation of customer expectations, as well as whether and how a service fulfils those expectations. There are degrees or ranges of influence on psychic dimensions. Figure 4 provides illustrations of ranges of psychic influence for several dimensions. Customer behaviour will also be a function of several variables including:

* mood at the time of: consideration, decision, sale, utilization, and evaluation;

* preconceived notions;

* business-client relationship;

* customer knowledge;

* behaviour of competitors;

* environment at the time of evaluation, decision, utilization, and evaluation;

* fear? because of possible personal effects and/or permanence of outcome; for example, the physical outcome of cosmetic surgery, the reaction of friends to cosmetic surgery; non-elective surgery;

* uncertainty: questioning or evaluating whether...e.g. I've never flown business class; I wonder if I...; I switch to this new man to prepare my taxes I...;

* experience: with purchasing the specific services or services which may or may not be related to the customer's current service need; with other providers;

* inexperience: "I've never had a major car repair before and I don't know...";

* knowledge, for example: "I would never have my car air conditioner worked on at Smacko's. Their service area and mechanics are filthy and dirt around open air conditioning systems is...";

* lack of knowledge: "Yes, I know the transmission is bigger, but taking out one transmission should not be more work than taking out six spark things".

Increasing effectiveness in psychic space

The following guidelines will prove helpful in efforts to increase the customer's perceived value for services. Success at increasing perceived value will yield greater customer satisfaction and support better prices and margins.

* Open channels of communication.

* "Listen" intently. Detect clues alerting you to critical factors important to the customer. Example: Knowing the accountant is extremely to delivery of the audit on schedule would suggest you make a positive statement in your summary and letter of agreement concerning certain delivery by a scheduled date. Addressing delivery date options issued prior to agreeing on the fee would probably make a higher fee more acceptable.

* Identify what you think are important factors to the customer and decide if these are personal, impersonal, conscious, or unconscious. Remain open-minded: you may have misjudged what is important to the customer.

* Clearly define the customer's desires and expectations. If they are not transparent, explain your desire to fully understand his or her needs and expectations.

* Disarm unreasonable expectations prior to making final sale and arrangements for delivery of service. In an oral summary or ideally in the written agreement, clearly outline the work product. Mention and disarm those items on which you could not agree: e.g., "We will be able to deliver the work product in final form by 2 April. Earlier delivery may be possible and we will attempt earlier delivery without overtime charges. If you desire certain delivery by 20 March, overtime charges most likely will apply".

* Determine if it is possible to influence a customer's position favourably on one or more psychic dimensions. Table II illustrates a possible cause of action for the "fear based" dimension.

* Ensure that those who will perform the service understand what is important to the customer. Agree on the best way to deliver the service and to fulfil or exceed the customer's expectations.

* Monitor and ensure service is delivered as expected. Remain alert for changes in customer expectations, a misunderstanding of expectations, or better ways to fulfil expectations. Example: "Earlier when we visited and agreed on photographic services, I understood you wanted our photographer there for the wedding and reception. Your mother called and gave us the location of the rehearsal dinner. Since we had discussed and agreed on the contract, I felt it important I verify your desires. We want to ensure we fulfil your desires. Our photographer is available for the rehearsal dinner. There is an extra charge of $xx for up to two hours. Normally two hours is adequate time".

* On completion of the service, measure delivery of satisfaction. Often this process will ensure the customer recognizes, understands, and values all the components of service delivered. This may make the fee for services more understandable and acceptable. Assessment of delivery also will allow you to correct immediately, if possible, any shortcomings or misunderstandings. Since services are not "visible" in the same fashion as a tangible product, this process helps to fix the value of service in the customer's mind. Example: "We now offer a choice of three entrees. Which do you prefer?". Alternatively: "I am sorry we only had a choice of two of the three entrees for you. I have completed a report indicating a need to change the mix of entrees".

Table II. Sample suggestions to affect psychic factors

Factor: Sample suggestions to affect psychic factors favourably
Fear   If fear is     Provide knowledge so customer
       unwarranted    realizes there is no basis for the fear


       If fear        Acknowledge the fear and seek to
       warranted      remove/disarm the dysfunctional
                      consequences


                      Show compassion, understanding, and
                      support


                      Develop confidence in dealing with fear.
                      Provide means, techniques, resources,
                      training, so customer realizes he or she
                      is best prepared to cope with the threat


Summary

Important factors affect the pricing of services. High margins often result from the customer's perceptions of "exclusive value". Consequently, the price the customer will pay can depend on your ability to alter the customer's perceptions and increase the customer's perception of exclusive value.

The exclusive value principle asserts that the price a customer will pay for a service stems from both the utility as well as psychic dimensions of pricing space. The effect of psychic factors in the pricing of services is crucial. The creation of pricing premiums anchored in customer psychic space gives rise to favourable pricing opportunities.

The customer assesses value fulfilment in terms of needs match and the risk of delivery. Thus, for services compared to a product, typically a greater proportion of the perceived value hinges on the uncertainty the customer discerns in the delivery and fulfilment of his or her expectations. Removing, or at least reducing this uncertainty, is integral to garnering the sale. Repeat and growing business first depend on the customer accepting surety of expected fuffilment. This customer acceptance is essential to prompt the sale of the service. Second, the provider must deliver service in a fashion that fulfils customer expectations. Success at match-delivery lays the foundations for attractive margins as well as repeat business. In addition, a track record of service delivery reduces perceived risk of service and hence increases the price the customer will pay. A track record of service delivery also insulates the company against competitive forces.

Finally, establishing credibility with potential incremental customers is difficult, given customer apprehension about service delivery. The creation and sustaining of exclusive premiums with current customers assists in expanding sales while maintaining premiums. Satisfied customers play a crucial role in establishing credibility with the incremental customer. Careful attention to the maintenance of an exclusive value with current customers will afford opportunities to cultivate additional sales and customers without an erosion of price premium.

[Figure 1 to 4 ILLUSTRATION Omitted]

Notes

(1.) Papers of interest directly related to this subject include Groth, J.C., "The exclusive value principle: a concept for marketing", Journal of Product & Brand Management, Vol. 3 No. 3, 1994, pp. 8-18; and Groth, J.C., "Managing action inhibitors to increase sales", Marketing Intelligence & Planning, Vol. 12 No. 4, 1994, pp. 4-9. (2.) A detailed discussion of critical factors appears in "Critical factors amplification effects". This working paper is available from the author.

Appendix: Sample scenarios to affect the price and purchase decision for services

C1, C2, C3, ...: Different customers R1, R2, R3, ...: Provider's response to needs of customers C1, C2, C3, ...

The following depict briefly three scenarios with different customers interacting with a travel agent on the telephone.

C1: I need to fly to Munich. ..business.

C2: I think...go to Munich...anniversary

C3: I have heard XLO has a student air fare...

Scenario 1

C1: I need to fly to Munich...Yes, on business...

R1: If your schedule permits it, you might like to arrive the

day before. You may already have selected a hotel for Munich. However, the airline has some attractive hotel packages.

C1: Is that booked through the airline?

R1: You can book through an airline. I know you are a busy person. I would be happy to take care of it for you and. . .

Scenario 2

C2: I think. . .go to Munich. . .anniversary.

R2: That sounds like a special idea. Which one? Congratulations, I've only gotten to my seventh. Is this a surprise? Then I'll mark the reservation so no one calls. . . .surprise her by having the tickets mailed directly to...?

There is quite a difference in price between economy and business class. But then again, most people have just one twenty-fifth anniversary.

Let's book it the way you think you might like it. Then, with your permission, I'll do my best to arrange to have a single rose served with your wife's dinner. Please understand if this happens, it will be a good surprise. I can't promise.

(The following is not explained to the passenger:)

If they book a hotel, the airline now sends a FAX to the hotel briefly explaining this is an anniversary trip. If hotel management is clever (and part of running a great airline is selecting clever partners), on the arrival of the couple, the manager will immediately be summoned and personally greet the couple. As a minimum, he or she will congratulate the customer. Ideally: Ms Winslow from your XX airline shared with me this is a special day and trip for you. I have arranged to upgrade your room. ..or please be my guest for a beverage. May I send a soft drink or glass of wine to your room now?

C2: Will that only work for business class?

R2: An anniversary is special. I'll try to make it happen however you decide to fly. Your anniversary is too important a day to have this make a difference.

C2: I don't enjoy flying but it's my wife's anniversary...and...I hear there is a new airport...how to get to the train station...

R2: Yes, sometimes being uncertain about arrangements makes me apprehensive. Since you do not like crowded planes and since you have a little flexibility, I'll check and see which days and flights have the lightest load. Then we can decide how to make this the best trip. As a matter of fact, since you have no airline preference, I'll call back after I find out probable movies. You might as well enjoy a movie you like. I am also familiar with a nice hotel that will pick you up and take you right to your hotel without extra charge. Your driver will have a sign with your name on it and...

Scenario 3

C3: Is there a student rate...

R3: Yes, there is, and it is a good deal if you qualify and, if you understand and can live with the restrictions. In particular, it is very important we remember. . .

C3: I am not sure if I. . .

R3: I understand. Let me suggest this approach. We book a regular fare now so you are sure to have a seat on acceptable dates. You have no obligation. Then before next Wednesday you can decide. Let me give you a number to make it easy to find this reservation in the computer. Also note my name, Jill Quick. My name also marks the reservation.

Application questions

(1) How does your organization determine the prices for its services?

(2) Think of a service which you buy regularly. What benefits does that service provide for you? What components of the service create those benefits? What percentage of the purchase price does each of the components justify?

The author thanks anonymous referees for their valuable comments, the Editor, S. Cade and M. Her, and Professor Dr Reber, the Institut fur inter nationale Managementstudien , Johannes Kepler Universitat, Linz, for allowing me to work at the Institut.

John C. Groth is Professor of Finance, College of Business Administration,
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Title Annotation:second of a two-paper series
Author:Groth, John C.
Publication:Management Decision
Date:Dec 1, 1995
Words:4462
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