Any decision on pricing strategy must be based on a clear understanding of the organization’s objectives. Ther e are two basic categories of pricing objectives for service firms:
Establishing Monetary Pricing Objectives
Pricing strategy must be a clear understanding of the organization’s objectives. There are three basic categories of pricing objectives open to a service organization. These are as follows:
1. Revenue-Oriented Objectives
Private sector firms are profit-seeking organizations. Within certain limits, they attempt to maximize the surplus of income over expenditures.
Managers responsible for public and non-profit service organizations, by contrast, are more likely to be concerned with breaking even or keeping the operating deficit within acceptable bounds.
i) Fixed Costs
Fixed costs are those that would continue (at least in the short run) to be incurred even if no services were provided.
This “institutional overhead” is likely to include such elements as building rent, depreciation, utilities, taxes, insurant administrative salaries, wages of contract employees who cannot be laid off at short notice, security, and cost of capital.
ii) Semi-Variable Cost
Semi-variable cost is those that are related to the number of customers served or the volume of service produced by the organization.
Included are operating costs such as incremental utilities, cleaning at service delivery sites, and wages and salaries incurred in paying overtime or hiring additional personnel.
iii) Variable Costs
Variable costs are those associated with making an additional sale – such as a new loan at a bank, a single seat in a train or theatre, a room in a hotel, or one more repair job.
2. Operations-Oriented Objectives
Some organizations seek to match demand and supply so as to ensure optimal use of their productive capacity at any given time.
Hotels, e.g., seek to fill their; rooms since an empty room is an unproductive asset. Similarly, professional firms want to keep their staff members occupied, airlines want to fill empty seats, and repair shops try to keep their facilities, machines, and workers busy.
When demand exceeds capacity, however, these organizations may try to increase profits and ration demand by raising prices.
3. Patronage-Oriented Objectives
Not all service organizations suffer from short-term capacity constraints. New services, in particular, often have trouble attracting customers.
Introductory price discounts may be used to stimulate trials, sometimes in conjunction with promotional activities such as contests and giveaways.
Firms wishing to maximize their appeal among specific types of customers need to adopt pricing strategies that recognize the differential ability to pay among various market segments.
Establishing Non-Monetary Pricing Objectives
Purely monetary pricing objectives are not necessarily relevant or appropriate for all organizations. Not-for-profit organizations such as charities, community service, and support organizations, e.g., & established for reasons and purposes other than commercial ones.
Then price-setting strategies need to consider the purpose and intent, mission, and values of the organization and give thought to the role played price in reflecting and communicating these.
Revenue-oriented and patronage-oriented pricing objectives nonetheless have a role to play. Not-for-profit organizations generally still need to achieve revenue targets and cover as much of their operating costs as possible.
Correspondingly, patronage-oriented pricing objectives may be appropriate in circumstances where there is a need to build and maintain ongoing support.
For example, the Australian Breastfeeding Association offers its support services to members and non-members, but low membership fees are an incentive for mothers to join.
For the association, a large membership base may result in more public recognition and external funding.
At the same time, prices charged or the amount of the donation, grant, bequest, or contribution requested, may need to consider aspects beyond the goals of revenue generation, cost recoupment, and patronage stimulation.
This is also what one means by non-monetary pricing objectives. Typically these can be defined with reference to:
- Markets served, and/or
- The organization and its purposes.
Looking at markets served, it may be appropriate to consider perceived fairness, equity, affordability, and the desired attitudinal response and support sought from customers and the wider community.
For example, community housing, animal protection, and aged care facilities. From the perspective of the organization, prices and how they are communicated can be employed to express credibly what the organization stands for, its principles and values, and the value offered by the organization to the community served.