Pricing in the Service Industry

According to Mckinsey Company's consultants, the fastest and most effective way for a firm to achieve maximum profit is to get its price right (Marn and Rosiello, 1992). These consultants reported that a 1 percent price improvement generates an average of 11.1 percent increase in profits among the 2,462 companies they studied. Given the importance of price in generating revenues and profits for a company, the approach used by service firms in price setting has been relatively unsophisticated. In an attempt to identify problems and strategies in service marketing, Zeithaml et al. (1985) found that cost-oriented pricing was the most popular approach used by service firms. Although this method offers some advantages, the simplistic nature of cost-oriented pricing is not effective in a complex and competitive business world. As consumers have become more sophisticated and demanding, it is very important that service firms be adapted to this changing environment when setting prices.…