Saturday, April 23, 2011
Art of Pricing in Services industry . what's ' fair' pricing ?
A Wharton article on pricing of services
--------------------------------------------------------------
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2751
These are charges for special services and modifications, like using an out-of-network ATM. Docters, who is also the author of Winning the Profit Game: Smarter Pricing, Smarter Branding, says that these premium fees can be well received if explained properly and understood by the consumer. He notes that companies often use these kinds of fees, or the lack thereof, to reward valued customers -- like high-mileage air passengers who are often exempt from the extra charges levied against less frequent fliers.
Making people pay $5 for a sandwich seems reasonable on a short domestic flight, for example, but if airlines start charging for basic beverages on international flights, where consumers have no other options, that seems unfair and is more likely to provoke outrage. "Consumer perception of fees is less about money and more about fairness," Berger notes.
With regulators drastically restricting overdraft fees in mid-2010, banks are looking to make up this income in other ways. Last month, Bank of America announced a new suite of accounts that include monthly maintenance fees, some as high as $25. Overall, the number of banks and credit unions that offer free checking declined 11% from 2009 to 2010, according to a study by Moebs Services. The study points out that, to recoup these lost fees, banks are pushing e-statements and direct deposit and may levy fees against customers who decline to use these features.
By way of explanation, he points to "prospect theory," which states that people prefer their gains in smaller increments to spread out their joy, but want losses to be concentrated so the pain arrives in one hit. "It's ... ironic that companies don't charge enough to begin with," and then compound their problems by spreading out the rest of the cost in the form of unpopular fees, Fader says.
According to Bell, for consumers to accept fees, three factors need to be in place: Customers need to understand the need for the fees, perceive them as fair, and feel that they have received some benefit from the fee. "Absent these conditions, consumers are likely to be frustrated."
"Fees must reflect the context of the event prompting the fee. If the fee is consistent with a customer's expectations, then customers tolerate a surprising level of fees."
--------------------------------------------------------------
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2751
These are charges for special services and modifications, like using an out-of-network ATM. Docters, who is also the author of Winning the Profit Game: Smarter Pricing, Smarter Branding, says that these premium fees can be well received if explained properly and understood by the consumer. He notes that companies often use these kinds of fees, or the lack thereof, to reward valued customers -- like high-mileage air passengers who are often exempt from the extra charges levied against less frequent fliers.
Making people pay $5 for a sandwich seems reasonable on a short domestic flight, for example, but if airlines start charging for basic beverages on international flights, where consumers have no other options, that seems unfair and is more likely to provoke outrage. "Consumer perception of fees is less about money and more about fairness," Berger notes.
With regulators drastically restricting overdraft fees in mid-2010, banks are looking to make up this income in other ways. Last month, Bank of America announced a new suite of accounts that include monthly maintenance fees, some as high as $25. Overall, the number of banks and credit unions that offer free checking declined 11% from 2009 to 2010, according to a study by Moebs Services. The study points out that, to recoup these lost fees, banks are pushing e-statements and direct deposit and may levy fees against customers who decline to use these features.
By way of explanation, he points to "prospect theory," which states that people prefer their gains in smaller increments to spread out their joy, but want losses to be concentrated so the pain arrives in one hit. "It's ... ironic that companies don't charge enough to begin with," and then compound their problems by spreading out the rest of the cost in the form of unpopular fees, Fader says.
According to Bell, for consumers to accept fees, three factors need to be in place: Customers need to understand the need for the fees, perceive them as fair, and feel that they have received some benefit from the fee. "Absent these conditions, consumers are likely to be frustrated."
"Fees must reflect the context of the event prompting the fee. If the fee is consistent with a customer's expectations, then customers tolerate a surprising level of fees."
Labels: Knowledge at Wharton
