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According to Mckinsey Companys 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 111 percent increase in profits among the 2462 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 Cost-oriented approach and competitive-oriented approach are the two traditionally dominant pricing approaches in the service industry Zeithaml et al 1985 A cost-oriented pricing approach sets a service price based on all the costs plus a desirable profit margin Beard and Hoyle It is usually based on full cost but it can also be a contribution and incremental basis For competitive-oriented pricing approach the price is set to meet the market competitive situation Kotler and Bloom 1984 The simplistic nature of these two pricing approaches provides the advantage of a useful and quick pricing method On the other hand the simplicity of these two pricing approaches also causes them to lose their effectiveness as the business world becomes more dynamic and complex In general competitive-oriented services pricing approach provides no guidance on how much higher or lower than a competitors price a service provider should set its price Also most cost-oriented service pricing strategies suffer several limitations including not considering supply and demand not maximizing profit and not incorporating unique service characteristics and
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