The marketing of services 601
structures; and the effects of distorted markets
for services.
The inseparable nature of services makes
the possibilities for price discrimination
between different groups of users much greater
than is usually the case with manufactured
goods. Goods can easily be purchased by one
person, stored and sold to another person. If
price segmentation allowed one group to buy a
manufactured good at a discounted price, it
would be possible for this group to buy the
item and sell it on to people in higher priced
segments, thereby reducing the effectiveness of
the segmentation exercise. This point has not
been lost on entrepreneurs who buy branded
perfumes cheaply in the Far Eastern ‘grey
market’ and import them to the UK, where
prices are relatively high. Because services are
produced at the point of consumption, it is
possible to control the availability of services to
different segments. Therefore, a hairdresser
who offers a discounted price for the elderly
segment is able to ensure that only such people
are charged the lower price – the elderly person
cannot go into the hairdressers to buy a haircut
and sell it on to a younger segment, which
would otherwise be charged the full price for
the service.
Services organizations frequently charge
different prices at different service locations.
The inseparability of service production and
consumption results in services organizations
defining their price segments both on the basis
of the point of consumption and the point of
production. An example of this is found in
hotel chains, who in addition to using price to
target particular types of customers, also often
charge different prices at different locations.
Some retailers with a combination of large
superstores and small convenience stores can
justify charging higher prices in their conveni-
ence stores.
A second major difference between goods
and services pricing is based on the high level
of fixed costs that many service providers
experience. The marginal cost of one additional
telephone call, one additional seat on an air-
plane or one additional place in a cinema is
often very low. This can give service suppliers a
lot of scope for charging different prices for
what is basically the same product offer. High
air fares in the peak period reflect a buoyant
level of demand, as well as the amount needed
to cover fixed costs at the peak. To encourage
additional demand in quieter periods, airlines,
like many other service industries, can reduce
their prices. This is often referred to as marginal
cost pricing. The price that any individual
customer is charged is based not on the total
unit cost of producing it, but only the addi-
tional costs that will result directly from servic-
ing that additional customer. It is used where
the bulk of a company’s output has been sold at
a full price that recovers its fixed costs, but in
order to fill remaining capacity, the company
brings its prices down to a level that at least
covers its variable, or avoidable, costs. Mar-
ginal cost pricing is widely used in service
industries with low short-term supply elasticity
and high fixed costs. It is common in the airline
industry, where the perishability of a seat
renders it unsaleable after departure. Rather
than receive no revenue for an empty seat, an
airline may prefer to get some income from a
passenger, so long as the transaction provides a
contribution by more than covering the cost of
additional food and departure taxes.
The final point of difference in managing
the price element of the services marketing mix
relates to the fact that services are more likely
than goods to be made available in distorted
markets, or in circumstances where no market
exists at all. Public services such as museums
and schools that have sought to adopt market-
ing principles often do not have any control
over the price element of the marketing mix.
The reward for attracting more visitors to a
museum or pupils to a school may be addi-
tional centrally derived grants, rather than
income received directly from the users of the
service.
Services are more likely than goods to be
supplied in non-competitive business environ-
ments. As an example, the high fixed costs