Heterogeneity of consumer demand: opportunities for pricing of services

The purpose of this paper is to provide a framework to help marketers of services price their products by looking beyond costs and competitive forces. By analysing the value of information; consumers' price sensitivity; and transaction costs other than search costs, against the characteristics of their service they could make more profitable pricing decisions.

A critical review of the academic and professional literature reveals a rich array of possibilities for pricing services. A simple framework is developed in the form of a matrix crossing the three dimensions of heterogeneity of consumer demand with the four characteristics of services. Each cell represents a set of pricing options.

Services should be priced in a way to reflect the customers' price sensitivity, the nature of the transaction and its cost, and the value of information. The pricing should also reflect the four characteristics of services: intangibility, perishability, lack of standardization, and inseparability of production and consumption.

This paper fills a conceptual and practical gap for a structured review of the current state of knowledge about the pricing of services. It offers practical and solid advice and examples demonstrating the application of the different types of pricing strategies for service providers.