RACY CASES-9 Niceties of pricing services


First published in HBL
V Pattabhi Ram

After her fairly instructive exchange with Doc (her senior audit manager) last week, Wafers had begun to appreciate how tricky service marketing was. And now there was this new dimension about service pricing. How does a lawyer figure out how much he should bill a client? Or a doctor decide what he should charge for a surgery. Her articleship gave her no lessons on these. She had turned to her cost accounting textbook for help. It offered no insights except to provide details of how transport companies, electricity boards and hotels price on the “cost plus margin” model. What about services that did not have any visible costs? She decided to fall back on the gang to get some clues.

It was China, her IIT pal, who provided the first insight. “Next time when you go to an optician’s shop, watch what the optician does,” he said. Rinku, the loud mouth reporter, was all ears. A story in as unglamorous a place as the optician’s shop? Phew. “Opticians are trained to look at the customer’s face when they quote” said China. “Suppose you are shown a range of glasses. You pick one and ask for the price. The optician would say “Rs 700”. And if the expression on your face stays unchanged he would tell you, “Sir, that’s only for the frame. The glasses will cost you extra.” You ask him “How much?” and he tells you “Rs 300” again looking you straight in the face. If your face stays expressionless, he chips in “Sir that would be for one piece.” Even Wafers smiled. “Who would want a frame and just a piece of glass?” She got the message.

Pricing was based on “What the traffic can bear.” Wasn’t that the phrase her professor had used?

Wafers distinctly remembered that day. She had fallen sick and had visited a local doctor. He had asked her name and it pleased her. Good, she didn’t have to be an anonymous patient. The doctor had then asked what her dad did. “Sr. Vice President, Citibank” she had told with pride. And mom? “Marketing Manager, HLL.” Then came the clincher, “What are you doing Wafers?” “Me, doc? I am studying to become a chartered accountant.” A few polite questions later came the doctor’s consulting fee. Rs 300. She had flinched but had paid up. Later she narrated the incident to her professor and he smilingly told her “next time when you visit a doctor tell him your dad works in a private firm, your mom is a housewife and you are one of those unemployed millions and he will bill you Rs 25.” She understood. “What the traffic can bear,” closed out her professor.

Even as she was doing this trip down memory lane, Rinku, the reporter, was pontificating. “I cannot understand why if a demand draft for Rs 1000 could cost Rs 10, a demand draft for Rs 100,000 should cost Rs 2000?” Wafers agreed. “They don’t need Rs 1990 to add two zeroes on the draft”. The bearer, bringing in another plate of French fries chipped in. “There is no extra effort by the bank for the Rs 100,000 draft. See, they don’t even have to count the cash!” Neither was there a risk. “Should the bank go belly up, it is the customer’s money that goes down the tube,” remarked Rinku. Wafers had the solution, “What the traffic can bear.”

But is it that way always? The other day she had read that the maverick painter M F Hussein, a self confessed admirer of Madhuri Dikshit, had received a contract to paint 100 paintings each at Rs 1 crore. 100 crores, wow. She didn’t even know how many zeroes would that have! Why should a Hussein painting fetch a million dollars? Do the tools and the material cost such a fortune? “Is there value for that money?” she mulled. In a different context, her professor had talked of how an Arrow Shirt costs thrice what a usual shirt made of similar material costs. Brand value. The customer gets a feeling of prestige paying that price! “Little wonder”, he had remarked, “some wear shirts with the designers label stuck not inside, but outside the shirt for everyone to see”!

An excited Rinku offered another dimension to service pricing. He recalled an incident at the Press. The imported machinery had gone kaput and the service engineer was called in to set it right. The engineer opened up the equipment, spent 10 minutes looking at the 100s of parts that the machine had; removed two, rectified one, replaced the other and presto the machine was working again. The bill: Rs 500 for parts and Rs 2500 for service. An aghast official of the newspaper had scorned. “10 minutes work and Rs 2500? That’s Rs 15,000 per hour or Rs 120,000 per day. Even my editor in chief doesn’t earn that much”. The service engineer responded, “Its not Rs 2500 for 10 minutes of work. Its Rs 2500 for figuring out which from out of the 100s of parts is working and which isn’t and then setting it right”. That settled it.

“What the traffic can bear.” “Quality Price.” “Brand Price.” “Prestige pricing.” “Vanity pricing.” “Knowledge pricing.” Wafers was beginning to learn a few things. And then China added his two bit “The price shouldn’t be too high as to appear crass. Nor should it so low that people would doubt the quality of service”. Rinku offered a supplement, “Would you trust a doctor who charged Rs 5,000 for a heart surgery?” Wafers remembered what her professor had once told the class, “If you offer peanuts you will get only monkeys.” She was feeling happy. The gang had with its small talk had given her some insight into pricing. Bravo.

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About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
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