When you price a program for services, all the costs have yet to be incurred. With a product, the costs have been spent, and the margin can be more easily determined.
Sophisticated service organizations utilize complex algorithms and modeling to predict costs that will be incurred to deliver service. There are lots of averages and metrics applied to the process: The average time between failures, the average time to restore, the average cost of the labor component, the travel. Unfortunately, some of these complex methodologies end up reducing the forest to the trees, and as a result services pricing is more art than science. We tend to me more inward-looking, and price according to our costs–rather than focusing on the market and what the customer will pay.
A true story from about 25 years ago illustrates this point, and a couple others:
The owner of a jewelry store in Santa Fe, NM, took a large inventory position in high-end turquoise and silver jewelry made by a leading local artisan. Unlike the stuff sold on the roadside in the Southwest, this was very high-quality art jewelry. She displayed it in one of the regular cases in her store, priced moderately.
For weeks the line did not move. She moved it into the feature showcase in the center of the store, and featured some information about the artist. The jewelry still didn’t move.
She was getting ready to go on a 3-week vacation, and she was reviewing the various items to be done around the store with her assistant. Among the other items, she told the assistant to cut the price of the jewelry in half–she had decided to cut her losses and move out the inventory.
When she returned from her vacation, she noticed that virtually all the art jewelry had sold. She mentioned to her assistant that it was a shame to have to lower the price to move it, but at least it was gone.
The assistant was surprised. She informed the owner that she had misunderstood, and instead of cutting the price in half, she had doubled the price.
People expect to pay a reasonable price for quality services.
Nobody wants a “cheap” turquoise bracelet.