Service cost is a charge attributable to handling tasks by another person, as per his knowledge, experience and skills.
Services include many types of work carried out by members of a company or organisation for its clients. Supply of services does not include transmission of ownership to customer nor his assets. The goods supplied are intangible and created once supplied. Common examples of services are:
- legal advice,
- medical advice,
- customer service in the broad sense.
Establishing costs and prices
Costs of services needs to be balanced in order to attract prospects. Low price is may be identified with low quality of service. Nevertheless, high prices deter the customer. Once setting prices we should take into account:
- market price of similar services- basing on average price we should decide on our pricing,
- lead time- how many hours do we need to work to finalize the service supply,
- benefits for customer- success fee, decide whether we should offer cost depending on results.
Also, popular methods of amending prices is Pareto's Law- also known as 80/20 rule. As 20% of customers would generate 80% of profits the costs of our service should be keep increasing throughout the service life-span,
Main costs To the main costs of supply of services are:
- primary product- materials we need to use in order to finalize service supply,
- time- not only spent on the project but also on achieving knowledge, trainings to gain know-how,
- risk- as per intangible nature of services, customers cannot use it before supply, this is connected with risk of not meeting client's expectation and may cause request to improve, change or resupply the service.
Prior service cost- Connected to perquisite voted due to retirement plan amendment. It is associated with worker services accorded in previous periods.
Past service cost- Connected to change of present value commitment of benefit obligations brought by workers in previous period. This cost comes from variations in post-employment benefits. The variation may be positive or negative.
It is rental added to payoff for core products or service delivery. Usually added as to compensate additional costs of interaction or in order to increase profits. For example, online customer service is free of charges but in order to contact company via phone, clients need to pay extra. Also, tips at the restaurant or hotels are used to appreciate work of worker.
- Elfenbein D. W., McManus B., (2010). A Greater Price for a Greater Good? Evidence That Consumers Pay More for Charity-Linked Products, "American economic journal: Economic Policy vol. 2", p. 28-60.
- Kelley S. W., Donnelly, J. H., & Skinner, S. J. (1990). Customer participation in service production and delivery. "Journal of retailing", 66(3), 315-335.
- Klenow P. J., Malin B. A., (2010). Chapter 6 - Microeconomic Evidence on Price-Setting, "Handbook of Monetary Economics", V. 3, p. 231-284.
- Lusch R. F., Vargo S. L., Tanniru M. (2010). Service, value networks and learning, "Journal of the Academy of Marketing Science", p. 19-31.
- Tan Z., Li W., Zhang X., Yang H. (2015). Service charge and capacity selection of an inland river port with location-dependent shipping cost and service congestion, "Transportation Research Part E: Logistics and Transportation Review", 13-33.
Author: Anna Zalewska