Pricing: A Normative Strategy in the Delivery of Human Services

Abstract

The price of a service is an integral part of that service. Price can be viewed as a statement of value, a reflection of costs, or a marketing strategy. In human services, particularly in not-for-profit sector, price can be used as an effective means of achieving program goals. That is, price can be used to reinforce specific patterns of service utilization, to prioritize resource deployment, and to pursue other goals relevant to mission of agency. For service providers in not-for-profit sector, revenue production aspect of price may often be secondary to other organizational goals. Traditional approaches to pricing have been either or market oriented. The former is supply focused in that price is viewed as a reflection of of input used to create goods or services, whereas latter is demand focused in that price is a tool for eliciting a certain response from a potential consumer. Economic Views on Pricing Economic theory relates price to cost, competition, and elasticity of demand. In competitive markets combined forces of competition and desire of sellers to maximize profits will lead sellers to produce to point at which price, marginal cost, and average are equal (McCain, 1981). The price of health and human services paid by consumers is influenced by third-party payers and voluntary and public subsidies. Insurance policies use deductibles, copayments, and limits to make consumers conscious and to limit their financial liability (Feldstein, 1983). Paringer (1983) noted that presence of insurance leads to the large divergence between consumer out-of-pocket price and marginal cost (p. 121), which means that price paid by consumer, who is insured against a particular loss, may be far less than of producing service. Enthoven (1980) argued that price of insurance itself is, in effect, subsidized because it is purchased with pretax dollars. Therefore, consumers will tend to buy more insurance than they would if they were purchasing insurance with after-tax dollars. In short, an economic approach to pricing of services is made more complex by presence of factors external to market, as well as by social norms and values (MacRae & Wilde, 1979). The extent to which demand for a product changes when price of product changes is referred to as price elasticity. Price elasticity is said to be high when demand changes dramatically in response to a given price change and low when such a change has a minimal impact on price. When demand is relatively elastic, profits will increase when costs are adjusted downward, within certain price points, because consumers will demand a much greater volume of goods or services at lower price. When demand is inelastic, amount consumers demand is relatively constant when changes are made between price points. Profits are therefore increased when prices are increased to maximum market can bear. Gabor (1988) observed that amount a consumer may demand may actually increase when prices are raised. Consider, for example, fictitious planet Zed. On planet Zed there are very rich, middle class, and poor. Furthermore, there are only two kinds of food, rice and caviar. The poor population eats only rice, which is much cheaper than caviar; rich population eats only caviar; and middle class eats rice two meals a day and caviar one meal a day. If price of rice rises, poor population will eat same amount of rice but forgo what few luxury items they once could afford. If poor population suffers extreme poverty, they may eat less rice and go hungry, but no one is that poor on Zed. The rich population, on other hand, does not eat rice, and therefore increase in price does not affect them. The middle class, however, provides a more interesting example. Because rice is their primary food, an increase in of rice will dramatically affect their food budgets. …