Academic journal article Social Work

Pricing: A Normative Strategy in the Delivery of Human Services

Academic journal article Social Work

Pricing: A Normative Strategy in the Delivery of Human Services

Article excerpt

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 the 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 the mission of the agency. For service providers in the not-for-profit sector, the revenue production aspect of price may often be secondary to other organizational goals.

Traditional approaches to pricing have been either cost or market oriented. The former is supply focused in that price is viewed as a reflection of the cost of the input used to create the goods or services, whereas the 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 the elasticity of demand. In competitive markets the combined forces of competition and the desire of sellers to maximize profits will lead sellers to produce to the point at which price, marginal cost, and average cost 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 cost conscious and to limit their financial liability (Feldstein, 1983). Paringer (1983) noted that the presence of insurance leads to "the large divergence between consumer out-of-pocket price and marginal cost" (p. 121), which means that the price paid by the consumer, who is insured against a particular loss, may be far less than the cost of producing the service. Enthoven (1980) argued that the 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 the pricing of services is made more complex by the presence of factors external to the market, as well as by social norms and values (MacRae & Wilde, 1979).

The extent to which demand for a product changes when the price of the 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 the 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 the lower price. When demand is inelastic, the amount consumers demand is relatively constant when changes are made between price points. Profits are therefore increased when prices are increased to the maximum the market can bear.

Gabor (1988) observed that the amount a consumer may demand may actually increase when prices are raised. Consider, for example, the fictitious planet Zed. On planet Zed there are the very rich, the middle class, and the poor. Furthermore, there are only two kinds of food, rice and caviar. The poor population eats only rice, which is much cheaper than caviar; the rich population eats only caviar; and the middle class eats rice two meals a day and caviar one meal a day.

If the price of rice rises, the poor population will eat the same amount of rice but forgo what few luxury items they once could afford. If the 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 the other hand, does not eat rice, and therefore the 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 the cost of rice will dramatically affect their food budgets. …

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