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Pricing and Revenue Management

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Title: Pricing and Revenue Management


1
  • Pricing and Revenue Management

2
Les Miserables
  • The duty of the innkeeper is to sell to the first
    comer, food, rest, light, fire, dirty linen,
    servants, fleas, and smiles to charge for the
    open window, the closed window, the chimney
    corner, the sofa, the chair, the stool, the
    bench, the feather bed, the mattress, and the
    straw bed to know how much the mirror is worn
    and to tax that and by five hundred thousand
    devils, to make the traveler pay for everything,
    even the fleas that is dog eats.

3
Objective of this section
  • Understand steps to better pricing
  • Understand Competitive Value Analysis
  • Review basics of revenue management
  • Understand price customization
  • Understand Value

4
The Challenge of PricingTaxi
5
There is no easy way to find out what the actual
true price of any car is. Oh sure, there is a
sticker price, but only a very naïve fungal
creature just arrived from a distant galaxy
would dream of paying this. In fact, federal
law now requires that the following statement
appear directly under the sticker price
WARNING TO STUPID PEOPLE DO NOT PAY THIS AMOUNT
-- Dave Barry
6
Assume that you go to make a reservation at the
luxury hotel you are loyal to and you find out
that they are charging you 50 per night more
than they usually do because they have only a few
rooms left. Please answer each of the questions
based on this knowledge.
  • 60.3 claimed they definitely would ask about the
    room rate the next time they made a reservation
  • 35.7 claimed they would definitely check rates
    at other properties the next time they planned to
    visit this hotel

7
Steps to Better Pricing
  • Assess what value your customers place on a
    product or service
  • How to create value
  • What is the economic value of this product or
    service to customers
  • Case study on Coca-Cola
  • Look for variation in the way customers value the
    product
  • Do customers vary in their intensity of use
  • Do customers use the product differently
  • Does product performance matter more to some
    customers, even if the application is the same

8
Steps to Better Pricing
  • Look for variation in the way customers value the
    product - continued
  • How do differences in both perceived value and
    non value factors influence price sensitivity and
    divide customers into market segments
  • How can members of different segments be
    identified prior to purchase
  • How can fences between segments be established
  • How can the firm avoid violating legal constraints

9
Steps to Better Pricing
  • Assess customers price sensitivity
  • - How could an effective marketing and
    positioning strategy influence the
    customers willingness to pay
  • - Market research techniques using Excel
  • - Behavioral aspects of pricing
  • Identify an optimal pricing structure
  • Bundle pricing

10
Steps to Better Pricing
  • Consider competitors reactions
  • Who are key current and potential competitors
  • If competitors are currently in this market, what
    actual transactional prices do they charge
  • Given competitors past behavior, personalities,
    and organization structures, what is their goal
    in pricing

11
Steps to Better Pricing
  • Consider competitors reactions - continued
  • What are competitors strengths and weaknesses
    relative to the firm
  • How might a firm use information to influence
    competitors behavior in ways that would make its
    goals more achievable or profitable

12
Steps to Better Pricing
  • Monitor prices realized at the transaction level
  • - pricing across different channels
  • Assess customers emotional response
  • Analyze whether the returns are worth the cost to
    serve

13
Steps to Better Pricing
  • Understand costs
  • What is the incremental variable cost of sales
  • At what levels of output will additional
    expenditures on semi-fixed costs be required, and
    how much will they be
  • What are the avoidable (not yet sunk) fixed costs
    involved to offer this product at the proposed
    price

14
Steps to Better Pricing
  • Understand Supply
  • Cost structure
  • Capacity utilization
  • Product perishability
  • Extent of product differentiation
  • Number and diversity of competitors
  • Impact of sales volume on cost

15
Steps to Better Pricing
  • Understand Demand
  • Price sensitivity of selective demand
  • Efficiency of price shopping
  • Degree of brand loyalty
  • Industry growth rate
  • Buyer concentration
  • Complementary product

16
Steps to Better Pricing
  • Understand Distribution Channels

17
  • Competitor Analysis and Positioning Key to
    Pricing

18
Index of Competitive Strength
The competitive advantages and disadvantages
which are shown in the matrix of competitive
advantages can be condensed into one single
index, the index of competitive strength. All
relative performances of the product on the
individual factors are weighted with their
importance and summed up.
19
Example Importance Question
  • Next, please think for a moment about the reason
    for visiting a specific hotel in Las Vegas for
    gambling. Please tell me how important each
    reason is for you in your decision to visit one
    specific property over another. Please use a 1
    to 10 scale, where a 1 means the reason is not
    at all important and a 10 means the reason is
    very important in your decision to choose one
    establishment over another for gambling. You may
    use any number on this 1 to 10 scale.
  • Ask questions in random order
  • How important is_______________in your decision
    to choose one place to visit over another?
  • It is a place my friends like to go

20
Example Attitude Question
  • Now I am going to read you a list of features
    that may or may not describe some of the hotels
    in the Las Vegas area. Well use a 1 to 10
    scale, where a 1 means it does not describe the
    hotel at all and a 10 means describes the hotel
    perfectly. If you have not been to the hotel
    personally, please base your answers on what you
    have heard, or what you believe to be true.
  • Ask questions in random order
  • How well does this feature describe(brand to be
    rated)?
  • It is a place my friends like to go

21
Calculation of Competitive Index
  • Sum the importance ratings for all features and
    multiply by the number of scale points. (The
    numbers are in column A in Table on next page)
  • For each attribute, multiple average importance x
    average performance. Answers in Column C
  • Sum all numbers in column C
  • Calculate the CSI as -- Total C/Total in A
  • Repeat steps for competitor's see columns D and
    E

22
Calculation of Competitive Index
23
Matrix of Competitive Advantages
Example Casino
high
Slot Club
Friendly Staff
Value of Promotions
Brand
Feel Safe
Service
Package
Level of Importance
Price
Good Entertainment
Non Smoking
low
Relative Performance
24
Steps to Developing a Positioning Strategy
  • Identify the competitors
  • From customers point of view
  • Different competitors in different segments

25
Best Way to Define True Competitors
  • Ask 50 100 customers at check-in, If you did
    not stay here tonight, where would you stay?
  • Those hotels who, if they took a pricing action,
    would force you to take a pricing action
  • Where do you currently walk guests?

26
Best Way to Define True Competitors
  • Based upon a definition of the core customer
    different competitors for different segments
  • Avoid emotional opinions

27
Steps to Developing a Positioning Strategy
  • Determine how the competitors are perceived and
    evaluated
  • Determine the competitors positions
  • Critical to also have reference points for data
    analysis

28
  • Identify competitive set
  • Upper tier member of competitive market with a
    rate premium above our hotel
  • Direct tier member of our competitive market,
    with a rate price point approximately equal to
    our hotel
  • Lower tier member of our competitive market,
    with a rate price point below our hotel

29
  • Calculate for your three core customers in all
    three competitive tiers a total of nine analysis
  • Three core customers
  • Business transient
  • Pleasure transient
  • Group customer
  • Thee competitive tiers
  • Upper tier
  • Direct tier
  • Lower tier

30
  • Conduct competitive pricing analysis
  • Shops for
  • Local hotel reservations office
  • Hotel 800 number
  • GDS system
  • Internet
  • Shop for leisure peak, leisure non-peak, business
    peak, business non-peak, group peak, and group
    non-peak

31
  • Use chart to plot each competitors overall value
  • Horizontal axis plot each competitors overall
    value assessment
  • Vertical axis plot each competitors lowest
    available retail rate obtained via blind shop
  • Center axis your hotel with rate equal to lowest
    available retail price point

32
(No Transcript)
33
53.16 Caesar
189
47.91 Bally
185
180
179
59.97 Rio
63.92 Boulder
43.41 Circus Circus
159
54.3 Fiesta
155
52.07 Excalibur
140
34
Creating Loyalty (44)
Process
Exit
Exit
Exit
Value (Added and Recovery)
Communication
Exit
Fluid
35
Value-Based Pricing
  • Involves choosing a price after developing
    estimates of market demand based on how potential
    customers perceive the value of the product or
    service.
  • Can satisfy diverse product strategies,
    including, for example, market penetration or
    profit maximization.
  • Should be the preferred pricing methodology

36
Question Where Would You Buy Gas?
Station A Sells gasoline for 2.30 per gallon,
and gives a 0.10 discount if the buyer pays
with cash. Station B Sells gasoline for 2.20
per gallon, and charges a 0.10 surcharge if
the buyer pays with a credit card.
37
Examples
  • Which do you choose? A____ or B____
  • A. Receive 50
  • B. 55 chance of receiving 100 45 chance of
    earning nothing

38
Examples
  • Which do you choose? C____ or D____
  • C. Loose 20
  • D. 20 chance of loosing 100 80
  • chance of losing nothing

39
Answer to Previous Question Pertains to Prospect
Theory
40
Daniel Kahneman Toasting Noble Prize
41
Prospect Theory Basic Idea
  • Value is associated not with actual levels of
    consumption, but with anticipated changes in well
    being
  • Buyer assesses prospective decision outcomes
    (prospects) by mentally categorizing them as
    either gains or losses relative to reference point

42
Explanation
  • Station A sets reference point at 2.30 and then
    rewards buyers who pay cash that is a gain
    relative to the reference point
  • Station B first establishes a reference point at
  • 2.20 and then penalizes buyers who use credit
    cards a loss relative to the reference point
  • This is in contrast to economic theory that
    predicts that gains and losses of equal size are
    valued the same

43
Positive Value
Value Function
Station A (2.30 0.10)
1.0
Gains
Losses
1.6
Reference Point (state of well being)
Station B (2.20 .10)
Negative Value
44
Examples
  • Which do you choose? A____ or B____
  • A. Receive 50
  • B. 55 chance of receiving 100 45 chance of
    earning nothing
  • Which do you choose? C____ or D____
  • C. Loose 20
  • D. 20 chance of loosing 100 80
  • chance of loosing nothing

45
Answer
  • If you chose A in Question 1, then you should
    choose C in Question 2
  • If you chose B in Question 1, then you should
    choose D in Question 2
  • How many had a reversal?

46
Rationale for Answers
  • Prospect theory states that people are risk
    adverse (e.g., conservative) when considering
    gains in contrast, more naturally inclined to
    risk a loss than to pay even the expected value
    of avoiding it.

47
Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
48
Economic Theory versus Prospect Theory
  • Economic Theory
  • Gains and losses of equal size treated the same
    (e.g., 100 gain to 100 loss)
  • Prospect Theory
  • loss judged more painful than a gain of equal
    value (e.g., loss of 100 more painful than a
    gain of 100)

49
Economic Theory versus Prospect Theory
  • Economic Theory
  • People are consistent in their decision making
  • Prospect Theory
  • If people perceive they are in the gain domain,
    they will act conservatively
  • If people are in the loss domain, they will tend
    to take more risks

50
Economic Theory versus Prospect Theory
  • Economic
  • Expected utility of uncertain outcome is weighted
    by its probability
  • Prospect
  • Expected utility of uncertain outcome is
    multiplied by a decision weight ?(p) where ?
  • 1.      Impossible events are discarded ?(0)0
  • 2.      Low probabilities are over weighted while
    moderate and high probabilities are under
    weighted (e.g., odds of being involved in an
    airline crash versus car accident)

51
Prospect Theory Implications
  • Increasingly larger gains are incrementally less
    pleasurable (10 to 20 great 110 to 120 not as
    great)
  • Increasingly larger losses are incrementally less
    painful (and smaller losses are almost as painful
    as slightly larger losses)
  • The displeasure associated with losing a certain
    amount (e.g., of money) is generally greater than
    the pleasure associated with winning the same
    amount (e.g., of money)

52
Implications
  • Once consumers have agreed to spend a certain
    amount of money, getting to pay more is easier
    than one would think
  • Goal for is to move the reference point beyond
    price to something that can gain a competitive
    advantage e.g., brand, type of ingredients,
    service, etc.

53
Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
54
Prospect Theory Leads to Framing
55
Framing
Buyers frequently form frames of reference when
making buying decisions, and these frames of
reference in turn influence how buyers respond to
price and product information.
56
Goal of Understanding Frames of Reference
1. Change the relationship between
what customers perceive they pay and what they
perceive they get in return. And manage this
relationship
57
Example -1 Change the relationship between what
customers perceive they pay and what they
perceive they get in return.
  • Option 1 Oliva Cameroon Cigar for 15
  • Option 2 Oliva Cameroon (Figurado, 6 ½ inch x 60
    ring) made by Oliva Cigar Co. Nicaragua
  • The Authentic Cameroon Wrapper gives this boxed
    pressed figurado a pronounced aroma of nuts, with
    hints of cocoa and coffee.
  • It is medium-bodied, but not exceedingly
    strong. 15

58
Example-2 Change the relationship between what
customers perceive they pay and what they
perceive they get in return.
  • Option 1 Selection of teas from wooden box 1.95
  • Option 2 Fresh pot of Lapsang Souchong
    black-smoked tea
  • From the Fujian province of China, this black
    tea is full ancient history and flavor! Smoky
    smooth character is achieved through the smoking
    process over pine and oak fires. 3.95

59
Example-3 Change the relationship between what
customers perceive they pay and what they
perceive they get in return.
  • Option 1 Our standard room for 240
  • Option 2 Or, an upgrade to superior from for
    only 15 more.

How is a better way to write this?
60
Example-4 Change the relationship between what
customers perceive they pay and what they
perceive they get in return.
  • Research shows that a significant number of
    consumers DO place a value on the X brand e.g.,
    for a 10 premium 56 of business travelers and
    38 leisure travelers are very likely to choose
    Brand A
  • Goal is to concentrate not on the price, but the
    components of the brand that consumers desire
  • Give customer choice

61
Example-5 Change the relationship between what
customers perceive they pay and what they
perceive they get in return.
  • Focus on the features of the menu item that are
    different from what consumer can buy at home
    e.g., Kobe beef

62
Ways To Frame Purchase Decisions
  • Structure transactions to reflect gains and
    avoid losses
  • Present price last after descriptions
  • endow potential buyers

63
2 Change Way Frame Decisions
64
Example 1
  • Let customer know the cost of not booking and
    paying now that is, give the difference between
    current booking class and the next level up

65
Examine How We Quote Rates
  • We always quote low to high, which sets reference
    point low and the other prices a loss
  • If we quote high price first, then other prices
    are a gain

66
Example 2
  • Make it simple for customer to see options and
    trade-offs

67
This slide shows how prices change depending upon
day of flight key here is that customer sees the
options and can make choices
68
Figure 3
69
(No Transcript)
70
(No Transcript)
71
Note departure and return are bundled Customers
knows price but has to buy prepackaged schedule
72
Customer chooses by schedule but does not know
price
73
Customer can easily get both price and schedule
and therefore it is easy to make choice
74
Example 3
  • Frame decision outcomes in terms of gains or
    losses
  • do not discuss benefits of buying the product,
    but discuss the consequences of not buying the
    product

75
Example 4
  • Frame by Bundling Gains and Losses
  • un-bundle gains
  • bundle losses

76
Frame by Un-bundle Gains
  • Packages such as London for Free use of free
    bundles gain list all the components separately
  • Ability to purchase upgrades by segment (e.g.,
    seat on UK to USA different utility than seat on
    USA to UK)
  • Check-in time use of lounge

77
Frame by bundle losses
  • Should we quote rates that include all taxes and
    airport fees?
  • What losses that can be bundled?

78
Hotel Examples?
79
Example of Research Study Undertaking
  • Test Condition Bundling Added
  • Utilize proper opening dialogue
  • Listen to callers requests
  • Ask repeat guest question and determine reason
    for stay
  • Provide normal sales strategy
  • At time of purchase, ask the following

80
Example of Research Study Undertaking
  • For an extra 15 we can offer an amenities
    package that includes
  • no phone access charge,
  • 10 free local phone calls,
  • free received faxes,
  • free sent faxes,
  • free internet access,
  • one 3-minute call to call home (may call anywhere
    in the world).

81
Examples of current research
  • Test Condition Willingness to Pay for
    Guaranteed Bed Type
  • At time of purchase, read the following
  • As you are probably aware, hotels only guarantee
    a room, they never guarantee what the bed type in
    the room will be. The reason for this pertains
    to the fact that the bed inventory is limited and
    fixed. Since guests arrive at different
    intervals, room assignments are made on a first
    come first serve basis. This means that the bed
    type you would like to have may not be available.
    For an extra 20 we can guarantee that no matter
    what time you arrive, the bed type you requested
    will be available. 

82
Examples of current research
  • Test Condition Willingness to Pay for
    Guaranteed Bed Type 
  • Other test conditions
  • At what price would this guarantee service be so
    expensive that you would not consider purchasing
    this service?
  •  At what price would this guarantee service be
    expensive, but you still would consider
    purchasing this service?
  •  What price would you expect this hotel to charge
    for the guarantee of a bed type?

83
Framing and Reference Price Formation
84
Hotel Example Would You Choose?
  • Staying at the Venetian Hotel in Las Vegas for a
    vacation Staying two nights 3036 rooms
  • Which Would You Choose?
  • A Luxury suite room at 159 and then for an
    additional 30 you get guaranteed room on a high
    floor with a strip view
  • B Luxury suite room with guaranteed room on a
    high floor for 189, or room for 30 less
    anywhere in the hotel

85
Hotel Example
  • Venetian Hotel in Las Vegas
  • Manipulation
  • Quote 159 first (option A previous slide)
  • Quote 189 first (option B previous slide)
  • Two Teams
  • Team 1 conversion 21.9 calls 1813
  • Team 2 conversion 21.2 calls 1654

86
Hotel Example
  • Upgrades
  • 159 quoted first 13.59 upgraded (option A)
  • 189 quoted first 20.55 upgraded (option B)
  • Translates 31,878 extra revenue for the month to
    the bottom line

87
Restaurant Study
88
Study Design
  • Eight different menus
  • Type of description
  • Modest/Detailed
  • Number of items
  • Three per category/Two per category
  • Prices
  • High prices/Low prices

23
89
Spinach and Feta Dip
  • Modest Description
  • Spinach and Feta Cheese with Tomatoes and
    Pinenuts
  • Detailed Description
  • Organic Spinach Sautéed in Garlic and Combined
    with Authentic Athenian Feta Cheese, Sun Ripened
    Yellow Tomatoes and Toasted Pinenuts

90
MENU DESIGN
Menu One Detailed Menu Descriptions, High
Price, 3 Choices Menu Two Detailed Menu
Descriptions, Low Price, 3 Choices Menu
Three Detailed Menu Descriptions, High Price, 2
Choices Menu Four Detailed Menu Descriptions,
Low Price, 2 Choices Menu Five Modest Menu
Description, High Price, 3 Choices Menu
Six Modest Menu Description, Low Price, 3
Choices Menu Seven Modest Menu Description,
High Price, 2 Choices Menu Eight Modest Menu
Description, Low Price, 2 Choices
91
Hypothesis Two Items Each Menu Category
Ho1 X value (high price with detailed description) X value (high price with modest description) Mean 4.74 4.26 p.083
Ho2 X value (low price with detailed description) X value (low price with modest description) Mean 4.99 4.74 P.369
Ho3 X value (high price with detailed description) X value (low price with detailed description) Mean 4.74 4.99 P.315
Ho4 X value (high price with modest description) X value (low price with modest description) Mean 4.26 4.74 p.113
Ho5 X value (high price with detailed description) X value (low price with modest description) Mean 4.74 4.74 p1.00
92
What Influence Buyers Reference Prices
  • Current Price Influences
  • Past Price Influences
  • Purchase Context Influences
  • Prices of similar items
  • Price considering cost of making item yourself

93
1. Current Price Influences
  • Product-Line Pricing
  • Adding a premium product to the product line may
    not necessarily result in overwhelming sales of
    the premium product itself. It does, however,
    enhance buyers perceptions of lower-priced
    products in the product line and influences
    low-end buyers to trade up to higher-priced items

94
Product Line Pricing Example Wine
  • 38
  • 48

95
Product Line Pricing Example Wine
  • 38
  • 48
  • 58

96
Anchoring
  • The idea is that when a person must make a
    judgment, he or she starts with an initial,
    approximate judgment - an anchor. This
    judgment gets the person in the ball-park.
    Then, in view of other considerations, the person
    arrives at a final judgment by adjusting away
    from that initial assessment

97
Our top room is a Park Avenue Suite decorated
with an elegant European accent. This suite is
900 Sq. Ft. The suite is designed with the
business traveler in mind. Suites feature a
separate parlor with a wet bar and refreshment
center, an oversized working desk, 2 multi-line
speaker phones with call waiting, voicemail,
data-port, fax machines, Lodgenet Entertainment
System with movies and CD Library. These rooms
overlook 56th street or the city view of 57th
street. The bedroom can be closed off from the
living room. The king size bed includes five down
pillows with satin-banded Egyptian cotton
Pillowcases. Suites sell for 995.00.   Position
following second   Our 2nd room type is the
Metropolitan Suite. This suite is 700 Sq. Ft.
  Position following third   Our 3rd room type
is the Executive Suite. This suite is 600 Sq. Ft.

98
Current Price Influences - continued
  • Suggested Reference Prices
  • State a price charged previously
  • State a price charged by a competitor
  • State suggested retail price

99
Example of item being tested
  • If consumers are always told the normal rate, and
    then provided with a discount from that rate,
    they will remember the normal rate, not the
    discount rate.  In addition, when the invoice is
    provided to the client at check-out, the normal
    price will be printed. At the end the discount
    will be subtracted. We should see a rise in
    "overall price value" compared to when customer
    only sees the price paid.

100
Current Price Influences - continued
  • Consider the following airline prices seen on
    Internet for round-trip
  • London to Paris 310
  • Paris to Prague 288
  • Nice to Prague 289
  • London to Nice 310
  • Given above prices, answer following questions
  • 1. What price would you expect to pay to fly
    from London to Prague _____
  • 2. What is the most you would pay _____
  • 3. What is a fair price _____

101
2. Past Price Influences
  • Past price paid has a particularly strong
    influence on the reference price because it is
    more likely to be recalled as a frame of
    reference than past prices that were observed in
    advertising

102
2. Past Price Influences - continued
  • Implications of Previous Slide
  • Numerous small price increases for frequently
    purchased items more likely to be accepted than
    are infrequent large increases
  • Need to always state actual price and discount
    from that otherwise, low promotional prices can
    establish low reference prices for judging the
    value of later purchases

103
3. Purchase Context Influences
  • You are lying on the beach on a hot day. All you
    have to drink is warm water. For the last hour
    you have been thinking about how much you would
    enjoy a nice cold bottle of your favorite
    imported beer. A companion gets up to make a
    phone call and offers to bring back a beer. The
    only near by place where beer is sold is a small,
    run-down grocery store. He asks what the maximum
    price you are willing to pay. If the price is
    higher, he will not buy it.
  • What price do you tell him? _____

104
3. Purchase Context Influences
  • You are lying on the beach on a hot day. All you
    have to drink is warm water. For the last hour
    you have been thinking about how much you would
    enjoy a nice cold bottle of your favorite
    imported beer. A companion gets up to make a
    phone call and offers to bring back a beer. The
    only near by place where beer is sold is a resort
    hotel. He asks what the maximum price you are
    willing to pay. If the price is higher, he will
    not buy it.
  • What price do you tell him? _____

105
3. Purchase Context Influences continued
  • Use context as a frame of reference that makes
    the price seem fair or reasonable
  • e.g., 8 hours tossing and turning trying to get
    comfortable, versus good night sleep
  • e.g., a day at the office
  • e.g., What is your time worth to drive versus
  • to fly to airport that is not
    convenient?

106
4. Prices of similar items (e.g., if consumers
think there is no difference, then there is a
problem)5. Price considering cost of making
it yourself
107
6. Price Differentials
  • Scenario A You are a purchasing agent for a
    large organization. You have ordered for your
    own use a new electric typewriter with special
    features, which will cost 1,000. A friend
    discovers that the identical typewriter is
    available from another vendor for 600. Would
    you cancel the current order and switch to the
    other vendor? (Assume that canceling the current
    order and initiating a new one will take one of
    the purchasing clerks who works for you about
    one-half day. Assume that there are no other
    costs such as a loss of good will or delay in
    delivery.)
  • Would you cancel the current order and switch
    to the other vendor?
  • Yes _______ No _________

108
  • Scenario B You are a purchasing agent for a
    large organization. You have ordered a new word
    processor with special features, which will cost
    20,000. Your purchasing department discovers
    that the identical word processor is available
    from another vendor for 19,600. Would you
    cancel the current order and switch to the other
    vendor? (Assume that canceling the current order
    and initiating a new one will take one of the
    purchasing clerks who works for you about
    one-half day. Assume that there are no other
    costs such as a loss of good will or delay in
    delivery.)
  • Would you cancel the current order and switch
    to the other vendor?
  • Yes _______ No _________

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  • Scenario A the difference is 40, whereas in
    Scenario B the difference is 2, even though the
    absolute difference in both is 400
  • Implications
  • the perception of a price change depends on the
    percentage, not on the absolute difference
  • there is a threshold above and below a products
    price at which price changes are ignored

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  • When quoting rates, quote price differences
    instead of whole rate e.g., 320 versus 290.
    For 30 less get.

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7. Framing Price Differences
  • Look at the two pairs of prices below and quickly
    answer the question For which pair of prices is
    the lower price more of a bargain?
  • Higher Price Lower Price
  • First Pair 0.89 0.75
  • Second Pair 0.93 0.79
  • Your answer _____

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  • Perceptions of Odd Price Endings
  • Buyers use left most digits in a price and round
    up to form a quick reference point to evaluate
    the actual price against.
  • Previous example second pair seems to have
    better discount.
  • (first pair 8-7 1 second pair 9-7 2 if
    figure same in first column, then look at second
    column)
  • In reality, difference is a greater percentage
    of the price in the first pair (18.6 vs. 17.7)

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Objective of this section
  • Understand steps to better pricing
  • Understand Competitive Value Analysis
  • Review basics of revenue management
  • Understand price customization
  • Understand Value
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