Pricing Strategies

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Pricing Strategies

• Week 5
• EWMBA 206.1

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Analysis Framework
Perceptual mapping
Company Analysis Marketing Myopia
First mover advantages
Customer Analysis
Competitor
Analysis
Segmentation
Positioning
Marketing Orientation
Marketing Strategy
Branding
Product
Pricing process Pricing and innovation
Price
Promotion
Place
Market
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Economics of PricingTwo Problems with Uniform
Price Strategy

• Leave money on the table
• Some customers are willing to pay more
• Pass-up Profit
• Some potential customers were not served even
  though the firm could have served them at prices
  above the marginal cost

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Price CustomizationPrice Discrimination and
Self-selection

• Iyers Carwash
• Price of Car washes
• 3 5000
• 4 3000
• How to Price ? What is the best single price?
• Can you increase revenues? If so to what level?

5
Price Discrimination and Self-SelectionConsumer
Couponing

• Why coupons
• People who are willing to pay more tend to have a
  higher personal time cost and are therefore less
  likely to clip coupons
• Disadvantage is non-redemption costs
• Companies spent approx. 6 B on distributing 257
  B coupons of which 3.6 B were actually redeemed.

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Key Principles

• Consumers are heterogeneous in their willingness
  to pay
• Charge according to consumer price sensitivity.
  Make sure that people with inelastic demand pay
  more and people with elastic demand pay less.
• Key Problem
• Ensuring self-selectionseparating the segments
• Make sure that prices directed at one segment
  cannot be taken advantage of by the other.
• How should you achieve this?
• Identify a bad for the high willingness to pay
  segment and bundle it with the product to create
  a product for the low segment
• This is where product design and pricing comes
  together.
• Separating the segments fences in airline pricing
• significant increase in prices lt 14 days before
  departure.

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Price CustomizationObservable Characteristics

• Based on observable characteristics that signal
  buyers price sensitivity
• http//www.chessclub.com/ Students vs. Adults
• Theaters can observe the consumer-type using his
  student ID, senior ID
• Customer 1 No student ID 6.75
• Customer 2 Haas student ID 4.75
• Customer 3 Senior citizen ID 4.75
• etc.
• Select the segmentation variables that
• Separate consumers based on observable
  characteristics into groups with different price
  sensitivities (e.g., ability to pay (tuition),
  age (movie))
• Are observable and targetable without great
  expense (e.g., Lotus 1-2-3 325 for first time
  buyer, 99 for upgrades)

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Price DiscriminationPurchase Location

• Consumers at different purchase locations have
  different price sensitivity
• Cure for anthrax 450 in the U.S. 190 in Canada
  http//www.canadadrugs.com
• Retailers like Staples website asks for zip code
  http//www.staples.com/
• Select segmentation variables that ensure
• different segments purchase at different
  locations
• high enough shipping cost to prevent arbitrage

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Customize By Time of Purchase

• Peak-load pricing designed to re-distribute
  usage from peak time to off-peak time
• Redeye flight.
• On demand computing.
• Electronic road pricing.

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Electronic Road Pricing
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Psychology in Pricing Strategy

• Jeans 5535
• http//www1.macys.com/catalog/index.ognc?CategoryI
  D89AdID509256LinkTypeSiteAdLinkLoc1PageID
  382911142924cm_re61.0.6-_-MENMAINAD-_-IMAGEMAP2
  0--2050925620--20893APants
• Rolex watch 10,000 http//www.rolex.com/en/
• 9,980
• 9,965
• Relative price difference matters not the
  absolute matters
• Weber-Fechner law Relative price difference and
  not the absolute matters.
• Gradually increased the weight that a blindfolded
  subject was holding and asked him to respond when
  he first felt the increase.
• Response was proportional to a relative increase
  in the weight.
• If the weight is 1 kg, an increase of 10 grams
  will not be perceived.
• If weight is 20 grams, an increase in 10 grams
  will be perceived
• Applies to sound, vision etc.

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Psychology in Pricing StrategyMental
Categorization

• I will show you two numerical differences. Look
  at them quickly!
• 0.89 - 0.75
• 0.92 - 0.79

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Psychology in Pricing

• Which difference do you think is greater?
• Odd number pricing (0.99 vs. 1.00).
• Why Nike shoes are priced at 79.99, not 80!
• Theoretical underpinning Mental categorization.
• Price quality perceptions
• Toronto flea markets
• Pricing and social networks
• Pricing Trump towers

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Prospect Theory (Kahnemann and Tversky)

• One additional dollar gives a lesser increase in
  satisfaction or value than the dissatisfaction
  caused by a one dollar decrease
• Giving or taking a dollar
• People feel the pain of losses much more than
  they feel the happiness of equivalent gains.

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Prospect TheoryApplications
Unbundle gains Sports Illustrated, offer
additional benefits rather than a discount Bundle
Losses Sellers of consumer durables and
warranties. Example, a 50 warranty for 700
appliance.
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Managing CompetitionPrice Matching (Crazy
Eddie)Homework

• In the New York city stereo wars Crazy Eddie had
  made his trademark We cannot be undersold. We
  will not be undersold. Our prices are the
  lowest.guaranteed. Our prices are insane.
• His main competitor Newmark Lewis is no less
  ambitious. With any purchase you get the stores
  Lifetime low-price guarantee. It promises to
  rebate double the difference if you can find a
  lower price elsewhere. If after your purchase
  from Newmark you find the same item at a lower
  price (proof of purchase required), in the
  marketing area, during the lifetime of your
  purchase, Newmark will give you a 200 gift
  certificate refund (100 of the price difference
  plus an additional 100).
• What would happen to prices when firms compete by
  offering these guarantees?
• What could be the reasons why these retailers
  adopted these policies in the first place?
• Would these price matching guarantees claims
  increase competition between the two retailers
  and reduce their profits or would it do the
  opposite?

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Key Messages

• Developing profitable pricing strategies is a
  critical and creative exercise.
• Pricing is the only element of the marketing mix
  whose cost is getting it wrong.
• Pricings impact on profitability is often more
  significant and more immediate than the impact of
  other elements of the marketing mix.

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Price Matching Guarantees

• Will PMs increase or decrease market prices?
• Price matching guarantees
• helps a firm to protect its consumers and charge
  a high price
• It makes your competitor soft. Takes away the
  benefit for your competitor to undercut your
  price.

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Crazy Eddie, Answer

• Price matching guarantees have the ability to
  actually reduce price competition. They are
  mechanisms for tacit collusion or competition
  reduction between firms. When crazy eddie offers
  the price matching guarantee then it is
  effectively taking away any gains that its
  competitor might get from cutting price. A
  competitor might cut price to win those consumers
  who search between store for the lowest price.
  But if eddie offers a price matching guarantee,
  then a search consumer will buy from eddie
  because the consumer knows that in the event that
  there is slower price offered in the market the
  consumer is insured that eddie will match that
  price.
• Because price matching takes away the gain from
  price cutting, no firm cuts price and price
  competition is reduced.
• Indeed if both eddie and newmark offer price
  matching guarantees this effect of reduced price
  competition is even higher.