behavioural pricing

8/14/2019 Behavioural Pricing

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BEHAVIOURAL PRICING



Managers when asked about 6 potential

inputs on product pricing decisions:

84% were well-informed on the variable cost ofproviding their product.

81% were well-informed on the fixed cost of

providing their product.

75% were well informed on the competitor’s productprice

61% were well-informed on the value of their

product to the customer.

34% were well informed on how consumers wouldrespond to price changes.

21% were well informed on consumers willingness

to pay at different price levels.



Value Pricing and the Economic

Perspective

Objective value

Perceived value

Product Price

Cost of Goods Sold

Rs.

0/-

Marketing Effort and

Price of SubstitutesConsumer

Incentive

to buy

Company’s

incentiveto sell

Per ceived value-

Price

Price-COGS



The Economic Perspective- Consumers buy

when perceived value exceeds price. Perceived value-Actual Price >0



You lying on a beach on a hot day All you have todrink is ice water. For the past hour you have

been thinking about how much would you enjoy a

nice cold bottle of your favourite beer. A friend

gets up to make a phone call and offers to bringback a bottle of your favourite beer from the only

nearby place where beer is sold-a small run down

grocery store. He says that the beer ,might be

expensive and asks how much are you willing tospend. He says he will not buy the beer if it costs

more than the price you state. What price do you

tell your friend?



You lying on a beach on a hot day All you have todrink is ice water. For the past hour you have

been thinking about how much would you enjoy a

nice cold bottle of your favourite beer. A friend

gets up to make a phone call and offers to bringback a bottle of your favourite beer from the only

nearby place where beer is a fancy resort hotel.

He says that the beer ,might be expensive and

asks how much are you willing to spend. He sayshe will not buy the beer if it costs more than the

price you state. What price do you tell your

friend?



Study revealed people where willing to pay more for the

fancy hotel compared to the grocery store.

The interesting question is why?

In both the scenarios the ultimate consumption is

identical.

No atmosphere from the fancy store or the run down

grocery store is being consumed by the beer drinker to justify different prices.

There is no strategic reason to report a price lower than

one’s perceived value (no discount from either of the

stores on bargaining)

In addition to economic utility the consumer is driven

by

Psychological utility of the products which in turn is



Relative Vs Absolute Value of

Money

You are set off to buy a walkman at what you

believe is the cheapest store in your area. Upon

arriving you find that the walkman costs you Rs.2500/- a price consistent with your prior

expectations. As you are about to make the

purchase a reliable friend tells you that the same

walkman is available at Rs. 500/- less in a storeapproximately 50 minutes away. Do you go to the

other store to buy the walkman?



You are set off to buy a camcorder at what youbelieve is the cheapest store in your area. Upon

arriving you find that the walkman costs you Rs.

4500/- a price consistent with your prior

expectations. As you are about to make thepurchase a reliable friend tells you that the same

walkman is available at Rs. 500/- less in a store

approximately 50 minutes away. Do you go to the

other store to buy the walkman?



The Absolute saving is the same. However thepsychological value of the savings is far greater in

the first scenario than the second.

The psychological utility of fixed amount of money

is relative.

Willingness to pay is impacted by relative

incentives. He will consider both economic utility

i.e. perceived value –price as well as his relative

incentive to enter the transaction(perceived

value-actual price)/actual price)



Impact of a Salient Reference

Price

Your favorite sports team has made to thebaseball world cup .The first round playoff series

is the best series of the seven series with games

1,2,5,7 being played on your team’s home field.

The general admission tickets have been pricedat Rs100 during the regular season. However the

team decides to raise the tickets of the home field

games to Rs 150. Is the price increase fair or

unfair?



Arguments in support of this stance

The nature of the product has changed- playoffgames are more exciting than regular season

games.

Demand almost certainly will be higher for the

playoff games and the team is merely responding

to this increase in demand.

It is common for the ticket prices to increase for

playoff games.



Your favorite sports team has made to the worldcup. The first round playoff series is the best

series of the seven series with games 1,2,5,7

being played on your team’s home field. The

general adm ission t ickets have been pr iced at

Rs100 du r ing the regu lar season and also for

games 1,2. However the team decides to raise

the t ickets o f the home field games no. 5,7to

Rs 150. Is the p rice inc rease fair or un fair?



If games 5,7 are worth 150/- in the scenario 5#they should be worth the same in scenario 6# so

economic utility remains the same. However

Psychological utility differs due to the component

of “fairness”

In scenario 5# the regular season tickets were

not the salient reference price for the playoff

tickets.

Willingness to pay is impacted by relative

incentives. He will consider both economic utility

i.e. perceived value –price as well as the

consistency between the actual and salient

reference price i.e (actual price-reference price).



Impact of cost of goods sold

A grocery store has no peanut butter in stock, butis about to receive a new shipment. Prior to

delivery the owner finds out that the wholesale

price of the peanut butter has increased to 20%

and will affect this new shipment. The ownerdecides to raise the price of the peanut butter by

20% is the price increase fair or unfair?



The grocery store has one week supply of peanutbutter in stock and is due to receive a new

shipment in near future. Prior to delivery the

owner finds out that the wholesale price of the

peanut butter has increased to 20% and willaffect this new shipment. The owner decides to

raise the price of the exiting stock price of the

peanut butter by 20% is the price increase fair or

unfair?



The product under scrutiny is the same and theprice is increasing 20% in both the cases so there

is no change in perceived value- price i.e the

economic utility.

Consumers are also concerned about the firms'

magnitude to sell.

In determining his willingness to pay a consumer

will consider his own “economic utility” from the

transaction and that of the firm i.e (actual price-

COGS)



Nature of the product being sold

In Indian Idol 5 Tamang made it to the final.During the season general admission to the

season the tickets were priced at Rs. 200.

However Tamang’s visit to his home ground his

performance was specially priced at Rs. 250 .

A hardware store had been selling snow shovels

in kalimpong at Rs 200/-. A night after a large

snowstorm he increased the price to Rs. 250/-. Is

the price increase fair or unfair?



In determining his willingness to pay a consumerwill consider his own “economic utility” from the

transaction and will vary across product

categories(e.g discretionary vs necessity, luxury

vs utilitarian )



Actively manage price expectations:

Establish credible reference price

Manage product price trends.

Encourage favourable comparison

Avoid unfavourable comparison through productdifferentiation.



Actively manage perceptions of

COGS

Focus attention on fully loaded cost of goodssold.

Bundle products to obscure cost of goods sold.

Focus attention on consumer value.

behavioural pricing

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