pricing summer08 stu

8/6/2019 Pricing Summer08 Stu

1/17

1Ganesh Iyer

Pricing Strategies

Session 7

XMBA 206.1


2/17

2Ganesh Iyer

Analysis Framework

Market

Customer AnalysisCompetitor

Analysis

Company AnalysisMarketing Myopia

Marketing Strategy

Product

Price

Promotion

Place

Marketing Orientation

Perceptual mapping

SegmentationPositioning

First mover advantages

Branding

Pricing processPricing and innovation


3/17

3

Ganesh Iyer

Economics of Pricing

Two Problems with Single 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


4/17

4

Ganesh Iyer

Price Customization:

Price Discrimination and Self-selection

Iyers Carwash Example

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?


5/17

5

Ganesh Iyer

Price Discrimination and Self-Selection

Consumer Couponing

Why coupons:

People who are willing to pay more tend to have a higher personal time cost andare 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.

Ti m eC o s t

W i l l in g t op a y

Nu m b e r o f c o n s u m e r s

Re v e n u e

Lo w

`

3 3

H i g h 4 3


6/17

6Ganesh Iyer

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-selectionsegmentation fences

Make sure that prices directed at one segment cannot be taken advantage of bythe 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.

Segmentation fences in airline pricing significant increase in prices < 14 days before departure.


7/17

7

Ganesh Iyer

Price Customization

Observable Characteristics

Based on observable characteristics that signal buyers pricesensitivity http://www.chessclub.com/ : Students: $29.95/year; Adults: $59.95

AMC theaters can observe the consumer-type using his student ID, seniors

Customer 1 o student ID $6.75

Customer 2 Haas student ID $4.75

Customer3 Haas student ID $4.75

etc.

Select the segmentation variables that Separate consumers based on observable characteristics into groups with different

sensitivities (e.g., ability to pay (tuition), age (movie))

Are observable and targetable without great expense (e.g., Lotus 1-2-3 $325 forfirst time buyer, $99 for upgrades)


8/17

8

Ganesh Iyer

Price Discrimination

Purchase Location

Consumers at different purchase locations have different pricesensitivity Cure for anthrax: $450 in the U.S. $190 in Canada

http://www.canadadrugs.com

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


9/17

9Ganesh Iyer

Customize By Time of Purchase

Peak-load pricing: designed to re-distribute usage from peaktime to off-peak time

edeye flight.

On demand computing.

Electronic road pricing.


10/17

10Ganesh Iyer

Electronic Road Pricing


11/17

11Ganesh Iyer

Psychology in Pricing Strategy

Jeans: $42$32;http://www1.macys.com/catalog/product/index.ognc?ID=204004&CategoryID=

11221&Link ype=EverGreen

olex watch: $10,000http://www.rolex.com/en/

9,990

9,975

Relative price difference matters not the absolute matters

Weber-Fechner law: Relative price difference and not the absolutematters.

Weber gradually increased the weight that a blindfolded man was holdingand 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 is perceived Applies to sound, vision etc.


12/17

12Ganesh Iyer

Psychology in Pricing Strategy

Mental Categorization

I will show you two numerical differences. Look at them quickly!


13/17

13Ganesh Iyer

Psychology in Pricing

Which difference do you think is greater?

Odd number pricing ($0.99 vs. $1.00). Why ike shoes are priced at $79.99, not $80!

heoretical underpinning: Mental categorization.

Price quality perceptions oronto flea markets

http://www.toronto.com/shopping/listing/000-211-237

Pricing and visibility Mark Laracy: If you like Opium you will like inja

Pricing and social networks Pricing rump towers


14/17

14Ganesh Iyer

Prospect Theory (Kahnemann and Tversky)

One additional dollar gives a lesser increase insatisfaction or value than the dissatisfaction causedby a one dollar decrease

Giving or taking a dollar

People feel the pain of losses much more than theyfeel the happiness of equivalent gains.


15/17

15Ganesh Iyer

Prospect Theory

Applications

Unbundle gains: Sports Illustrated, offer additional benefits rather than a discountBundle Losses: Sellers of consumer durables and warranties. Example, a $50 warranty for$700 appliance.


16/17

16Ganesh Iyer

Managing Competition

Price Matching (Crazy Eddie)

In the ew York city stereo wars Crazy Eddie had made his trademarkWe cannot be undersold. We will not be undersold. Our prices arethe lowest.guaranteed. Our prices are insane.

His main competitor ewmark & Lewis is no less ambitious. With any

purchase you get the stores Lifetime low-price guarantee. Itpromises to rebate double the difference if you can find a lower priceelsewhere. If after your purchase from ewmark you find the sameitem at a lower price (proof of purchase required), in the marketingarea, during the lifetime of your purchase, ewmark will give you a200% gift certificate refund (100% of the price difference plus anadditional 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 firstplace?

Would these price matching guarantees claims increase competition betweenthe two retailers and reduce their profits or would it do the opposite?


17/17

17Ganesh Iyer

Key Messages

Developing profitable pricing strategies is a critical and creativeexercise.

Pricing is the only element of the marketing mix whose cost isgetting it wrong.

Pricings impact on profitability is often more significant andmore immediate than the impact of other elements of the

marketing mix.

pricing summer08 stu

Documents