the behavioral side of pricing
DESCRIPTION
The Behavioral Side of Pricing. MKT 750 Dr. West. Agenda. Issues associated with product pricing Defining terms Capturing value Behavioral pricing Discuss Paradise Parks case Should they offer a preferred customer card?. Product Pricing. Objective Value Marketing Efforts - PowerPoint PPT PresentationTRANSCRIPT
The Behavioral Side of Pricing
MKT 750Dr. West
Agenda
Issues associated with product pricing
Defining termsCapturing valueBehavioral pricing
Discuss Paradise Parks caseShould they offer a preferred customer card?
Product Pricing
Objective Value
Marketing Efforts
Perceived Value Price of Consumer’s Incentive Substitutes to buy
Product Price
Firm’s Incentive to sell
Cost of Goods Sold
$0
Firm’s Perspective on Pricing
Cost of Goods Mark-up pricing – tack a percentage onto COGS
Price of Substitutes Competitive “going rate” pricing – evaluate your price relative to what your competitor is charging for similar goods and services
Firm’s Perspective on Pricing
Market ValueValue Pricing – measure the perceived value of the good or service
What if consumers differ in their “willingness to pay”? How can you frame your price to enhance its perceived value?
Entry Strategies
Factors to consider: Forecasted market size Competitive Threats Price sensitivity of consumers
Skimming versus Penetration Innovators & Early Adopters Early Majority
Entry Strategies
Two-Part Pricing: TivoHardware = List Price $249Service = $12.95 per monthLowering the hardware price might pay off in the long run if more consumers adopt the product
Strategies to Capture Value
Tiered Pricing Airlines and Hotels Movie Theaters Restaurants
Consumer’s perception of fairness Pricing based on ambient temperature
Strategies to Capture Value
Setting your price: Maximum Price
Theater A Theater B Matrix Reloaded $10,000 $9,000
Down with Love $8,000 $8,500Total $18,000 $17,500
Cost per film per theater to distributor $2000
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Strategies to Capture Value
High Road: Set your price to capture the maximum value
Matrix = $10,000 Down with love = $8,500
Outcome Theater A will only buy Matrix Reloaded Theater B will only buy Down with Love
Profits ($10K-$2K)+($8.5K-$2K) = $14.5K
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Strategies to Capture Value
Low Road: Set your price based on the lowest willingness to pay
Matrix = $9,000 Down with Love = $8,000
Outcome Theaters A and B will buy both movies!
Profits 2($9K-$2K)+2($8K-$2K) = $26K
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Strategies to Capture Value
Bundling: Set your price based on the combined value
Bundle price at $17,500 for both films
Outcome Theaters A and B will buy the package.
Profits 2($17.5K-$4K) = $27K
Enhancing Perceived Value
Pay-per-use Music downloading services
“All-in-one” versus “two-part” pricing
Theme parks/cruise lines
Rebates and coupons The secret with rebates is that they influence a purchase decision but are rarely redeemed
Scenario 1
Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows. Program A: If Program A is adopted, 200
people will be saved. Program B: If Program B is adopted, there is
1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.
Scenario 2
Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Assume that the exact scientific estimates of the consequences of the programs are as follows. Program C: If Program C is adopted 400
people will die. Program D: If Program D is adopted there is
1/3 probability that nobody will die, and 2/3 probability that 600 people will die.
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Behavioral Pricing
Scenario 1Imagine that you are about to purchase a calculator for $20 when a friend tells you that the same calculator is on sale at another store five blocks away for $15. Would you go to the other store to buy the calculator?
Scenario 2Imagine that you are about to purchase a television for $620 when a friend tells you that the same television is on sale at another store five blocks away for $615. Would you go to the other store to buy the television?
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Behavioral Pricing
Scenario 1Imagine that you are about to purchase a desk. You are trying to decide whether to use a credit card or pay cash. The dealer tells you that the price of the desk is $550 if you use a credit card but that there is a $15 discount for cash.
Will you use a credit card or pay cash?
Scenario 2Imagine that you are about to purchase a desk. You are trying to decide whether to use a credit card or pay cash. The dealer tells you that the price of the desk is $535 if you pay cash but that there is a $15 surcharge if you use your credit card. Will you use a credit card or pay cash?
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Behavioral Pricing
Scenario 1Imagine that Sheri and Susan went to the track last weekend.
Sheri won two $50 bets Susan won one $100 bet.
Who do you think is happier?
Scenario 2Imagine that Bob and Bill went to the track last weekend.
Bob lost two $50 bets Bill lost one $100 bet.
Who do you think is more upset?
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Behavioral Pricing
Consumers make relative, not absolute judgments Value is defined in terms of gains and
losses, not final wealthThe pleasure from a gain is less
than the pain associated with an equivalent loss.
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Behavioral Pricing
GainsLosses
Value
Awarded the Nobel Prize in 2002
Prospect Theory
Pleasure
$100 $200
Pain
-$200 -$100
Implications
Our evaluation of a promotion depends on the base price (percentage change)To maximize pleasure one should:
Frame an offering in terms of a gains Segregate gains and integrate losses
Willingness to pay is affected by the perceived fairness of the transaction
Are All Customers Created Equal?
Should Paradise Parks institute a preferred guest card to supplement its revenues?How might this new pricing strategy impact the experience for its guests?Are there other alternatives that can help to achieve the objective of increasing revenues?What would you recommend that they do?
Assignment
Prepare for your team presentation!