Pricing Strategy 2

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Pricing Strategy - 2

• Week 8
• Fall 2007

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ODI Key LearningComprehensive Pricing Approach
Price Ceiling (Demand Factors, Consumer
Reservation Prices)

• Competition
• Risk
• Preemption
• Market Penetration

Final Pricing Decision
Price Range

• Corporate objectives
• Liquidity
• Skimming

Price Floor (Cost Factors, Direct Variable Costs)
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Customized PricingPrice 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?

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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
• Segmentation FencesEnsuring self-selection
• 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.
• Segmentation fences in airline pricing
• significant increase in prices departure.

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Price Discrimination Disabling AttributesA
Curious Story

• Intel sells 486DX chip for 1000
• Intel disables the math coprocessor of the DX
  chip and makes the SX chip (thus incurring a cost
  of 50)
• Intel sells the 486SX chip for 800!
• So you are selling a damaged product which
  actually costs more to make for a lower price.
• What is going on here?

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Disabling Attributes (contd)

• Problem facing Intel when it introduced 486 chip
  (two types of early adopters)
• Elaine, George
• Res. Price Buyer Revenues
• 1000 Elaine 1000
• 800 Elaine George 1600
• Must company price at 800?

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A Curious Story (contd)

• If Intel can charge different prices to different
  users
• 800 to George
• 1000 to Elaine
• Revenues
• From George-type 800
• From Elaine-type 1000
• Total 1800
• Price discrimination can earn the seller an extra
  200!
• But there is a caveat..

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A Curious Story (contd.)

• The seller wants to charge George less than
  Elaine for the same 486 chip.
• At the same time, the seller has to prevent
  Elaine from buying the product meant for George.
  What does the seller do?
• The seller disables the math coprocessor for
  George!
• Actually incurs a cost of doing so (say 10)
• But makes 200 extra from Elaine.

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Price DiscriminationObservable Characteristics

• Based on observable characteristics that signal
  buyers price sensitivity
• 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 No student ID 6.75
• Customer 2 Haas student ID 4.75
• Customer 3 Haas student ID 4.75
• etc.

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Psychology in Pricing Strategy

• Jeans 5444
• http//www1.macys.com/catalog/product/index.ognc?I
  D204004CategoryID11221LinkTypeEverGreen
• Rolex watch 10,000
• 9,990 http//www.rolex.com/en/
• 9,975
• Relative price difference matters not the
  absolute matters
• Weber-Fechner law Relative price difference and
  not the absolute matters.
• Weber gradually increased the weight that a
  blindfolded man 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 is
  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
• 0.93 - 0.79

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Psychology in Pricing

• Which difference do you think is greater?
• Odd number pricing (0.99 vs. 1.00).
• This is why Nike shoes are priced at 49.99, not
  50!
• Theoretical underpinning Mental categorization.
• Price quality perceptions
• Toronto flea markets
• http//www.toronto.com/shopping/listing/000-211-23
  7
• Pricing and visibility
• Mark Laracy If you like Opium you will like
  Ninja
• 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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Analysis Framework
Segmentation
Positioning (Vintage)
Company Analysis
Competitor
Analysis
Consumer Orientation
Competitive Advantage
Marketing Strategy
Consumer Behavior (TiVo)
Branding and Product Strategy
Steinway
Product
Optical Distortion
Pricing Process
Price
Promotion
Place
Market
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Homework

• From AK
• New product pricing strategies p. 275
• Also Public Policy and Pricing pp. 290-91.

Market Skimming Pricing
Setting a high price for new products to
maximize revenue from the target segment
Market Penetration Pricing
Setting a low price to attract a large number of
buyers before any competitor enters
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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.
• Pricing strategies must work in an integrated
  fashion with other elements of the marketing
  mix..