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8/6/2019 Pricing Summer08 Stu
1/17
1Ganesh Iyer
Pricing Strategies
Session 7
XMBA 206.1
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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
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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
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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?
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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
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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-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.
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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)
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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
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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.
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Electronic Road Pricing
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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.
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Psychology in Pricing Strategy
Mental Categorization
I will show you two numerical differences. Look at them quickly!
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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
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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.
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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.
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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?
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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.