Review Slide for last lecture

3The Strategy and Tactics of Pricing

Techniques for Measuring Price SensitivityTechniques for Measuring Price Sensitivity

• Simulate Purchase Experiments

• Trade-off (Conjoint) Analysis

• Direct Questioning

• Buy-response Survey

• Depth InterviewPreferences and Intentions

• In-store Experiments

• Laboratory purchase experiments

• Historical Sales Data

• Panel Data

• Store Scanner DataActual Purchases

Experimentally ControlledUncontrolledVariable Measured

Measuring Price Sensitivity: Controlled Conditions

In-Store Purchase Experiments

Most common method is to use two or more retail outlets that have similar characteristics (experiment and control).

“+” Ability to disentangle price and other promotion

“-” Can be extremely expensive. Competitors’ actions can contaminate results (special sales promotions, advertising)

Appropriate for products sold through more controlled methods (mail-order) Inappropriate for products of great seasonality

Measuring Price Sensitivity: Controlled Conditions

Laboratory Purchase Experiments

These experiments attempt to simulate the real store purchase experience. Mall intercepts an example of laboratory experiments.

Very adaptable.

“+” Inexpensive. High validity Control for demographics

“-” Artificial (Heightened consumer awareness)

Appropriate for products that are at Inappropriate for products that

7The Strategy and Tactics of Pricing

Cell 4:Experimentally Controlled Studies of Preferences and Intentions

• Simulate Purchase Experiments

• Trade-off (Conjoint) Analysis

• Direct Questioning

• Buy-response Survey

• Depth Interview

Preferences and Intentions

• In-store Experiments

• Laboratory purchase experiments

• Historical Sales Data

• Panel Data

• Store Scanner Data

Actual Purchases

Experimentally Controlled

UncontrolledVariable Measured

Difference between laboratory experiment and simulated experiment “+” Conjoint analysis can be conducted very quickly and at a low cost.

“-” Validity

Appropriate for determining what familiar attributes to include (and at what levels to include them at) during the product/service design process. Inappropriate for attributes that are less familiar to the consumers.

Measuring Price Sensitivity: Controlled Conditions

Conjoint Analysis

Most methods used to calculate consumer preference are compositional. For example, consumer ratings of attribute importance represent a compositional approach.

Conjoint analysis is a decompositional approach to measuring consumer preferences. Consumers rate a product while evaluating several product attributes simultaneously.

Conjoint Analysis

Consumer preference data is collected for several product configurations.

Product configurations are presented such that various trade-offs can be assessed on a monetary basis.

Data can be reported on an individual or aggregate basis, which is useful for segmenting a market based on price or other product attribute.

Sensitivity analysis can be conducted with the data to assess the impact that changes in attributes have on price sensitivity.

Discussion QuestionsFor each scenario below, which method should be used to measure

price sensitivity? You want to determine price sensitivity for an existing brand of

orange juice. You are a long distance telephone company trying to determine

what causes price sensitivity and how price sensitive consumers are in their selection of a long distance telephone service.

You are a hotel chain trying to determine what features to include in a room (color TV, free toiletries, etc.).

You are a laundry detergent maker introducing a flanking brand and want to see how many sales you will take away from your flagship brand as well as from competitors' brands. It is important, however, that competitors not find out about the test. Otherwise, they will be forewarned of the new brand's introduction.

Discussion Questions

For each scenario below, which method should be used to measure price sensitivity?

You are the editor of a weekly newspaper and are considering raising the price of the paper from $.40 to $.50.

You have developed a new headphone radio with built-in ear muffs called "Hot Tunes." You want to determine price sensitivity for the product.

The marketing managers for Advil Pain Relievers want to determine the effectiveness of coupons to encourage purchase.

A chain of grocery stores is trying to decide which products to feature in price promotions.

Cost and Cost-Plus Pricing (Chapter 1)

Tactical Pricing Orientations

Cost-Driven Pricing Customer-Driven Pricing Competition-Driven Pricing

Key Terminologies

Unit contribution is the difference between the price and the variable cost

Margin Markup

Margin

Margin refers to profit in terms of revenue, expressed as a percent

Manufacturer’s margin Retailer’s margin

Manufacturer Retailer Consumer

Cost of sales: $1Selling price: $1.50Unit contribution: $.50Margin: 33%

$1.50 $2.00

Cost of sales: $1.50Selling price: $2.00Unit contribution: $.50Margin: 25%

Markup

Markup refers to profit in terms of cost, expressed as a percent

Manufacturer’s markup Retailer’s markup

Manufacturer Retailer Consumer

Cost of sales: $1Unit contribution: $.50Markup: 50%

$1.50 $2.00

Cost of sales: $1.50Unit contribution: $.50Markup: 33%

Conversion Between Markup and Margin?

1/Markup = 1/Margin -1

A 25% markup = % margin

A 20% markup = % margin

A 25% margin = % markup

A 50% margin = % markup

Distinction Between Fixed and Variable Costs

Fixed cost is independent of the number of units sold.

Variable cost is dependent on the number of units sold.

Ask The Right Questions

Wrong question: What prices do we need to cover costs and achieve

our profit objectives?

Right questions:

What costs can we afford to incur and still earn a profit?

How much sales gain would be required to profit from a price cut?

How much sales loss would be tolerable to profit from a price increase?

Problems with Cost-plus pricing

Cost-plus pricing will lead to over-pricing in a weak market (Death Spiral).

Example

Mini Case Study: Self-Expedited “Death Spiral”

In 2007 Movie Gallery changed the 7-day rental period to 5-day.

The 7-day option was retained, at an additional fee.

In the same year Movie Gallery filed for bankruptcy protection and stocks dropped below $1.

Year # Stores

1985 1

1987 5

1992 37

1996 850

1999 950

2003 2000

2005 4700

What Could Have MG Done?

Channel Strategy

Pricing Strategy

Problems with Cost-plus Pricing

Cost-plus pricing will also lead to under-pricing in a strong market.

Next Lecture

Break-Even Analyses (Chapter 9)