Pricing Strategies

Session 7 XMBA 206.1

Ganesh Iyer

Analysis Framework
First mover advantages

Company Analysis Marketing Myopia

Perceptual mapping

Competitor Analysis
Positioning Segmentation

Customer Analysis

Marketing Strategy
Pricing process Pricing and innovation

Marketing Orientation

Product Price Promotion Place

Branding

Market
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

Ganesh Iyer

Price Customization: Price Discrimination and Self-selection

Iyers Carwash Example
Price 3 4

# of Car washes 5000 3000

How to Price ? What is the best single price? Can you increase revenues? If so to what level?

Ganesh Iyer

Price Discrimination and Self-Selection Consumer Couponing

Why coupons:
Time Cost Low High Willing to pay ` 3 4 Number of Revenue consumers 3 3

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

Ganesh 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 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 < 14 days before departure.

Ganesh Iyer

Price Customization Observable 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.

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 for first time buyer, $99 for upgrades)

Ganesh Iyer

Price Discrimination Purchase Location

Consumers at different purchase locations have different price sensitivity
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

Ganesh Iyer

Customize By Time of Purchase

Peak-load pricing: designed to re-distribute usage from peak time to off-peak time Redeye flight. On demand computing. Electronic road pricing.

Ganesh Iyer

Electronic Road Pricing

Ganesh Iyer

10

Psychology in Pricing Strategy

Jeans: $42$32;
http://www1.macys.com/catalog/product/index.ognc?ID=204004&CategoryID= 11221&LinkType=EverGreen

Rolex watch: $10,000 http://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 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.

Ganesh Iyer

11

Psychology in Pricing Strategy Mental Categorization

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

Ganesh Iyer

12

Psychology in Pricing

Which difference do you think is greater?

Odd number pricing ($0.99 vs. $1.00).

Why Nike shoes are priced at $79.99, not $80! Theoretical underpinning: Mental categorization.

Price quality perceptions

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

Pricing and visibility

Mark Laracy: If you like Opium you will like Ninja

Pricing and social networks

Pricing Trump towers

Ganesh Iyer

13

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.

Ganesh Iyer

14

Prospect Theory Applications

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.
Ganesh Iyer

15

Managing Competition Price Matching (Crazy Eddie)

In the New York city stereo wars Crazy Eddie had made his trademark We cannot be undersold. We will not be undersold. Our prices are the lowest.guaranteed. Our prices are insane. His main competitor Newmark & Lewis is no less ambitious. With any purchase you get the stores Lifetime low-price guarantee. It promises to rebate double the difference if you can find a lower price elsewhere. If after your purchase from Newmark you find the same item at a lower price (proof of purchase required), in the marketing area, during the lifetime of your purchase, Newmark will give you a 200% gift certificate refund (100% of the price difference plus an additional 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 first place?
Would these price matching guarantees claims increase competition between the two retailers and reduce their profits or would it do the opposite?
16

Ganesh Iyer

Key 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.

Ganesh Iyer

17