Chapter 1: Pricing & Profits Profit: Sensitivity Prospect: + VS - framing: + framing better as framed as gain - highlight gains &

framing better as framed as gain - highlight gains & minimize loss (pain): 1. Unbundle Exploiting Contrasting Demand: exploits CD for different products. Some value one pdt highly, other lesser. The
Improve by 1% (B2C): Price (8.7%); VC (5.9%); Volume (2.8%); Fixed (1.8%) gains & bundle pain; 2. Avoid surcharges+provide dist ; 3. Shift pain from direct price paid to indirect opp costs products would partially be both substitutes and complements. Selective discount PA or PB ≤ P Total ≤ PA + PB
Improve by 1% (B2B - EBIT): Price (8%); Market.S (4%); Variable (4%); Fixed (3%) Diminishing sensitivity: Pain + loss feel relatively. Less ps as gain/loss moves further away from point of ref Retailer Promotional Bundling: More effective than per unit promotions. Attracts heavy users from other brands
Exchange Value Model Inflection at point of reference: Compare agnst reference price and more likely to stay in status quo Bundling Pricing Optimization: Leverage Effect: savings gains for their preferred item is partially allocated to an
Lower bound: Marginal cost
Risk aversion in the positive frame and risk seeking in negative frameEffects related to Prospect Theory increase in willingness to buy other items in bundle. Brand Betrayal: reject the brand they would otherwise choose,
Upper bound: Consumer utility and switch to another brand. If bundle too large, excludes most customers from benefits of bundle, they will defect.
Reference price: Last price they paid form expectation of price they are willing to pay
Differential value: Change in Reduces dispersion in WTP. The price acts as segmentation hedge btwn different segments giving dists (extra gain)
Endowment effect: People place more value in something once they possess it
consumer utility that a product has in
Anchoring: Price expectation based upon information gathered early in DM process (relearn / evidence) Chapter 10: Yield (Revenue) Management Set prices acc to predicted demand levels among diff segments
comparison to its comparable alt
Comparison set effect: More price sensitive; higher the product's price relative to its substitutes. Framing effect: Market Requirements: Large no.of potential customers. WTP will change over time depending drivers of demand.
Exchange value: Price of competing
Better off highlighting the benefits and the value derived from a product. Order Bias: Present a range of products Demand derived - contingent on specific factors external to the product being offered (MRT breakdowns)
alternatives;
within same category by starting at highest price first. End-benefit effect: Relationship between goal and product Operational Requirements: Capacity is limited & perishable; reservation; selling @ diff prices (fare classes); can
DV + price of alternative change the availability of pre-defined fare classes Least sensitive pay higher; other segments lower
Price of nearest competitor / substitute Chapter 5: Price Segmentation Price segmentation - limited transferability (no resell)
Fare Class: the different prices at which units of capacity is sold; n - no. of fare class
Price segmentation: align price to demand heterogeneity and factors that drive value / cost factor
Booking control: number of units of capacity available at a given fare class – e.g selling higher class seats to family
Profit is asymmetrically sensitive 1st degree PD: charge customers prices that matches their WTP PS: Improve profits & no.of customers served of 4 when there are only 3 seats in lower class
to price cut & hike. WRT volume change 2nd degree PD: Different prices according to qty purchased - Demand heterogeneity Dynamic Nesting of booking control: can purchase more expensive fare until capacity close. bi = booking limit for
Volume hurdle (price cut/hikes) - 3rd degree PD: different market segment for different prices- Demand heterogeneity (include add-on) class i, where i goes from 1 to n, n = no. of fare classes under management. i= 1 for first class. i= n for the lowest
Chapter 2: Profit Sensitivity to Price tactical price action (discount, promotion) Complete segmentation: need complete info on WTP / Direct: attributes (age) / Indirect: proxy (WTP) fare class. Booking limits nested if they decrease most ex fare class to the least ex b1 ≥ b2 ≥ b3 ≥ … bn
FC have no effect on a Segmentation hedge: barriers to prevent people who are willing to pay higher @ lower price (demographics, Dynamic Nesting of booking limit: BL for highest fare class (b1) = total number of units of available capacity. BL on
Change in volume must be > this
all fare classes are reduced as seats are reserved in individual FC. Ensures all capacity can be sold at full fare
ratio for the price change to yield marginal price change, VC do time, purchase location, self identification, product engineer, qty & usage (auto charge more when more utility)
higher profits Protection level: is the number of seats held available for that fare class and all higher fare classes. Held constant
Where - Price cut, where %P is negative, Segmentation hedge: correlates with WTP, minimal info to implement, enforceable and culturally accepted
requires a positive increase in until all seats in next lower class are reserved under dynamic nesting y
Strategic price segment: enable people to pay diff price | Tactical: capture marginal / unique situations Challenge: Dilution (not selling at full price when there's demand) vs Spoilage (Holding onto full priced unit when
Percent Change in Volume volume to improve profitability
Large CM -> small Q required; Chapter 6: Price Structures and Multipart Pricing there's discounted demand) ^B is what we are finding - 137 - ? - Optimal is when this % = pd/pf
Small CM -> large Q required - Strong implications to tactical Two part tariff: fixed entrance fee charged to all customer regardless of consumption and metered fee for lvl of
Protection level: is the number of seats held available for that fare class and all higher fare classes. Held constant
price cuts (discounts / ST sales) consumption. For products that cant be easily resold/stored / limited comp. Profit through entrance fee (Taxi)
Percent Change in Price until all seats in next lower class are reserved under dynamic nesting y
Tying Arrangements: Sell two related products that function together to deliver value to a customer. First product
Price Cuts: larger changes in Volume Littlewood's Rule* B: optimal booking limit for discount fare where x = protection level
than Price Rises so firm is equally well What to do when prices increase?
- = durable good, second product = consumable good used in conjunction w durable good. (C - B): protection level
off. Initial Contribution Margin as a absorb cost / holding margins Two-part tariff. Inclined block: Discourage heavy users (used by regulators to discourage wasteful water). Depends on ratio of prices btwn discount & full fare, and probability of full fare demand
constant in dollar value / margins Declined block: Encourage heavy users. Both is in terms of disparity of WTP of custs w diff consumption vol exceeds (C - B) as described by 1 - Gf (x)
percentage of the original price constant in %
prob that full price
Complementary: purchase of one product increases likelihood of purchasing another product, (Tangible and demand is at or above pd = discounted price; pf = full fare price
Profit sensitivity for fixed cost current protection level
Series of related indi purchases converted into single purchase decision. Separate timing
Profit sensitivity when change price -> changing VC increase Intangible Goods; Durables and Consumables); Add-ons: Pizza & toppings; Smartphone & accessories;
Third Degree PD: Total price = sum of constituent parts. Ptotal = Pa + Pb Chapter 11: Subsciption of payment from consumption. Reduce transaction costs. Manage info asymmetry
Add-ons: Customers who seek higher utility pay for increased utility (add features). Lower willingness to pay Price Boundaries: Total Period Price: Price customers would pay if they purchased every item within subscription.
where
Upper bound. CPV: Identifies min sub price firm could offer which equalizes profits. CLV: The pv of future cash flows
purchase only the core product and forego utility enhancing optional features
attributed to the customer during his/her entire relationship with the company
where Contribution Margin: Two-part tariff: High cm on base product (all consumer surplus) Low CM (if not zero) on Behavioral Effects Market Segmentation: Loyal cust who suspect total period purchases will be above sub price
Percent Change metered product. %CMA > %CMB (Racket + Ball; Disney land entrance w free mickey)
in Quantity would choose subscription. Variety seeking who suspect total period purchases below the subscription price would
Tying Arrangement: Low cm on entry product (if not negative) High cm on metered product. %CMA < %CMB. choose to purchase the individual items. Those who purchase subscription are signaling their pdt loyalty & would
Initial Contribution Relatively Equal Margins: %CMA ≈ %CMB (Desks and Chairs) razor handles and blades. have a higher retention rate. The subscription price represents a discount to more-loyal customers.
Signpost Effect: Lack full info of all comparable offers (imperfect memory + unlikely to recall). They construct an Lock-in: Customers suffer from uncertainty about their ability to predict future demand. Due to (-) impact lock-in
overall price image for retailers in calculating their anticipated utility for selecting one retailer over another. presents to cust, sub price must be below the total period price to induce customers to purchase.
CM = P - V Economic Price Optimization
Companies can use low prices on popular products to induce purchase of less popular product (higher CM) Increased Consumption: Customers tend to consume more of product than they would. Partially cause future
Elasticity of Demand consumption of pdt comes with a zero or low marginal price. Info asymmetries: not knowing enough of product
Constant elasticity of demand: Air-ticket Pricing: Drip Pricing: Add mandatory/optional price during transaction; final price higher. Pre-ticked
is the ratio of the observed percent Optimal Price for elastic markets Overestimation Bias of positive future behavior. Join > attend few times > fail to return. Pay higher price to cancel
boxes: pre-ticked boxes offering add. products at extra prices as default. Strikethrough pricing: high price
change in volume to an executed membership early > no attend > no cancel. Overestimation of control to attend & cancel economic relationship.
At optimal price, the Q sold; crossed out, a lower "sale" price is indicated next to it, no indication of whether two prices are for same product.
percent change in price Chapter 11: Competition Based Pricing (Follow / hold or price war?)
>1 elastic (brand demand) - P ↓ Qi & Pi the current demand Pressure-selling tactics: creates anxiety -> command higher pricing. gives consumers a false sense of urgency - Price wars: Cost is ex. Benefits of winning is uncertain, unlikely victory & less likely future spoils. hard to kill and
<1 inelastic (category demand) - P↑ and price for example, by claiming a "limited time" offer, reveal prices in sequence
Network Externalities: Encourage the more popular base product to be priced low, while add complementary
permanently remove industry capacity. Higher profits earned in a market invite new competitors to re-enter. Break
out cause of profit goals & drive to size opportunities. Inability to manage or anticipate actions with competitors
Chapter 3: Customer Perception Driven Pricing products priced higher. When the value of product increases with number of people that use it. NE & Upgrade Structural Factors Favoring Price Wars: No.of competitors; Competitor's managerial maturity; High fixed costs
Conjoint analysis discriminates between benefit of brands, attributes, service level and and low marginal costs; Industry Growth Rate & Future Economies; Industry Growth Rate & Network Effect
Market: Cost of creation is high but cost of reproduction is low, network externalities lead to aggressive pricing
market segments - more insights than pure EPO / Price acc to CPV Chapter 12: Product Life Cycle try to find price/time segment thru skim, growth - price fall due to economies of
behavior where base product is offered freely & profits are captured through complementary products (spotify)
Reveal dispersion of value of diff cust, on product/features - potential segment scale, learning, decline & maturity; price stabilize & decline for entry model, niche for higher end can increase price
Lock-in Effect w Complements: Complementary that increase switching costs of base pdt enable companies to
For evolutionary product that customers experienced and understand price and value
price base product high & complementary pdt low, abdicating any monopoly power over add-on. Pricing strategy Time Segmentation: Uses timing as a segmentation hedge to encourage customer with highest WTP to purchase
(narrower price band) > need many CST early, and those with lower WTP to purchase later. Price Skimming is used to “Time Segment” market of its early
wherein complement products are priced aggressive to encourage dissemination, capturing profits from core pdt
Rank, score, divide all product with attribute A/no. of products to get part-worth utility - adopters. Early purchasers are the least price sensitive, and purchase first
Chapter 7: Pricing Strategies for Two sided Markets and Network Effects Pricing for Penetration: 1.Pricing Strategy: go up (flat prices don't attract new households) 2.Pricing Architecture: Small and
Aggregate market part worth util = avg of individual's part worth utility
Two sided platform: incurs costs in serving both groups and can collect revenue from each (money + subsidy) large pack sizes 3.Customer & Trade Execution: Build compelling category mgmt story (avoid 1for1 promo but still attract new);
Part-worth utility - attribute to value relationship - Priced according to customer perceived
Network effect: Same side network drawing users to one side helps attract even more users to that side. Cross identify required in-store real estate & merchandise; select price increase to fuel investments (euro beer - new pack types) 4.
value (snapshot of WTP, X fast growing)
side network effects money side attracts subsidy side Capabilities: Change incentives LT; Build right biz system; Give pricing a home (dept); Penetration more impt than buy rates
Value Equivalence: Price increases proportional to benefits ^ Value = Benefits - Price
1. Get Pricing right: Subsidize quality & price-sensitive users (Ability to capture NE, sensitivity to price / quality / BV) Psychology of Consumption: 1.Higher consumption = higher sales.: switching costs 2.Cost drive consumption: more likely
Zone of Indifference: Elasticity - key ingredient for determining width of this zone. There is
a range of pricing moves that will not impact purchasing behavior: Range of demand 2. Cope with Winner-Take-All Competition: Decide whether to share the single platform or fight for proprietary to consumer if aware of cost (sunkcost) 3.Pricing drive perception of cost: Pricing tactics that mask rather than highlight prices
3. Avoid Envelopment: Platforms with overlapping user groups who may threaten to encroach into target segment reduce pressure on buyers to use the product (cash vs CC). 4. Timing: payment near/at the time of consumption inc attn to cost;
inelasticity, as the next nearest competitor is out of the comparison metric. Can be a source
Sherman act: for predatory pricing that drives competitors out of business and raise prices after boosting consumption. Monthly > use often > renew 5. Bundling: reduce consumption > hid cost > little sunk cost pressure / 1.
of a painless price increase, thus improving profitability
Singapore Competition Act 2004 - anti-competition agreements, decisions and practice / abuse of dominant Yield mgmt, 2. Stagger payments to smooth consumption 3. Time payments 4. Psychologically link to benefits 5. Reduce Consum
Value Adv: Excess benefits beyond what is captured in price. Un-harvested Value because
position and merger that substantially lessen competition Promo design: Targeted / Temporary / Special / Irregular Pricing & Net: Cut search costs, Speed and ease, Mass customization using data analytics (CB), Revenue maximization, Variable /
company has opportunity to raise the prices. (pricing error). Market Share Taking as people
Chapter 7: Price Promotions EG: Coupons, trial offers, rebates (mail in / trade in) dynamic pricing, Marketing is not useful in an efficient market (e.g stocks where only price is enough), Total purchase cost
perceive there are more benefits & choose the product. May instigate a competitive reaction.
Discounting is Price Differentiation: Target discounts allow charging diff prices to diff customers. Keeps utility Ditch the Discounts: (Recession) Adaptive pricing: Intro lower priced version - poorer quality, lesser features, smaller qty; P&G
Hyper Competition: Aggressively pricing new technology that offers significant costs adv basic ver (1ply/15% > outperform other companies pdt); Honda Assurance Program (return car); Subway (reduce price to $5) vs
sensitive purchasing at higher price. Incremental sales at a discount price above marginal u cost enhances profit
Value Dis: Price higher than justified based on measure of benefits. Missed Opp as firm Quiznos (inexpensive sandwich): allow Quiznos to cont charging full price for sig items & avoid subway dilemma. Use promo to
Promotional Discounts tend to increase sales volume; comes from capturing share from competitor & growing
could sell more if prices were inline with expectation. (PE / loss of market share). Stable if avoid price drop: "Buy 2 get 1 free", lower effective cost w/o change adv rates, discounting that avoids devaluing the brand.
product offer good benefits along a dimension not measure (wrong segment). Capture overall market. Short term reactions to downward price movements tend to be larger than long term reactions
Adapt pdt to maintain affordability: decrease pdt size/vol. Unbundle services + addon: attract ps cust and earning higher
profits from a segment that seeks value and derives benefits from features. Disadvantage: Imperfect segmentation hedge: Dilution / cannibalization of otherwise higher margin sales.
profits from ppl willing to pay premium. (Recovery) Intro new premium pdt: Economy picks up: take adv of cust willingness to
Pricing according to Price to benefit map: Customer Churn: switch not captured > high-customer-acquisition cost with the loss of customer retention profits
PT: making irrational decisions which doesn’t
splurge (premium pdt / vip package). Increase prices. Offer new ways to experience luxury: Jetstar's private plan; Ritz couple
maximise utility losses weigh heavier than gains
Resets Price Expectations: to a lower level, dampening demand in future. Full price increase price expectations
1. Penetration pricing ( Value advantage) - UV, Mkt share, hypercomp Easy Jet: Auto yield mgmt system based on maximizing revenue on flight every day. Bookings made through airline
Increases Price Sensitivity: Promotions highlighting brand and price alone increase price sensitivity. Marcom, reservations staff through phone/internet. No agency bookings to cut out middleman. Manage by revenue mgr & specifically
2. Skimming pricing (value disadvantage) - missed opportunities
highlighting features and benefits increase utility sensitivity and decrease price sensitivity developed. Modified on regular basis & adjusted as operations mature. Segment by destination & route (biz/leisure); flight time
3. Price neutral (Value equivalence) - unserved / Zone of indifference where price & benefits
Impacts Pricing Integrity: Excessive promo = prices irrelevant. Promo dists in a Good/Better/Best affect cust (morn&evening, daytime): diff booking patt, instead of customers - cheapest for first 25 seats / exceed 40 from takeoff. Instill
changes does not affect sales volume
tradeoffs. Discounting high end products targeting utility sensitive cust provide unnecessary price concessions confidence for stakeholders. Effective & efficient online booking system which offers simple quick way to book tickets (thus
Take note to not stay too long in VD zone ie Bike sharing companies
Chapter 9: Versioning alternative price segmentation to add-ons P(A+B) (>=<) PA + PB CMA + CMB < CMTotal providing a good view of a yield management system working minute by minute) No agency booking – easy & quick reservation
3 ways: Executive, Delphi / consumer research - mgt, mkt transact price & expert, percept Price segment customers according to their WTP for marginal improvements in attributes, features & benefits system that shuts out & opens various pricing level as date approaches. The price offered will be dictated by yield mgmt system,
Chapter 4: Psychological Influences on Price Sensitivity True Economic Costs: Diff variations of similar product sold simultaneously. Products vary btw feature deprived to feature enhanced related to the seat availability and the closeness of take-off date. Penetration pricing: operates a no-frills airline, based on
Shared Cost Effect: Price sensitivity reduced when use other people’s money to pay Trade-offs: Cannibalizes sales from other ver. Profits depends on the tradeoffs between market expansion for shorthaul flights, aiming at maintaining a low-cost strategy and providing a quality low-price flight.
Switching Cost: Product specific investments decrease price sensitivity for existing firm by offering alternative versions and the loss of higher value sales through sale of lower value versions. Product Line: differentiated by qty (size) or quality; achieve price discrimination. (quantity) Larger-size product - lower per unit
customers; Complimentary goods. learning, engineering cost (b2b) + brand loyalty Good > better > best, price increases & benefits provided increase proportionately WTP & benefits demand price. Size of per-unit price discount greater if people consume more. Size of per-unit price dist lower if economic/ psychological
Expenditure Effect: Higher price sensitivity when expenditure is larger portion of budget. follow a normal distribution. Requires uds of heterogeneity in benefits: which features are used costs of stock-outs are high. (quality) Weber Fechner for middle products. lower: how easy to show upgrade / how likely to
Difficult Comparison Influence: Product and price comparisons difficult > increase search Lower marginal cost reap higher profits through versioning over add-on purchase higher quality / cust in which lifecycle (retiree / student). higher: cust laughability test / intermediaries wont carry pdt)
costs & DM uncertainty, discouraging product switching + reducing price sensitivity. Psychological aversion to Extremes: customers tend to select the “better” (extreme aversion) Weber fechner Addon: 3rd degree, allows for further segmentation based on needs and allow utility sensitive customers to pay for increased
Number effect: Marketing costs become prohibitive. Too many version: difficulty making tradeoffs & confusion utility by purchasing add features. Demand heterogeneity = better profit opp through customization of benefits
Perceptual Challenges: Over confidence: think you’ll maximise #.of.use = decrease PS Range effect (wide range affect value perception); manage segment - don't neglect bottom
Price ending in 9s. Small gain mildly encourages purchase; invokes “wins” in mental bargain Horizontal: by competitors (agreed on price) selling to common cust. Illegal by per se. Vertical: firms in same chain of
Order Bias: Add new version at a higher price imp profits by shifting preferences towards higher priced ver.
Promotional Influence: Communicate value properly to right customers > capture decent distribution: involves agreement btwn a manufacturer & its distributors to sell at a stated price – not illegal per se
Chapter 9: Bundling assumes the products can be used in isolation or in combination
price. Price-oriented communication (discount) > increase PS. Value (Benefit)-oriented Heterogeneity in Demand: Customers value different items differently (WTP, reservation price, utility). Applicable
promotions > increase sensitivity to variation in benefits > decrease PS when heterogeneity in demand is contrasting btwn products (ppl who love product A have less desire for pdt B)