Week 1: Boundaries of a Good Price (1) Profit sensitivity analysis %∆# Week 2: To improve pricing capability, focus on the

%∆# Week 2: To improve pricing capability, focus on the pricing process

(2) Elasticity of demand = ! ≡ %∆$
Finance… Profit… Wants to Raise Price %%∆$ %∆&' Profit • Strategy and coordination
• %∆% ≥ %&' )%∆$ = &' )∆&' • Firms… elastic demand… favour price cuts
Sales… Market Share… Wants to Lower Price ( ( and Price • Marketing strategy (consistent with message)
Ops… Capacity Utilization… Vary Price ∆* • Always ≥ industry elasticity • Coordination (align goals and incentivise)
• %∆Q ≥ +, ×. • Industries… inelastic demand… favour price increases
R&D… Product Image… Wants to Raise Price / Steps: Assess driver of value → Look for variation
Mktg… Customers… Wants to Maintain/Lower Price • Tactical → evaluate promotions/discounts • Short-term more inelastic as customers are locked in (heterogeneity) → Assess price sensitivity (customer
• Strategic → evaluate price increases/decreases • Cons: ! is always historic, difficult to identify relevant ! economics, search and usage, competition) → Identify
Marginal costs = extreme lower boundary • Strategic factors not considered • Small v Large price changes may have different !
Consumer utility = extreme upper boundary optimal pricing structure → Consider competition →
• Long-term changes in customer demand • Upward v Downward price changes may have different ! Monitor prices at transaction level → Assess
• Form utility = product properties • Reset customer expectations of prices • Difficult to uncover relevant marginal costs (depends on time
• Place utility = acquire in desired location customers’ emotional response → Analyse if returns
• Competitor reactions frame) are worth cost to serve
• Time utility = accessibility/convenient moment
• Ownership utility = possessing rights to value Conjoint → new product compositions and potential price points customers would accept Markets EVM Economic Price Optimization Conjoint
EV = Comparative Alternative + Differential Value • Greater valuations → customers having alternate uses OR satisfying need greater than anticipated
• Inferior alternatives = narrow lower bound Revolutionary ✓ No history to identify ! Cust. have no experience
• Lower valuations → customers perceiving a wide variety of alternatives OR no longer need the benefits
• Superior alternatives = narrow upper bound Evolutionary Range is too Best measures of elasticity ✓ (ability to compare)
• Pros: Highly cost-efficient, time-efficient Value equivalence line → slope change indicate shifts in customer demand
Week 3: Customer- broad only found at industry-level
• Con: Price range is not narrow enough Zone of indifference
Driven; Price-to-Value
• Products unable to exhaust VEL
Dispersion in perceived price, may be Mature Little product ✓ Cust. unable to differentiate
• Challenges in customer purchase decisions (benefit floor/ceiling)
1. Strategic/tactical decision differentiation (commodity products)
• Price brackets due to budget constraints, credibility issues
2. Inability to communicate prices accurately • Inelastic market = wider zone as people would still be WTP Price-neutral positioning: priced within the zone of indifference
Dispersion in perceived benefits, may be Value advantaged • Competes on other market factors (promotion)
1. Poor marketing communications • Unharvested value, Take market share, hyper-competition • Competitive response most likely from closest competitor
2. Dispersion in risk tolerance of customers Value disadvantaged (pricing error or to cater to niche market) Penetration pricing: low price compared to benefits delivered (value advantaged)
• Benefit types: functional, process, relationship Constructing the map • To gain market share quickly (new/undeveloped markets, EOS/L, limited comp. pricing)
• Search goods → functional comparison 1. Executive approach → features, benefits, prices, based on impression • Competitors may respond by lowering prices
• Experience goods → past experience 2. Delphi approach → use market prices and expert evaluations Price skimming: high price compared to benefits delivered (value disadvantaged)
• Credence goods → unknown benefits 3. Consumer research → measure from consumers • Capture profits from early customers (with benefits not foreseen by other competitors)
Dispersion in both, uncertain VP with multiple prod. • Unlikely to incur competitive response
Perceptual challenges Prospect theory Effects of Prospect theory
True economic costs Week 4: 1. Prices ending with 9 (9 low quality, 0 high quality) 1. Unbundle gains and bundle losses 1. Reference price effects RP = α Last Observed P + 1 − α Currently Observed P
1. Shared cost effect Psychological 2. Fairness effect 2. Avoid surcharges and provide discounts 2. Endowment effect
2. Expenditure effect Influences 3. Overconfidence of future behaviour 3. Shift pain to indirect opportunity costs (time, travel) 3. Anchoring (forms a reference point) 5. Framing effect
3. Switching costs (psychological, fiscal/monetary) 4. Small pie bias 4. Organisms habituate to steady states 4. Comparison set effect 6. Order bias
4. Difficult comparison effect (size changes, discounting) 5. Promotional influence (message affects price sensitivity) 5. Marginal response to changes is diminishing • Add higher-price items to reduce P sensitivity 7. End-benefit effect
Week 5: Price Segmentation 1st, 2nd, 3rd degree discrimination Complete, direct, indirect discrimination To improve segmentation hedge Common hedges
Pricing same products differently for different segments 1. First: based on each WTP 1. Complete: complete information (1st degree) 1. Correlation with driver of value 1. Customer demographics 5. Product-engineered
1. Improve profits (increase premium price) 2. Second: based on quantity purchased 2. Direct: based on specific attributes (age, gender) 2. Information needed for implementation 2. Time of purchase 6. Quantity purchased
2. Improve number of customers served (reduce entry price) 3. Third: different segments different prices 3. Indirect: based on proxy (colour of credit card) 3. Enforceability 3. Purchase location 7. Customer usage
Challenges Strategic, tactical 4. Cultural acceptability 4. Buyer self-identification 8. Negotiation
• Acceptable and enforceable means to charge differently 1. Tactical (short-term): capture marginal Positioning statement
• Segmentation hedge to limit transferability 2. Strategic (long-term): price structure itself enables difference customers to pay different prices To [target]… Our [brand] is… The [product]… That is [point of difference]… Because [rationale]
Unlawful behaviour Week 6: Pricing & Law Positive effects Price Promotions Trade-offs Centralized executives → explicit knowledge
1. Price fixing 1. Price segmentation (↑vol to lower WTP, ↑ price to higher WTP • Coupon FV, processing fee, price, margin Field executives → implicit/tacit knowledge
• Horizontal (Illegal per se, by reason) 2. Market size and share (brand switching) • Redemption rates, type of customer, segmentation hedges Tools
• Vertical (Illegal by rule of reason) +0120345 +6787
Negative effects • Breakeven Incremental Unit Sales per Redemption = +0120345 9:6;38 • Net price band, net price paid by market variables,
• Resale price encouragement (Illegal by reason) 1. Imperfect segmentation hedge price waterfall
• If % of incremental sale users > the above, then it is efficient Discount Management
2. Non-price vertical (Illegal by reason) 2. Customer churn Discount decision management
• Customer and territorial restrictions Inst. Rebate Value < Mail-in Rebate Value x Mail-in Rebate Redem. Price
• Customers switch back = high Acq cost, lose Retn profits 1. Decision rights escalated ($, type, discount purpose)
• ∴ use main area of resp., quota, profit passover • Higher cross-! = stronger brand = harder to steal Products that should avoid EDLP channels 2. Decision incentives (vol-, rev-, profit-based)
• Product restrictions (refusal to sell) 3. Reference price effect (deep and frequent resets price) 1. Complex products
Sales Credit = [Target P = k(Target P – Actual P] x Vol
3. Exclusionary/predatory pricing (violates Sherman Act) 4. Loss of price credibility 2. Those that require learning <
• Tying, and below-cost pricing (Illegal by reason) 5. Increase of price sensitivity (market growth from advertising) 3. High-priced products (benefit from salespeople interactions) • Kicker k ≥ +658:3=>8365 ,0:435 (%)
4. Price/promotional discrimination (Robinson-Patman Act) Design (Targeted, Temporary, Special, Irregular: Time + Depth) Price structure: method by which total transaction prices are determined Tying arrangement: durable + consumable (dominant)
Singapore Competition Act 2004; prohibits Coupons → reach broader audience (direct mail, web, newspaper) • Price = Commodity price (dominant cost) + Fabrication charges • Switching barrier for consumable (patent)
1. Anti-competitive agreements Trial offers → ↓ price, ↓ size, ↓ functionality / partial functionality • Redemption rates, type of customer, segmentation hedges Block tariff
2. Abuse of dominant position Rebates → reduces tendency to resell Two-part tariffs: entrance (dominant source of profits) + metered • Capture higher prices from light users
3. Mergers which substantially lessen competition Promotional bundling → less effect on resetting expectations B!"#
• P E
A = CD × S − P,
C • Capture profitable marginal rev from heavy users
PTotal = PA + PB 3rd degree discrimination → WTP for add-on vs no add-on • q 10E = max demand per customer, S = max utility derived Inclined tariff (for negative externalities)
Independent complements (each provides benefits own its own) • PM = marginal cost • Discourage use as certain resources are limited
Tying arrangement %CMA < %CMB
Tied complements (provide little benefits without base product) 9$
Two-part tariff %CMA > %CMB • πF = PA + q× P, − V , q = q 10E× 1 − Week 7: Price Structures
D
S3 + V3 Add-on Pricing Relatively constant %CMA ≈ %CMB
P3 = Type 1 Periodic price△ | Seller sets, buyer accepts/reject | ↓ transaction cost, fair
2 Cross-! is negative for complements
D D D D Type 1 Dynamic pricing | Seller updates often OR price customization | gather info = accurate WTP, ↓ menu costs, check prices
• V3 < S3 , V3 < P3 , G% ≥ G& , 9% ≥ 9& , A = base, B = add-on Influences to price levels in addition to price segmentation
% & % & Type 2 Specified/non-specified negotiation | customize prices, but takes longer, focus on price, must have authority
Demand heterogeneity uniformly distributed 0 to 1 1. Signpost-effect (hetero. store format and cust. preferences,
Type 3 Auction (B2B, B2C, C2C) | Seller sells, buyers bid | tailored prices, item always sold, gather buyers, ↓ search and access
9 cust. select based on exp. utility, prices signalled via adv. P)
costs
• Fraction of market that would purchase i = 1 − '
D' 2. Optional equipment effect (lower base, high-margin optional)
Type 3 Reverse auction | Buyer specifies, sellers bid | ↓ acquisition costs for complex and commodity products by ↑ seller base
Q SH − VH C SI − VI C 3. Network externalities (two-sided market) Type 3 Exchange | Electronic marketplace | dynamic updated buy/sell list, global scale, ↓ variability of prices (market-determined)
Total proSit π add − ons = + 4. Lock-in with complementary Cust. Hetero Marginal Cost Prospect
4 SH SI Price bundling: ≥2 distinct products (contrasting demand) at single price
• 2 segments, 0 marginal costs, equally opposing reservation prices Add-on Wide pref. Applicable to Discourage
Versioning: diff. versions of similar product sold simultaneously Consumer utility valuations → constant else cannibalize • Use pure bundling → only bundled offering is available both high and
• PH)I > = < PH base + PI add − on Consumer behaviour → divergent to target high and low WTP • >2 segments, or failure to meet above assumptions low
• Assumes benefits can be added monotonically, heterogeneity Incentivise towards best version → convergent differential • Use mixed bundling → both independent offerings + bundle
sought is one dimension Calculations for versioning • Mixed bundling is favoured when Version Hetero along Applicable to Encourage
• Trade-off: Market exp. v Loss of higher value sales via cannibali. E D()D% )G% Bundling 1. Each product in bundle has an independent market dominant both high and
• Optimal price for Base version PH = C
Should not shift all customers to highest version as 2. Markets for each product overlap dimension low
• SJ = Value assigned by least-demanding customers 3. Consumption of one does not subtract from the other
1. Leave room for competitor below
Week 7: • SH = Value assigned by most-demanding customers 4. Distribution of RP is broad and contrasting Bundle Contrasting N/A to high MC Encourage
2. Means highest-version price is too low
Versioning • VH = Marginal cost 5. Low marginal costs preference
3. Can lead to hyper-competition E D( )D) )G)
• Optimal price for Improved version P K= C Bundle design P(A+B) < PA + PB
Influences Subscip Loyal v Applicable to Encourage
• Marginal cust. Indiff. Btw not buying and buying base • Promotional bundle is more effective than per-unit promotions
• Sub-additive MC: ↓ costs to deliver same level of benefits = ↓ 9 M%D N Variety both high and
price for same benefits = ↑ demand version = t J,H = D • Leverage effect: savings on most preferred item partially allocated to
seekers low
• Prospect theory → bundles pain compared to add-ons
M the rest (↑ in WTB the rest)
• Marginal cust. Indiff. Btw buying base version A and • Brand betrayal limits bundle size (quantity requirement too high = bad) YM Based on High fixed; low -
• Versioning: Pay PA or PTotal, where PTotal > PA 9 O%9 M
• Add-on: Pay PA or PA + PB Upgrade version T = t H,K = D %D 1. Reference-dependent model → savings associated with least desired timing or MC
O M • Evaluate each item, then determine WTP
• Use mktg comms, packaging, visual differential other driver
• % who would buy base at optimal price = t H,K − t J,H 2. Weighted-additive model → savings associated with most desired item
• Extreme aversion: Good, BETTER, Best (goldilocks pricing) • % who would buy improved at optimal price =1 − t H,K
• Too many versions = difficult to make trade-offs • Evaluate starting from most desired item Π(solo) = (PA – VA)QA + (PB – VB )QB – F
. D N)D M%G M Q D %G %(D M%G M) Q
• Wide range = hard to believe • π*= + O O Legal issue: (1) market power (2) used to add value or block competitor
P DM D O%D M Π(bundle) = (PA – VA)(QA – ∆QA→T – ∆QAB→T ) + (PB – VB )(QB – ∆QB→T – CMH x ∆QH + CMI x ∆QI
• Present in descending price order QK >
∆QAB→T ) + (∆QA→T + ∆QB→T + ∆QAB→T + ∆QNew )(PA – VA + PB – VB – ẟP) – F CMH + CMI − ẟP

Subscription: series converted into a single purchase decision

• Separates timing of payment from consumption
• Reduce transaction costs
• Trade-off: Market exp. v Loss of higher value sales via cannibali.
Should not shift all customers to highest version as
1. Leave room for competitor below
2. Means highest-version price is too low
3. Can lead to hyper-competition
Influences
• Sub-additive MC: ↓ costs to deliver same level of benefits = ↓
price for same benefits = ↑ demand
• Prospect theory → bundles pain compared to add-ons
• Versioning: Pay PA or PTotal, where PTotal > PA
• Add-on: Pay PA or PA + PB
• Use mktg comms, packaging, visual differential
• Extreme aversion: Good, BETTER, Best (goldilocks pricing)
• Too many versions = difficult to make trade-offs
• Wide range = hard to believe
• Present in descending price order
W eek 1: Boundaries of a Good Price (1) Profit sensitivity analysis %∆#
Finance… Profit… W ants to Raise Price %%∆$ %∆&'
(2) Elasticity of dem and = !≡ %∆$
Week 2: To im prove pricing capability, focus on the pricing process

Sales… M arket Share… W ants to Lower Price

Ops… Capacity Utilization… Vary Price
R&D… Product Im age… W ants to Raise Price
M ktg… Custom ers… W ants to M aintain/Lower Price
M arginal costs = extrem e lower boundary
Consum er utility = extrem e upper boundary
• Form utility = product properties
• Place utility = acquire in desired location
• Time utility = accessibility/convenient m om ent
• Ownership utility = possessing rights to value
EV = Comparative Alternative + Differential Value
• Inferior alternatives = narrow lower bound
• Superior alternatives = narrow upper bound
• Pros: Highly cost-efficient, tim e-efficient
• Con: Price range is not narrow enough
Dispersion in perceived price, m ay be
1. Strategic/tactical decision
2. Inability to com m unicate prices accurately
Dispersion in perceived benefits, m ay be
1. Poor m arketing com m unications
2. Dispersion in risk tolerance of custom ers
• Benefit types: functional, process, relationship
• Search goods → functional com parison
• Experience goods → past experience
• Credence goods → unknown benefits
Dispersion in both, uncertain VP with m ultiple prod.
True economic costs W eek 4:
1. Shared cost effect Psychological
2. Expenditure effect Influences
3. Switching costs (psychological, fiscal/m onetary)
4. Difficult com parison effect (size changes, discounting)
• %∆% ≥ %&' )%∆$ = &' )∆&' • Firm s… elastic dem and… favour price cuts Profit
• Strategy and coordination
( ( • M arketing strategy (consistent with m essage)
∆* • Always ≥ industry elasticity and Price
• %∆Q ≥ • Industries… inelastic dem and… favour price increases
• Coordination (align goals and incentivise)
+, ×. /
• Tactical → evaluate prom otions/discounts • Short-term m ore inelastic as custom ers are locked in Steps: Assess driver of value → Look for variation (heterogeneity) → Assess
• Cons: R is always historic, difficult to identify relevant R price sensitivity (custom er econom ics, search and usage, com petition) →
• Strategic → evaluate price increases/decreases
• Strategic factors not considered • Sm all v Large price changes m ay have different R Identify optim al pricing structure → Consider com petition → M onitor prices
• Upward v Downward price changes m ay have different R at transaction level → Assess custom ers’ em otional response → Analyse if
• Long-term changes in custom er dem and
returns are worth cost to serve
• Reset custom er expectations of prices • Difficult to uncover relevant m arginal costs (depends on
• Com petitor reactions tim e fram e)
Conjoint → new product com positions and potential price points custom ers would accept Markets EVM Economic Price Optimization Conjoint
• Greater valuations → custom ers having alternate uses OR satisfying need greater than anticipated
Revolutionary ✓ No history to identify R Cust. have no experience
• Lower valuations → custom ers perceiving a wide variety of alternatives OR no longer need the benefits
Value equivalence line → slope change indicate shifts in custom er dem and W eek 3: Custom er-Driven; Evolutionary Range is too broad Best m easures of elasticity only ✓ (ability to com pare)
Zone of indifference Price-to-Value found at industry-level
• Products unable to exhaust VEL
• Challenges in custom er purchase decisions (benefit floor/ceiling) Mature Little product ✓ Cust. unable to differentiate
• Price brackets due to budget constraints, credibility issues differentiation (com m odity products)
• Inelastic m arket = wider zone as people would still be W TP
Price-neutral positioning: priced within the zone of indifference
Value advantaged
• Com petes on other m arket factors (prom otion)
• Unharvested value, Take m arket share, hyper-com petition
• Com petitive response m ost likely from closest com petitor
Value disadvantaged (pricing error or to cater to niche m arket) Penetration pricing: low price com pared to benefits delivered (value advantaged)
• To gain m arket share quickly (new/undeveloped m arkets, EOS/L, lim ited com p. pricing)
Constructing the map
1. Executive approach → features, benefits, prices, based on im pression • Com petitors m ay respond by lowering prices
2. Delphi approach → use m arket prices and expert evaluations Price skimming: high price com pared to benefits delivered (value disadvantaged)
• Capture profits from early custom ers (with benefits not foreseen by other com petitors)
3. Consum er research → m easure from consum ers
• Unlikely to incur com petitive response
Perceptual challenges Prospect theory Effects of Prospect theory
1. Prices ending with 9 (9 low quality, 0 high quality) 1. Unbundle gains and bundle losses 1. Reference price effects RP = α Last Observed P + 1 − α Currently Observed P
2. Fairness effect 2. Avoid surcharges and provide discounts 2. Endowm ent effect
3. Overconfidence of future behaviour 3. Shift pain to indirect opportunity costs (tim e, travel) 3. Anchoring (form s a reference point) 5. Fram ing effect
4. Sm all pie bias 4. Organism s habituate to steady states 4. Com parison set effect 6. Order bias
5. Prom otional influence (m essage affects price sensitivity) 5. M arginal response to changes is dim inishing • Add higher-price item s to reduce P sensitivity 7. End-benefit effect

W eek 5: Price Segm entation 1 st, 2 nd, 3 rd degree discrimination Complete, direct, indirect discrimination To improve segmentation hedge Common hedges
Pricing same products differently for different segments 1. First: based on each W TP 1. Com plete: complete inform ation (1 st degree) 1. Correlation with driver of value 1. Custom er dem ographics 5. Product-engineered
1. Im prove profits (increase prem ium price) 2. Second: based on quantity purchased 2. Direct: based on specific attributes (age, gender) 2. Inform ation needed for im plem entation 2. Tim e of purchase 6. Quantity purchased
2. Im prove num ber of custom ers served (reduce entry price) 3. Third: different segments different prices 3. Indirect: based on proxy (colour of credit card) 3. Enforceability 3. Purchase location 7. Custom er usage
Challenges Strategic, tactical 4. Cultural acceptability 4. Buyer self-identification 8. Negotiation
• Acceptable and enforceable m eans to charge differently 1. Tactical (short-term ): capture m arginal Positioning statement
• Segm entation hedge to lim it transferability 2. Strategic (long-term ): price structure itself enables difference custom ers to pay different prices To [target]… Our [brand] is… The [product]… That is [point of difference]… Because [rationale]

Unlawful behaviour W eek 6: Pricing & Law Positive effects Price Prom otions Trade-offs Centralized executives → explicit knowledge
Discount
1. Price fixing 1. Price segm entation (↑ vol to lower W TP, ↑ price to higher W TP • Coupon FV, processing fee, price, m argin Field executives → im plicit/tacit knowledge
2. M arket size and share (brand switching) Managem ent
• Horizontal (Illegal per se, by reason) • Redem ption rates, type of custom er, segm entation hedges Tools
• Vertical (Illegal by rule of reason) +0120345 +6787
Negative effects • Breakeven Incremental Unit Sales per Redemption = • Net price band, net price paid by m arket variables, price waterfall
• Resale price encouragem ent (Illegal by reason) +0120345 9:6;38
1. Im perfect segm entation hedge Discount decision management
2. Non-price vertical (Illegal by reason) 2. Custom er churn • If % of increm ental sale users > the above, then it is efficient
1. Decision rights escalated ($, type, discount purpose)
• Custom er and territorial restrictions • Custom ers switch back = high Acq cost, lose Retn profits Inst. Rebate Value < Mail-in Rebate Value x Mail-in Rebate Redem. Price 2. Decision incentives (vol-, rev-, profit-based)
• ∴ use m ain area of resp., quota, profit passover • Higher cross-R = stronger brand = harder to steal Products that should avoid EDLP channels Sales Credit = [Target P = k(Target P – Actual P] x Vol
• Product restrictions (refusal to sell) 3. Reference price effect (deep and frequent resets price) 1. Com plex products <
3. Exclusionary/predatory pricing (violates Sherman Act) 4. Loss of price credibility • Kicker k ≥ +658:3=>8365 ,0:435 (%)
2. Those that require learning
• Tying, and below -cost pricing (Illegal by reason) 5. Increase of price sensitivity (m arket growth from advertising) 3. High-priced products (benefit from salespeople interactions)
4. Price/prom otional discrim ination (Robinson-Patman Act) Design (Targeted, Tem porary, Special, Irregular: Tim e + Depth)
Price structure: m ethod by which total transaction prices are determ ined Tying arrangement: durable + consum able (dom inant)
Singapore Competition Act 2004; prohibits
Coupons → reach broader audience (direct m ail, web, newspaper) • Price = Com m odity price (dom inant cost) + Fabrication charges • Switching barrier for consum able (patent)
1. Anti-com petitive agreem ents Trial offers → ↓ price, ↓ size, ↓ functionality / partial functionality
2. Abuse of dom inant position • Redem ption rates, type of custom er, segm entation hedges Block tariff
Rebates → reduces tendency to resell
3. M ergers which substantially lessen com petition Two-part tariffs : entrance (dom inant source of profits) + metered • Capture higher prices from light users
Prom otional bundling → less effect on resetting expectations B!"#
• PEA = CD × S − P,
C • Capture profitable m arginal rev from heavy users
PTotal = PA + PB 3 rd degree discrim ination → W TP for add-on vs no add-on Inclined tariff (for negative externalities)
Independent com plem ents (each provides benefits own its own) • q 10E = max demand per customer, S = max utility derived
Tying arrangement %CMA < %CMB • Discourage use as certain resources are lim ited
Tied com plem ents (provide little benefits without base product) • PM = marginal cost
Two-part tariff %CMA > %CMB 9 W eek 7: Price Structures
S3 + V3 Relatively constant %CMA ≈ %CMB • πF = PA + q× P, − V , q = q 10E× 1 − D$
P3 = Add-on Pricing
2 Cross-R is negative for com plem ents Type 1 Periodic price△ | Seller sets, buyer accepts/reject | ↓ transaction cost, fair
D D D D
• V3 < S3 , V3 < P3 , % ≥ & , % ≥ & , A = base, B = add-onInfluences to price levels in addition to price segmentation Type 1 Dynamic pricing | Seller updates often OR price customization | gather info = accurate W TP, ↓ menu costs, check prices
G% G& 9% 9&
1. Signpost-effect (hetero. store form at and cust. preferences, cust. Type 2 Specified/non-specified negotiation | customize prices, but takes longer, focus on price, must have authority
Dem and heterogeneity uniform ly distributed 0 to 1 Type 3 Auction (B2B, B2C, C2C) | Seller sells, buyers bid | tailored prices, item always sold, gather buyers, ↓ search and access costs
9 select based on exp. utility, prices signalled via adv. P)
• Fraction of market that would purchase i = 1 − D' 2. Optional equipm ent effect (lower base, high-m argin optional) Type 3 Reverse auction | Buyer specifies, sellers bid | ↓ acquisition costs for com plex and com m odity products by ↑ seller base
'
3. Network externalities (two-sided m arket) Type 3 Exchange | Electronic marketplace | dynamic updated buy/sell list, global scale, ↓ variability of prices (m arket-determ ined)
+ +
Q S * − V* S , − V,
Total pro;it π add − ons = + 4. Lock-in with com plem entary Price bundling: ≥2 distinct products (contrasting dem and) at single price
4 S* S, Cust. Hetero Marginal Cost Prospect
• 2 segm ents, 0 m arginal costs, equally opposing reservation prices
Versioning: diff. versions of sim ilar product sold sim ultaneously Consum er utility valuations → constant else cannibalize • Use pure bundling → only bundled offering is available Add-on W ide preferences Applicable to both Discourage
• >2 segm ents, or failure to m eet above assum ptions high and low
• PH)I > = < PH base + PI add − on Consum er behaviour → divergent to target high and low W TP
• Use mixed bundling → both independent offerings + bundle
• Assum es benefits can be added m onotonically, heterogeneity sought Incentivise towards best version → convergent differential
• M ixed bundling is favoured when Version Hetero along Applicable to both Encourage
is one dim ension Calculations for versioning
1. Each product in bundle has an independent m arket dom inant dim ension high and low
• Trade-off: M arket exp. v Loss of higher value sales via cannibalisation DN)DM)GM
• Optimal price for Improved version P -H = Bundling 2. M arkets for each product overlap
Should not shift all custom ers to highest version as C 3. Consum ption of one does not subtract from the other Bundle Contrasting N/A to high M C Encourage
1. Leave room for com petitor below • S 1 = Value assigned by least-dem anding custom ers preference
W eek 9: 4. Distribution of RP is broad and contrasting
• S * = Value assigned by m ost-dem anding custom ers
2. M eans highest-version price is too low Versioning 5. Low m arginal costs
• V* = M arginal cost
3. Can lead to hyper-com petition Subscip Loyal v Variety Applicable to both Encourage
- DN)DO)GO Bundle design P(A+B) < PA + PB
Influences • Optimal price for Improved version P K = seekers high and low
C • Promotional bundle is more effective than per-unit promotions
• Sub-additive M C: ↓ costs to deliver sam e level of benefits = ↓ price • M arginal cust. Indiff. Btw not buying and buying base
• Leverage effect: savings on most preferred item partially allocated to the rest YM Based on tim ing or High fixed; low M C -
for sam e benefits = ↑ dem and 9% %D(
version = t J,H = D (↑ in W TB the rest) other driver
• Prospect theory → bundles pain com pared to add-ons %
• Brand betrayal limits bundle size (quantity requirement too high = bad)
• Versioning: Pay PA or PTotal, where PTotal > PA • M arginal cust. Indiff. Btw buying base version A and 1. Reference-dependent model → savings associated with least desired
9) %9% Π(bundle) = (PA – VA)(QA – ∆QA→T – ∆QAB→T ) + (PB – VB )(QB –
• Add-on: Pay PA or PA + PB Upgrade version T = t H,K = D %D • Evaluate each item , then determ ine W TP
• Use m ktg com m s, packaging, visual differential
) %
2. W eighted-additive model → savings associated with m ost desired item ∆QB→T – ∆QAB→T ) + (∆QA→T + ∆QB→T + ∆QAB→T + ∆QNew )(PA – VA +
• % who would buy base at optim al price = t H,K − t J,H PB – VB – ẟP) – F
• Extrem e aversion: Good, BETTER, Best (goldilocks pricing) • Evaluate starting from most desired item
• Too m any versions = difficult to m ake trade-offs • % who would buy im proved at optim al price = 1 − t H,K CMH x ∆QH + CMI x ∆QI
. D )D %G Q D %G %(D %G ) Q Legal issue: (1) market power (2) used to add value or block competitor
QK >
• W ide range = hard to believe • * = P N DM M + O OD %D M M
π Π(solo) = (PA – VA)QA + (PB – VB )QB – F CMH + CMI − ẟP
• Present in descending price order M O M
Subscription: series converted into a single purchase decision Yield Management: drives prices higher as tim e of use of product approaches
• Separates tim ing of paym ent from consum ption • Uses timing and expectations of demand to price segm ent the m arket
W eek 10: Subscription
• Reduce transaction costs • Dem and m ay be derived on specific factors external to product offered
Total period price (TPP): sum price of all item s in subscription (upper bound) • Preconditions: (1) Perishable and lim ited inventory (2) High fixed costs, low M C (3) Advance
• Price lower: (1) m ore profitable (2) incentivise otherwise indifference purchase (4) M any potential custom ers (5) W TP changes over tim e depending on dem and
driver (6) Different m arket segm ents exist (7) Firm can sell a variety of prices (fare classes)
Customer period value: sum price paid given actual behaviour (lower bound)
• Individual price P3 and variable costs V3 • Fare classes define different prices at which units of capacity is sold
• Booking control/limit (BL): # of units available at a given fare class
• Custom er retention rate r 5%< and applicable discount rate 1 + d 5%<
Fixed allotment → fixed capacity for each fare class W eek 11:
• Acquisition costs A and retention costs R
• M axim izes revenue only if lowest-priced fare class is filled first Dynam ic
• CPV(individual) = CPV(Subscription) = P – X
Dynamic nesting → each fare class has a BL, reduces as seats are sold Pricing
Consum er behaviour and ∆value proposition m oderates the prices in the range
• BL ↓ from m ost expensive to least expensive fare class
• Higher than CPV due to increases in total benefits for custom ers
• ∆VP can increase econom ic value, thus enabling higher prices (SaaS)
• b< ≥ bC ≥ bx ≥ ⋯ b5
Customer lifetime value: PV of future CF to custom er during entire relationship
• b<= m axim um num ber of seats/capacity
: • Protection level: # of seats held for a fare class and the higher fare classes
• CLV = P3 − V3 − A + P7 − V7 − R • y3 = b< − b3)<
<)t%:
v 9- %G- %w :./0 • y< ≤ yC ≤ yx ≤ ⋯ y5%<
• CPV = P3 − V3 − A + ∑5uC <)t ./0
: : v%< Account for no-shows → BL ↑ by expected # of no-shows
• CPV = P3 − V3 − A + P7 − V7 − R 1− M anage cancellations → add seats back to BL of appropriate fare classes
<)t%: <)t
• For subscriptions, P7 = ] Capacity allocation: defines BL for relevant fare classes
• Certain dem and → set PL to expected dem and
• CLV influence decisions outside of subscriptions (2-sided markets)
• Uncertain dem and → use norm al distribution function, µ and σ
Behavioural effects • CPF: probability dem and is ≤ a given level
• Market segmentation: Loyal (↑r = ↑ CPV) v Variety seekers • 1 – CPF: probability dem and is ≥ a given level
• -ve impact of lock-in means subscription price < TPP to incentivise • 1 – G(i – 0.5, µ, σ)
• Increased consumption patterns: (1) future consumption = 0/low Decision tree
marginal price (2) address information asymmetries (overall utility) • Dilution: selling a unit at discount when dem and exists at full fare
• Overestimation bias: overestimate own future +ve behaviour • Spoilage: holding onto unit for full fare when dem and does not exist
• Higher frequency of payments = higher usage and retention • Discount optim al booking → further ↑ in BL has 0/-ve im pact on revenue
Tactically → prom otions effective at capturing m arginal custom ers • 1 − Gy C − B a = 92 , C − B a = PL
93
Strategically → best to use other levers (segm entation, brand positioning) Reacting to price reductions, consider Price points Mature → m arket growth from productivity
• New price structure often leads the rest to catch up
• Direct costs and benefits • Intro/Growth → entry products ↓ rapidly EOS/L, netw • Custom er preference techniques and EPO Intertemporal
Goal W eek 12: • Secondary consequences (others cust., price war) • M aturity/Decline → prom otions, cost savings = ↓ P • Com petitive pressures and custom er hetero
• ↑ value without as m uch cost Com petition • Strategic position (firm s with cost advantage) • Higher-end/niche ↑ P → coupon, discount, prom otion
• ↓ cost without as m uch value • EOS/S/L captured
Initiating price reductions Intro → Revolutionary product fulfils latent dem and
• ↑ reaction tim e to seize opportunities • Price m ay be strategic focus on the firm • Tinkerers appreciate product properties Decline, strategies
Price war is bad • Gauge com petitive response (visibility, threat, • Visionaries (early adopt) seek a strategic breakthrough 1. Harvest
• (1) Expensive (2) Shakeout rare (3) Re-entry priority, organisational inertia) • Use EVM and price skim m ing 2. Consolidate (acquire harvesters)
Product Life Cycle
Structural drivers of price war M anaging price actions Growth 3. Focus (exit weakness, invest in strength)
1. Num ber of com petitors • (1) Expensive (2) Shakeout rare (3) Re-entry • Early m ajority: very value-sensitive, quite price-sensitive
2. Com petitor’s m anagerial m aturity • Late m ajority/laggards: reluctant, highly price-sensitive
Managing price actions
3. High fixed costs, low m arginal costs 1. Price signalling: (1) highly public (2) credible reasons • Use conjoint, add-ons, bundling
4. Savings (EOScale/Scope/Learning) • Upward price expansion by including different m arket
2. Tit-for-tat pricing: m atching every price action
5. Network externalities (2-sided m arket/com plem entary products) segm ents
• Convince them battle is not worth fighting