Profit sensitivity Profit sensitivity when change price Profit sensitivity for fixed cost increase Economic price

ty when change price Profit sensitivity for fixed cost increase Economic price optimization
Volume hurdle (price cut/hikes) - tactical price action (discount, in response to changing VC
promotion)
e = elasticity of demand
(negative)
Profit is asymmetrically sensitive to price cut and hike
WRT volume change

CM = P - V

Effects related to prospect

theory
1. Reference price effects (Pe)
>1 elastic (brand demand) - P
2. Endowment effect
<1 inelastic (category demand) - P
Prospect theory - Irrationally fail to maximize utility 3. Anchoring (Reservation price)
What can we do when prices increase? absorb cost / holding
0. (utility) losses weigh heavier than gains 4. Comparison set effect
margins constant in dollar value / margins constant in %
Influences Perceptual Challenge 1. Inflection at point of reference - avoid loss and discount 5. Framing effect
True economic cost 1. Price ending in 9s gain - status quo 6. Order Bias
1. Shared cost effect PS 2. Fairness effect 2. Diminishing sensitivity away from reference point 7. End-benefit effect
2. Switching cost PS 3. Overconfidence in future 3. Risk aversion/seeking in positive/negative frame (gain/loss) Sensitivity to reference pt (WTP)
3. Expenditure effect PS economic efficiency / Minimize pain and highlight gain Value owned more PS
Lower bound: Marginal cost
4. Difficult comparison effect PS overestimation bias We can unbundle gain and bundle losses due to 0 and 2. Set expectations on early info
Upper bound: consumer utility
Complementary 4. Promotional influence Avoid surcharges and provide discounts (0). Alternative prices on expectation
Differential value: Change in consumer
goods/learning/brand 9/0 - imply discounts/quality Shift the pain from direct price to indirect opportunity cost How an offer is framed
utility that a product has in comparison to
loyalty/engineering cost want to pay the same - time/effort Present expensive first
its comparable alternative
Branded/Discount/Size/New entrant What companies say affect E.g Price promotion, versioning, free, bundling Relationship of goal and product
Exchange value = DV + price of alternative
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Search cost > uncertainty decis making perceived value and thus price Price of nearest competitor / substitue
Multi-part pricing A form of Two-part tariff Price war factors
Inclined block tariff: to discourage heavy use 1. No. of competito
Declined block tariff: Encourage heavy use 2. Competitor
Both is in terms of disparity of WTP of customers with different managerial
consumption volume Legality vs ethicality maturity
Typing: If seller have substantial market power with tying 3. High fixed cost a
Sherman act: for predatory pricing that drives competitors
product to restrain free competition for tied product and low MC
Two part tariff: fixed entrance fee charged to all customer regardless of out of business and raise prices after
coerce sales of tied product 4. Industry growth
consumption and metered fee for lvl of consumption. Used for industries Singapore Competition Act 2004 - anti-competition
future
with limited competition. For products that cant be easily resold/stored Robinson-Patman Act: prohibit sellers from discriminating agreements, decisions and practice / abuse of dominant
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Profit through entrance fee against different buyers when adversely affects competition (B2B) position and merger that substantially lessen competition
5. Network effect

Bundling
Factors that affects price:
Brand, economy, market
preference, technology
and other market factors

Grandfathering pricing
Data analytics
Signpost effect - 1 item cheap, think all cheap e.g
supermarkets and Ikea
products are partially both substitutes and complements for each other
- a form of selective discount for contrasting demand for A and B
Leverage effect - savings gain in A use for WTP for B
Brand betrayal: bundle too large and exclude most customers from
benefits, reject brand and switch
Talk in terms - Qualitative and quantitative
** ** approach, Price (%/$), Willing to pay, marginal
cost, heterogeneity in demand, price sensitivity,
utility sensitivity , (perceived) value, behaviourial
econs, reservation price (D/S), consumption lvl
Good-better-best
Weber-fechner law 1. Set prices (strategic pricing fit comp adv)
2. Managing price variances
3. Deciding price structure
4. Pricing strategy in the market (competitors and life
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Price structure: method that determine transaction price - WTP Conjoint analysis: Customer perception driven pricing Exchange Value Model: Used when it is a new product (wider price band) -
Change reference price and customer expectation (segment) Discriminates between benefit of brands, attributes, service level Cordis drug eluting stent
Add-on: For complementary products. flexible for different utility and and market segments - more insights than pure EPO Total cost of ownership: Take into account direct and indirect cost
WTP: base product is entry into product category benefit network Reveal dispersion of value of different customers on Economic price optimization
externalities increase value of core product e.g Fax product/features - and thus potential segmentation - Price per util Price guarantees: For infrequently purchased consumer product where
Versioning : price-segment customers according to their WTP for consumers are uncertain- match lowest price (market/advertised or give
For evolutionary product that customers experienced and
marginal improvements in attributes, features, and benefits coupons. GIve customers greater confidence to purchase
understand price and value (narrower price band) > need many Cst
Choice of middle, manage segment - don't neglect bottom. Add $ ver Force competitors to compete on other non-price factors
1. Rank, score, divide all product with attribute A/no. of products to
Number effect and range effect (too wide range affect value perception Power of free: Prospect theory - it is a gain - e.g free shipping.
get part-worth utility - Aggregate market part worth util = avg
Price bundling : For contrasting heterogeneity in demand for Part-worth utility - attribute to value relationship - Priced according Price cut/hike: Must ensure can hit volume hurdle if it is to improve
distinct products that can be used in isolation or combination to customer perceived value (snapshot of WTP, X fast growing profitability (Strategic vs tactical price change > get more market
Dispersion in WTP and act as price segmentation hedge Competition based pricing
Pricing according to Price to benefit map:
Subscription pricing: segment who anticipate consuming all individual Follow or hold?Price promotion: imperfect segmentation, need to retain
1. Penetration pricing ( Value advantage) - UV, Mkt share, hypercomp customers after they switched, reset price expectation and +
products and those that consume a small portion of overall offering Price war?
2. Skimming pricing (value disadvantage) - missed opportunities price sensitivity > grab market share from competitor/grow mkt
A series of related individual purchase converted into 1 purchase dec
3. Price neutral (Value equivalence) - unserved / Zone of indifference should be targeted, temporary, special and irregular
transaction cost/info asymmetry and separate payment from consu
where price and benefits changes does not affect sales volume Constant/Convergent/Divergent(Y) - price to value > Issue of
UB: total period price/LB: customer period value, CLV and S$ < UB LIE Dispersion in
Take note to not stay too long in VD zone ie Bike sharing companies cross-product cannibalization and loss of value/price position
Dynamic pricing: revenue management where prices increase as perceived
3 ways of doing it: Executive, Delphi or consumer research Value promotion - make it customers less price-sensitive
time of use approaches/demand increase > Price to predicted D lvl price/benefit
approach - mgt, mkt transaction price and expert, perception E.g Coupons (promo code) , trial offers and rebates
least sensitive pay highest, other segment lower (PD and VP)
Need a lot of customers with changing WTP based on demand factors. Price segmentation: align price to factors that drive value and cost factor Consider cost, redemption rate, sales volume, type of
Perishable and limited capacity, customers reserve ahead of time, firm 1st degree PD: charge customers prices at WTP customers and hedge
can sell at variety of price (fare class) and can change availability 2nd degree PD: Different prices based on Qty - Demand heterogeneity promotional bundling e.g 1 for 1 to avoid devaluing brand
Tying arrangement: sell two related products that function together 3rd degree PD: different market segment - Demand heterogeneity Adaptive Pricing: adjusting the price to meet the demand
durable good (priced low) with consumable (priced high - forms profit). Need segmentation hedge: that correlates with WTP, minimal info to implement, so you can still make a profit in times when demand is weak.
Common in industries that want LT relationship (Tie-in pricing) enforceable and culturally accepted (limited transferability) Product life-cycle pricing: Intro: trying to find price/time
Lock in with complement: Segment based on demographics, time/location, self identification, Qty and segment thru skim, growth - price fall due to economies of
Aggressive priced complementary products, profit through core usage - automatically charge more when more utility scale, learning, decline and maturity - price stabilize and decline
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product: increase switching cost - e.g apps on android (part of add-on) Strategic vs tactical price segmentation > increase profit and no. of customers for entry model but niche for higher end can increase price
Dynamic pricing
Fare class: the different prices at which units of capacity is sold - n - no. of fare class
Challenge: Dilution (not selling at full price when there's demand) vs Spoilage revenue maximization by
Booking control: number of units of capacity available at a given fare class – e.g selling higher class seats to
proposing that discounted fares
(Holding onto full priced unit when there's discounted demand) family of 4 when there are only 3 seats in lower class
be accepted if their revenue Protection level: is the number of seats held available
Littlewood's rule value exceeded anticipated
Dynamic Nesting: control booking to ensure can purchase for that fare class and all higher fare classes. Held
pd = discounted price revenue from the expected
more expensive fare until capacity close constant until all seats in next lower class are reserved
probability that full priced demand is pf = full fare price value of full-fare tickets
at or above current protection level - Nested (b1 = total capacity) under dynamic nesting y
Protection Level:
^B is what we are finding - 137 - ? - Optimal is when this % = pd/pf
Booking limit: number of available seats with a given fare class
where x = protection level in a specific flight - b where 1 = 1st class and n = lowest
Issue, its importance, root cause (why), when Where,
do I have to decide (urgency), what I can class. BL lowered for all fare class as seats in any FC is booked.
actually do? key measure of success and risk If low priced BL (dilution) / holding constant (spoilage)
mitigation/assumption