Pricing Strategies

Session 7
XMBA 206.1

Ganesh Iyer

Analysis Framework

Competitor
Analysis

Perceptual mapping

Company Analysis
Marketing Myopia

First mover advantages

Customer Analysis
Positioning

Segmentation

Marketing Strategy
Pricing process
Pricing and innovation

Product

Marketing Orientation

Branding

Price
Promotion
Place

Market
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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

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Price Customization:
Price Discrimination and Self-selection
Iyers Carwash Example
Price
3
4

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# of Car washes
5000
3000

How to Price ? What is the best single price?

Can you increase revenues? If so to what level?

Price Discrimination and Self-Selection

Consumer Couponing

Why coupons:

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

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Companies spent approx. $6 B on distributing 257 B coupons of which 3.6 B were

actually redeemed.

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

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significant increase in prices < 14 days before departure.

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)

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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

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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.

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Electronic Road Pricing

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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.

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Psychology in Pricing Strategy

Mental Categorization

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

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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

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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.

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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.
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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?

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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.

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