2: Pricing

Question 1

• View price as proxy for (but not identical

to) value

Answer 1

Price < Value = Buy

Question 2

What is the first challenge of pricing?

Answer 2

Prices are ambiguous because value is

ambiguous

Question 3

Consumer Value: Four Inputs

Answer 3

1. Value of net benefits
2. Production cost
3. Cost of substitutes (Opportunity Cost)
4. Cost of complements

Question 4

In the face of ambiguity, how do firms

price new products?

Answer 4

1. Cost-plus pricing
2. Target return pricing
3. Value-based pricing
4. Consumer-based (Psychological) pricing

Question 5

Value elicitation Process?

Answer 5

The process of determining consumers’
reservation price (max WTP)
• A measure of price sensitivity/elasticity
• Methods include:
– Surveys (Focus groups)
– Bidding tasks
– Experiments

Question 6

Value elicitation formula

Answer 6

R ≈ p – b + s
Reasons why consumers underbid in
value elicitation tasks
– p: Can’t fully appreciate value
– b: Overly cautious about future budget
– s: Buyer strategy to lower price
• Reasons why consumers overbid in value
elicitation tasks
– p: Overestimate net benefits (or over-promised)
– b: Forget to consider budget
– s: Buyer strategy to ensure that product is offered

Question 7

When can strong brands command

price premiums for new products?

Answer 7

1. Brand associations are positive
2. Brand associations “fit” (BSAs)
3. New product category has higher than
   average risk

Question 8

Psychological Pricing?

Answer 8

Because of weak reference prices,
consumers use cues to evaluate the
appropriateness of a price

Question 9

What heuristics impact pricing?

Answer 9

Firms signal “good deal” to the consumer
by using several common tactics

1: SALE SIGNS
2: Prices that end in 9
3: Signpost items
4: Price guarantees (Price matching)
5: “Sharp numbers”
6: Packaging cues

Question 10

Confirmatory Bias

Answer 10

The tendency to “see what you expect to
see.” People will interpret information in a
way that supports (or confirms) their prior
expectations.

Question 11

When are pricing signals most effective?

Answer 11

1. Infrequently bought goods
2. New or novice consumers
3. Product designs change frequently over
   time
4. Product quality or sizes widely vary