Chapter 7&8 Flashcards
is a pricing strategy characterized by charging different prices to different
customers is (perhaps) a way to extract more surplus and increase profit.
Price customization
is simply charging different prices to different people for the same or similar product
or service.
Price segmentation
Examples of price segmentation
*student prices at movie theaters, *senior
prices for coffee at McDonald’s
*people who use coupons
*airlines
Price segmentation Pros
*aimed at getting the most profit possible
*optimizes revenue and profits
Price segmentation Cons
*price discrimination
*Premium customers may get upset if they are aware
others are getting the same or similar products or services at lower prices.
7 Examples of Price Segmentation
- Channel purchase
- Time used
- Time of purchase
- Location
- Volume
- Attribute
- Service offering
For example, online vs. in-store purchase. Customers who purchase online can be offered a lower price because the cost to serve this purchase is lower.
Channel purchase
For example, many resorts charge more for their vacation packages depending on the time of year. Frugal travelers will travel to sunny destinations in late March for better deals
while other travelers will pay more to get away from the January deep freeze.
Time used
For example, many items are priced higher before the holidays and drop in price after. In the fashion industry, fashionistas will pay a premium to wear the latest styles while those on a budget will wait for the end of season clearances.
Time of purchase
For example, theaters and concert venues charge based on how close you are to the
stage.
Location
This one is very common, the larger the volume you order, the lower the price per
unit.
Volume
For example, first class vs coach or hardwood vs laminate.
Attribute
For example, a plane ticket that is non-refundable is usually less expensive than one that is fully refundable
Service offering
refers to the manner by which businesses establish the prices of their goods and services offered to other businesses
B2B pricing model
When building a pricing strategy, there are three components to consider:
- pricing model
- pricing approach
- psychological pricing tactics
The FOUNDATION of a pricing strategy that you will use
Ex:
usage-based pricing
tiered pricing
Pricing model
Once you have decided on a pricing model, you need to select a ….
Ex
cost-plus pricing
value-based pricing
Pricing approach
Finally, you should consider which psychological you will employ to
fine-tune your price points
Ex:
odd pricing
charm pricing
Pricing tactics
When picking a pricing model, you need to consider a few different questions.
- Are we going to offer one price point or many?
- Which value metric are we going to use? In other words, what and how are we going to charge for our solution?
is easy for customers to understand but leads to lower revenue.
Single price point
often the BEST APPROACH,
especially if a company has complex solution.
Multiple price points
There are several different value metrics to consider:
• Users
• Active users
• Feature usage
• Activity
customers pay more as the number of individuals who can access the
product increases
Users
customers pay more as the number of people using the product
increases.
*Keep on using the product
Active users
customers pay more as the number of features they use increases,
regardless of the number of users
Feature usage
customers pay for each activity conducted. For example, email marketing
platform users could pay per email sent
Activity
B2B Pricing Models:
- Flat-rate Pricing
- Tiered pricing
- Usage-based pricing
- Per-user pricing
means offering one product, with the same set of features, for one
price.
Flat-rate Pricing
Most companies with tiered pricing models offer 3-6 tiers or packages. The most
COMMON MODEL IS LINEAR. The lowest-priced tier has the fewest
features, and each subsequent level adds new features for a higher price.
Tiered Pricing
Most companies with tiered pricing models offer 3-6 tiers or packages. The most
common model is linear. The lowest-priced tier has the fewest
features, and each subsequent level adds new features for a higher price.
.
Tiered Pricing
means the more you use a service, the more you pay.
Usage-based pricing
the purchasing company pays for each individual who can access a
product or service. The more users, the higher the price.
Per-user pricing
B2B pricing approaches
inward-looking
outward-looking
driven by strategy
you develop pricing based on how much a product or service
costs you to produce.
Inward-looking
price is determined by what your
customers are willing to pay given the product value or the current competitive landscape.
Outward-looking
you start by considering what the company is trying to achieve, e.g., maximizing market share.
Driven by strategy
B2B Approaches
- Cost-plus pricing
- Marginal cost pricing
- Value pricing
- Product-line enhancement
- Dynamic or tailored pricing
- Market penetration
- Market skimming
One of the MOST STRAIGHTFORWARD APPROACHES to pricing. You calculate how much a product or service costs your business to make, add a fixed profit margin, and set that as your price.
This approach is very INWARD-LOOKING.
Cost-plus pricing
takes a similar approach to cost-plus pricing. The critical difference is that, when calculating costs, you ignore the ‘sunk’ or ‘fixed’ costs that
are inherent in the development of the product or service. Like cost-plus pricing, marginal cost pricing is an INWARD-LOOKING APPROACH but a useful starting point.
Marginal cost pricing
ignores how much a product costs to make and focuses on a product’s perceived value. Typically, companies doing value pricing are looking to charge a premium for their product.
Value pricing
If you are releasing a product comparable to existing products, your pricing options
can be limited. If the price of the new product is set too low, you will undermine
the existing products. If it is too high, buyers are likely to stick with the status quo.
This approach is OUTWARD-LOOKING
Product-line enhancement
Each buyers’ willingness to pay is different. In an ideal world, each individual would
have to pay the highest price they’re willing to consider for a product.
In reality, tailoring pricing to each individual isn’t possible. However, it is
possible to tailor pricing to some degree. Some companies do this by setting
different prices at different levels depending on a customer’s location or size
Ex.
prices are set lower in countries that are more price sensitive.
Dynamic/ tailored pricing
If you want to maximize your market share, you should set a lower price than competitors. Often, this can mean setting prices at levels that are unsustainable in
the long-term.
Market penetration
like market penetration, is a pricing approach driven by a
specific strategic objective.
In this case, the focus is on profitability over market share.
Market skimming
Market
skimming has two critical steps:
a. The company sets a high introductory price to attract a market segment that wants the product and is less price-sensitive;
b. Over time, the company lowers the price to appeal to different segments
who are more price-sensitive
B2B pricing tactics
- Anchoring + decoys
- Charm prices + odd prices
- Prestige pricing
- Trial pricing
- Bundling
- The Goldilocks effect
that tactic assumes that the buyer will purchase, or intends to
buy, the more expensive package.
Anchoring
you can nudge buyers to select a specific choice by offering a product that is a bad deal by comparison. The decoy’s goal is to make the existing product look more attractive by comparison, increasing willingness to pay.
Decoy pricing
the practice of ending a price with a nine. Standard that psychologists believe that our brains are starting to factor it
into decisions.
Some believe that these are now subconsciously associated with good
value, meaning that a price ending in 9 gets an extra boost. Others believe that this is so common that people are now correctly associating
$499 prices with a $500 reference point.
Charm pricing
uses the same principle as ‘charm pricing,’ except the price
ends with a number other than nine. For example, in the example above, we
would charge $497.
Of course, it has additional benefit of allowing your
product to stand out through its novelty. However, in doing so, it could make
the buyer more conscious of the price and mitigate the left digit effect.
Odd pricing
people intuitively link price and quality. They assume that low price
goods are of low quality.
Some businesses can take advantage of this perceived link. By charging a high
price, they encourage the belief that the product is of high quality.
Prestige pricing
Multiple studies have demonstrated the ‘power of free,’ the extent to which a price of zero can drive an increase in purchases.
Trial pricing
is a tactic that takes advantage of the power of
free/discounts. A company offers its solution for free, or at a reduced price,
for a limited time.
This tactic gets more customers to try the product than would have at a regular
price. And if you’re able to demonstrate how useful the product is during the trial, they’ll be happy to pay a full rate once the trial ends.
Trial pricing
Companies offer their customers multiple products or features, some of which may
not be required or desired. They often ‘bundle’ these individual components
together into one package. This package is likely to have a lower price than if all of
its features were purchased individually. However, it may have a higher price than if
the buyer purchased all the features it wanted independently.
The buyer is happy because they are getting discounts, even if some discounts are
on products they don’t want or need.
Bundling
When people are presented with multiple options, they tend to
select the ‘middle’ option. Or the center-stage effect.
If there are three pricing levels, they are more likely to select the middle price. That’s because it is probably a safer choice than the lower price (which may be
linked to an inferior quality product) and the high price (which may be a w aste of
money).
The Goldilocks effect
