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Strat Innovation > Innovatice Pricing > Flashcards

Innovatice Pricing Flashcards

1
Q

Innovative pricing definition Swann

A

Innovative pricing can be defined as the activity of creating a new pricing scheme or tariff structure with no change to the product or service

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2
Q

Innovative pricing may be used to

A

Raise firm profits

Used to increase or gain market share by introducing level pricing schemes,

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3
Q

Price discrimination

A

Charging different prices to different customers for the same product or service (eg why so many prices paid for sake ticket for same ticket for same flight?)

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4
Q

Objective of PD

A

Is it the attempt by a monopoly firm to increase its profits by capturing ‘consumer surplus’
I

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5
Q

Necessary conditions for PD

A

1 homogenous products (the same)
2 consumer heterogeneity (there must be differences between the WTP to different buyers in the market
3 there must be barriers to prevent customers switching - buying at lower prices
4 the firm is a monopolist provider

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6
Q

A monopolist

A

Has power to set prices
Supplier may be the first to market a new good
Supplier may the dominant player
It may be natural monopolist - water company, railway operator

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7
Q

Willingness to pay

A

The law of demand states hat there is a negative relationship between market demand and price
To understand this we need to look at difference in WTP to different customers

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8
Q

Reserve prices

A

Reflects willingness to pay and ability
Difference in people’s taste
Difference in income/wealth

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9
Q

Consumer surplus

A

Difference between the reserve price that individuals are WTP and the ruling market price

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10
Q

1st degree price discrimination

A

Individual consumers WTP
Seller able to capture all consumer surplus
To achieve this the seller must know the reserve price of each and every buyer

Eg Dutch auction - start with High asking price and keep going down until somewhen says yes
Haggling - occurs between v experienced seller and naive buyer

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11
Q

Why 1st degree rare

A

Hard to implement
It is very unlikely that the buyers are willing to disclose their WTP
Even if possible it would involve high costs in terms of information collection and processing
It requires a different price for each and every buyer and to exclude other buyers from this price

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12
Q

2nd degree price discrimination

A

Non linear pricing
Bulk buying
A producer sets a number of different price tags for the product whereby the unit price is lower, the larger the quantity purchased
Buyers self selecting themselves into market segments according to WTP
Each individual will purchase at the price that is at or below theirs WTP
Still base on WTP
Can be seen in bulk buying, 3 for 2, get 10th free loyalty cards

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13
Q

3rd degree price discrimination

A

This depends on groups of consumers having a different WTP
The seller must identify these different groups of buyers and charges different prices according to
Age group, studentD gender, citenzenship, income

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14
Q

Use of internet tech

A

Online sales increasingly use data on consumers characteristics to differentiate prices
In turn ‘comparison websites’ business have been established to help consumers in markets where there are many alternative prices being affected: airline tickets, insurance, gas and electricity.
Note some not on these sites - direct line, Ryanair

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15
Q

Preventing re selling

A

For 3rd degree PD to work it is essential that one consumer cannot pass on or re well the item to another consumer
Wants to prevent
Selling st a Unique time
Software firms offer large discounts to educational users, provides buyers an academic email account
Students show id

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16
Q

2nd degree PD - two part tartiffs

A

A buyer pays a fixed cost and usage related cost
Mobile 3 tarrifs
A- offers a lower fixed fee of £80, then high charge for calls
B- offers a higher fixed fee of £100, then lower charge for calls (free 10 nominated numbers)
C- offers a higher fixed fee of £200, then get v low charge for calls (free calls to others on same operators)

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17
Q

Noisy pricing - 3rd degree

A

Getting the best price is time consuming and involves hassle
Time of purchase - this petrol station if offering cut price fuel fro 2 days a week BUT doesn’t tell you which days
Clever marketing - from a distance you see ‘cut fuel prices’ you only notice 2 days on closer inspection
Suppliers are seeking to separate out searchers and non searchers
Buyers who are more price sensitive/have more time (poorer/unemployed( will be able to take advantage:
Most consumer - time scarce - will pay first acceptable price - not look further

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18
Q

Other forms of innovative pricing

A

Many others

These include offers on different quality products and are used by firms who are not monopolists

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19
Q

Short term give away

A

Build up market share
Used by firms that need to get consumers to try out their products
Where a radically new product is being launched and consumers have no previous experience to draw upon (google, adobe, I Netscape)
Or a firm is entering a market where there is one or more dominant firms

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20
Q

Essential that the for free firm…

A

Turns non paying customers into paying ones fast enough to cover costs. If not it will go bankrupt

21
Q

Pay what you want

A

2007- radio heed released in rainbows and fans paid what they want
2010- humble bundles pay what you want e book bundle makes 1.1 million in 2 weeks

22
Q

Tie in sales

A

Gillette offered consumers a sturdy permanent razor supplemented by cheaper easily replaceable blades
By doing so, Gillette game to dominant men’s facial grooming marker and create a massive repeat customer base

23
Q

Many other example where one time products offered- usually a low price (loss leader) - to gain profits on the stream of repeatedly purchased complementary products

A

Printer - ink cartridges
Set top boxes and satellite dishes to pay for subscription tv - sky
Next generation video game consoles and online gaming subscriptions (Sony and Microsoft)

24
Q

Anchoring

A

We use anchoring information everyday to predict the outline of events to estimate how much time something will take or how much money something will cost
An anchor price gives you a point with which to compare
The problems is that this can be used to re evaluate a buyers purchasing decision and salesmen know this
Wine £15,7,5
Leather jacket - try on £1000 like it out back too much the someone working tells you on sales for £400

25
Q

Legal limits of innovative pricing

A

Against consumer interest? Anti competitive?
Eg 2 for 1 deals are illegal in Germany because they are anti competitive
Regulatory bodies to oversee natural monopolies
‘Presumption in law - price acts against consumer interest’ - Swann

26
Q

Ethical limited of innovative pricing

A

How can different prices be changed for same product that cost same to produce?
What about environmental waste of bulk buying
There may be some benefits for 3rd degree for less wealthy buyers in the price offered them is cross susbsidised

27
Q

Cross subsidising

A

By charging someone above marginal cost, you can charge poorer people below marginal cost.
The lower cost is subsidised by the buyer at higher prices

28
Q

3 problems of PD (Swann)

A

Legal
Philosophical
Ethical

29
Q

Philosophical problems of PD - Swann

A

Some would argue if 2 different sales are done at different prices, then they must represent different products or services

30
Q

Kantain perspective of PD (ethical) ( Swann)

A

Noisy discrimination seems unattractive because it exploits the ignorance of some customers.
And any Pd based on the fact that those in extremists have no choice but to pay the higher prices seems doubly unattractive

31
Q

Utilitarian perspective (ethical) (Swann)

A

Pd and innovative pricing may be a necessary evil, without it socially and economically valuable services cannot break even and will not he offered

32
Q

Noisy (Swann)

A

Most subtle pricing scheme of all

Time sort

33
Q

Yoffe and Cusumano - Netscape (Swann)

A

Used innovative pricing methods to become market leader internet browser in 1995
Official price of navigator 10, $39
But for education and non profit use was free for 90 day trial
Knew after trail some would pay
Aim of free not free was to build large network and some market standard.
When established as standard could hope to sell browser
Meanwhile Netscape would make its money selling services for their web servers.
This innocatice rpricign strategy is a mix of different method- pricing according to consumer characteristics, penetration pricing and sort of a two part tariff (where services on web server are sold at Hugh price while the browser itself if sold and subsidised price) and tie ins.

34
Q

What constrains price discrimination (Swann)

A 
Regulation 
Competition 
Arbitrage 
Commitment
Reputation
35
Q

Airlines cages different fares based on

A 
Time of sale
Time of travel
Where tickets bought
Whether student or not
Class of accommodation
Whether ticket is bundled
36
Q

Systematic price discrimination v Noisy PD

A

Systematic - prices well known, well understood but still opt for higher price
Noisy- randomness; customer don’t know where to find better deal; related to time and search

37
Q

Regulation (Swann)

A

Anti trust authorities may take the view discrimination is happening

38
Q

Competition (Swann)

A

If monopoly they can do it.

When comp operates it helps to prevent PD

39
Q

Arbitrage (Swann)

A

People buying and selling it different prices.

Subscription helps to prevent this

40
Q

Commitment and reputation (Swann)

A

If you gain bad reputation for PD then consumers will wait for better price.
Commitments made to not cut prices but hard to keep.

41
Q

The seriousness of threat posed by a new entrant hinges of 3 factors (Bryce et al)

A

The entrants ability to cover its costs quickly enough.
The rate at which the number of its users of the free offering is growing
The speed with which your paying customers are deflecting

42
Q

If free offerings user base is growing by

A

40% or more a year or customer deflection rate is 5% a year, serious trouble may be looming
Bryce et al

43
Q

Offer a better free (Bryce et al)

A

Can utilise customer learning, brand equity, financial resources knowledge of the market etc to introduce a better free offering many firms are reluctant to move from existing strategy

44
Q

Yahoo and google

A

Email.
Yahoo responded to google offering of free by eventually doing same…bad in short term but paid off in long run.
However with google docs etc will things hangs

45
Q 
Rethink profit strategies 
2 misconceptions (Bryce et al)
A

Belief products must generate a respectably level of revenue and profit
Profit centre and accounting system it employs

46
Q

4 strategies Bryce

A

1 up sell - introduce free basic, then charge for a premium version
2 cross sell - sell other products not directly tied to the first product
3 charge third parties - provide a free product to users that charge a third party to access them
4 bundle - offer a free product or service with a paid offering

47
Q

Two obstacle ls prevent managers st established companies from marking the leap to free strategies
(Bryce et al)

A
  • depp rooted belief must generate profit and revenue.

- profit centre structure and accounting system it employees which both reflect and reinforce this mind set

48
Q

Matrix for identifying how threatening feee competition is

Bryce et al

A

Deflection high low
Growth low Hugh

Immediate threat
Business model threat
Minor threat
Delayed threat

Strat Innovation (3 decks)

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