Price (20) Flashcards
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Pricing Objectives
4 “oriented” Approaches: CPCD
- Cost-oriented approach
- profit oriented approach
- competition oriented approach
- demand oriented approaches
Cost Oriented Approaches
Pricing Objectives:
- Types:
- standard markup
- cost-plus
- experience curve - Problems
- ignores customer & competition
- which costs to consider?
Profit Oriented Approaches
- Types:
- target profit
- target profit-on-sales
- target ROI - Problems
- ignores customer
- difficult to predict sales volumes
Competition Oriented Approaches
- Types:
- above/at par/below
- loss-leader
- product-line pricing - Problems
- ignores customer
with exp. that consumers will buy more than the thing they want
Demand Oriented approaches:
Start with what the consumer is willing to pay (Target)
Benefit from heterogeneity in consumer preferences (strategy/tactic)
EXAMPLE: BPY
1. Bundle pricing, value pricing (Not always lower price in the end)- helps sellers but hurts buyers- (Mcdonals Value Meals/ Happy meals)
2. Prestige Pricing- has changed the way people perceive its quality (Stella Artois)
3. Yield Management Pricing
Dilemna
Objective
Pricing Decisions chart
- Economic Framework
2. Psychological Framework
Economic Framework
-customer value
-measuring customer value
price elasticity
economic value to consumer
survey methods
-pricing objectives
-pricing strategy
Psychological Framework
- perceptions of price differences
- reference price
- mental accounting
Yield Management Pricing
Dilemma:
- Point: we dont want empty seats
- Counterpoint: filling up empty seats with % fares doesn’t make airlines a profit
Objective: Profitably fill capacity
- set price
- observe demand (+ nature of demand)
- adjust price over time to ensure/ maximize profitably
Ex. Wait til last minute to book flight is VERY expensive Reasons Why people get upset: 1. normative 2. tradeoffs 3. info symmetry
Psychological Effects of Pricing or framework
- Perception of price differences
- Reference prices
- Mental accounting
I. Perception of Price
Psychological Effects of Pricing:: OWfA I. Odd-even pricing effect (2.99 vs 3.00- 2 bucks vs 3 bucks) II. Weber-Fechner Law (impact of relative differences) (target: 29.99; nordstrom: 30.00) III. absolute differences matter too smaller $- difference matters more bigger \$\$ (buying Calulator vs. Car)
II. Reference Price
Psychological Effects of Pricing
standard of comparison against which an observed price is compared- Every price is in reference to something else.
I. Internal source (beer @ the beach)
- influenced by decision makers time and experience (the “fair” price, the last price you paid)
II. external source (choice set)
- influenced by decision making context
(“regular retail price” what its placed near)
The Decoy Effect
III. Zero-price Effect
Value of free- no downsides
The Decoy Effect
(or asymmetric dominance effect) is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated.
III. Mental Accounting
People are “naive” accountants
EFSPP
Erica Franc Shay Pretty Population
- consider losses & gains separately
- Weigh losses more than gains
- separate mental account for cost
ex. buy 10$ theater ticket + lose a 10 bill - same mental account- 10$ loss
ex. buy 10$ ticket + lost 10$- seen as 2 tickets
1. Endowment effect (bank account)
2. Framing effects
3. Separate mental counts (theater ticket)
4. Preference for status quo (investments by Paul and George)
5. Price Bundling (colorado ski trip)
Prospect Theory Value Function
CHART (Losses feel larger than gains)
changes are with respects to REFERENCE POINTS
