Pricing

Question 1

Sad state of pricing 1

Answer 1

• few firms employ great research on pricing
• rather stick to simplistic methods such as: percentage over cost, or competition
• price has largest effect on profits

Question 2

Sad state of pricing 2

Answer 2

• managers know about their costs

- fail to understand consumer’s response to price change or willingness to purchase at x price

Question 3

economics - supply/demand in the real world

Answer 3

reasons for why supply/demand isn’t directly applicable

1. cost-based pricing - firms may only price based on their costs and ignore consumers
2. invisible handshake - perceived unfairness of profits prevent prices from rising in certain cases

Question 4

economics - elasticity

Answer 4

understanding elasticity is important, profits may be lost when demand is unknowingly inelastic

Question 5

accounting insights

Answer 5

• information on source of costs - valuable to marketers

- costs are central to finding breakeven points

Question 6

Marketing vs pricing

Answer 6

marketing in the spirit of needs and wants, such as consumer oriented product development.
pricing is meant to profit maximize with the consumer as the focal point

Question 7

company perspective pricing

Answer 7

create product > has a cost > add a profit = price to consumer

Question 8

marketing perspective pricing (target costing)

Answer 8

analyze consumer > pick a target price > produce a product based on constraints

Question 9

EVC

Answer 9

• the maximum a customer should be willing to pay for your product
• purchase price of next best alternative
• add your value to calculate EVC

Question 10

two ways to increase EVC

Answer 10

reduce costs

increase value

Question 11

complication 1- incentive

Answer 11

customers reason to pay more-
managers need be aware of:
-ability to pay, myopia, uncertainty, ignorance, switching costs, perceptions on fairness

Question 12

complication 2- identify value

Answer 12

different types of value-
economic value- post purchase costs
functional value- incremental value
experiential value- customer service, loyalty, design
social value- prestige, social reference groups

Question 13

complication 3 - tradeoffs

Answer 13

take the price of next best alternative
+ $ value of advantages
- $ value of disadvantages
= economic value

Question 14

Economics and price sensitivity

Answer 14

price sensitivity is heterogeneous in consumers, how to price and appeal to as many consumers as possible
segment the market “willingness to pay” - price discriminate

Question 15

Price lining - versioning

Answer 15

offer different product (quality) variations at different prices and have consumers self-select
-airline seating, damaged goods

Question 16

second market discounting

Answer 16

produce unbranded version of product
take advantage of unused capacity
works well when : fixed costs and level of cannibalization are stable

Question 17

sequential skimming

Answer 17

initially price high for insensitive market, then periodically drop price to capture more sensitive consumers

Question 18

periodic discounting

Answer 18

price high at beginning of period, lower at end of period

Question 19

random discounting

Answer 19

price high throughout the period but insert random discounts, attractive when mix of informed/uninformed consumers. -people buy on need

Question 20

product differentiation/ price sensitivity

Answer 20

EVC is clear and obvious- consumers are willing to pay in approximate relation to this value
When firms can’t create product value or uniqueness- they can create perceptions of uniqueness
-prevent consumers from discovering lack of uniqueness

Question 21

manipulating perceptions

Answer 21

4 Ps

Product, price, promotion, place

Question 22

Psychology and pricing

Answer 22

willingness to pay affected by economic factors such as wealth, but also psychological factors

Question 23

sunk investment effect

Answer 23

failure to ignore unrecoverable transaction costs
examples:
-bar cover charge
-buffets
-declining stock
-game ticket
-draft picks

Question 24

value function

Answer 24

when gains/losses are at lower levels, changes on a per dollar basis feel greater $50 when you paid $100, $50 when you paid $10,000

Question 25

marketing implication of value function

Answer 25

marginal disappointment stabilizes as losses
get greater
marginal happiness stabilize as gains get greater
= integrate losses and segregate gains

Question 26

transaction utility

Answer 26

acquisition utility - compared to absolute utility

transaction utility - compared to a reference point of utility, the psychological value

Question 27

reference point on competitor prices

Answer 27

consumers accept price increases when they reference inherent quality increase
consumers are sensitive to price increase when they can’t reference indirect costs cause

Question 28

reference point on seller costs

Answer 28

consumers believe in “fair profit” but often lack knowledge about all the costs involved in production
-grossly underestimate firm’s costs (material)

Question 29

reference points on previous price

Answer 29

consumers anchor on previous prices - don’t adjust for market conditions or cost increases

Question 30

on-going vs one-time relationships

Answer 30

• relationships equate to well-known reference points on price and inability to raise price much

Question 31

enhancing price attractiveness

Answer 31

increase the reference point
encourage favorable comparisons
increase perceived vendor cost
obscure the reference price
report the per-usage price

Question 32

multiple mental accounts

Answer 32

money is fungible, but people tend to allocate expenditures into categories
categories have reference points- consumption is evaluated within the context of its category

Question 33

pricing ethics?

Answer 33

collusion- illegal
price discrimination- increasingly present, technically fair
gouging- no such thing, supply/demand