Pricing

Question 1

EVC and 3 Complications

Answer 1

Estimated Value to Customer
Complications:
1) Incentives
2) Identifying Value
3) Tradeoffs

Question 2

EVC: 6 Complications of Incentives

Answer 2

1) Customer cannot afford it.
2) Myopia: future value over discounted
3) Can’t picture value. (New tech)
4) True value not understood
5) Switching costs & loyalty
6) Perception of fairness

Question 3

EVC: 4 Complications of identifying consumer received value

Answer 3

1) Economic Value: don’t understand longterm savings. (Electric car vs gas)
2) Functional Value: don’t understand the improvement (Attribute changes)
3) Experiential Value. (Service)
4) Social Value. (Prestige)

Question 4

EVC: Complications of Tradeoffs & formula

Answer 4

Your product isn’t better at EVERYTHING than competitors. Customers might not prioritize the tradeoffs necessary to switch.

Consider the price of next best alternative + monetary value of each advantage - monetary value of each disadvantage.

Question 5

Economics and Price Sensitivity & Problem of consumer heterogeneity

Answer 5

Price sensitivity is affected by consumer wealth.

Consumer heterogeneity: appeal to as many consumers as possible. Solution is to segment market based on “willingness to pay”.

Question 6

5 Pricing Strategies to get the most money from consumers.

Answer 6

1) Price Lining or “Versioning”
2) Second Market Discount
3) Sequential Skimming
4) Periodic Discounting
5) Random Discounting

Question 7

Price Lining or “Versioning”

Answer 7

Offer different product quality variations and charge different prices for each.

Question 8

Second Market Discount

Answer 8

Selling an unbranded version. Can be same product, but unbranded.

Question 9

Sequential Skimming

Answer 9

Initial high price to capture least price sensitive revenue, then tier pricing down to an attractive price for the masses.

Question 10

Periodic Discounting

Answer 10

Similar to sequential but based on time. Pricing drops based on season/time. Example: clothing

Question 11

Random Discounting

Answer 11

Coupons/Discounts at random times. Only money left on table is when coupons are issued at the coincidental time that someone was already going to buy.

Question 12

2 EVC Assumptions

Answer 12

1) Consumers are willing to pay prices relative to the utility received.
2) Consumers can assess utility with some accuracy.

Question 13

2 strategies to overcome poor product utility. (Darkside of Marketing)

Answer 13

1) Create perceptions of uniqueness.
2) Prevent consumers from discovering lack of uniqueness.

Question 14

4 ways firms can increase perception of uniqueness

Answer 14

1) Product: position it differently. OTC Drugs, same ingredients to treat different colds.
2) Price: Assumed quality for its bracket.
3) Place: Branded variants. Same product sold at different channels with different models.
4) Promotion: build customer perception.

Question 15

4 concepts where psychology and price are intertwined.

Answer 15

1) Sunk Investment Effect
2) Value Function: a dollar is a dollar.
3) Enhance high price attractiveness
4) Multiple Mental Accounts

Question 16

Sunk Investment Effect

Answer 16

Wanting to get your money’s worth. Example: cover charge at bar.

Question 17

Explain the value function or what “a dollar is a dollar” means.

Answer 17

The value of a dollar doesn’t change based on context. You’re still out the same amount of money.

Even though $5 for a beer at a resort is considered “fair” it wouldn’t be fair at the grocery store.

Question 18

Draw the Value Function:

Answer 18

X-axis: ($) Losses —> ($) Gains
Y-axis: (-) Value ^ (+) Value

Perfect world would be a straight 45 degree line through the middle.

Reality: It’s close to equal in the middle, but value (or pain) diminishes as money is extended

Question 19

4 applications of the value function (losses & gains)

Answer 19

1) integrate losses: bundle pains with positives
2) Segregate gains: maximize positives by keeping them separate. (Toys under tree)
3) integrate smaller loss with bigger gain
4) integrate small gain with large loss

Question 20

Acquisition Utility

Answer 20

Value of the good you receive relative to its cost.

Question 21

Transaction Utility

Answer 21

Value consumers get based on reference points. It’s the world we live in. No one asks what are socks actually worth to me.

Question 22

Secret to happiness.

Answer 22

Choose your reference points.

Question 23

3 challenges with references points.

Answer 23

1) Geographic differences. Consumers fail to consider impact to supply costs and demand.
2) Seller cost estimation. Consumers are terrible at it and usually only focus on variable product costs.
3) Previous price. Consumers do not account for inflation and changes to market conditions.

Question 24

5 tactics to enhance attractiveness of high price

Answer 24

1) Increase reference point (msrp)
2) Encourage favorable comparison to other product categories. (Treadmill vs gym membership)
3) Increase perceived vendor costs
4) Obscure reference price
5) Report per usage price. (Pennies a day)

Question 25

Multiple mental accounts

Answer 25

Money is fungible. There’s no such thing as “vacation account”. A dollar is a dollar.

Question 26

3 considerations for ethics (price)

Answer 26

1) Collusion
2) Price discrimination (against unsavvy)
3) Gouging

Question 27

4 perspectives of gouging.

Answer 27

1) Entrepreneur: this product wouldn’t exist without me.
2) CEO: job is to maximize shareholder value.
3) Shareholder: wants profits maximized
4) Taxpayer: didn’t want to personally pay for it.