Pricing Flashcards
EVC and 3 Complications
Estimated Value to Customer
Complications:
1) Incentives
2) Identifying Value
3) Tradeoffs
EVC: 6 Complications of Incentives
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
EVC: 4 Complications of identifying consumer received value
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)
EVC: Complications of Tradeoffs & formula
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.
Economics and Price Sensitivity & Problem of consumer heterogeneity
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”.
5 Pricing Strategies to get the most money from consumers.
1) Price Lining or “Versioning”
2) Second Market Discount
3) Sequential Skimming
4) Periodic Discounting
5) Random Discounting
Price Lining or “Versioning”
Offer different product quality variations and charge different prices for each.
Second Market Discount
Selling an unbranded version. Can be same product, but unbranded.
Sequential Skimming
Initial high price to capture least price sensitive revenue, then tier pricing down to an attractive price for the masses.
Periodic Discounting
Similar to sequential but based on time. Pricing drops based on season/time. Example: clothing
Random Discounting
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.
2 EVC Assumptions
1) Consumers are willing to pay prices relative to the utility received.
2) Consumers can assess utility with some accuracy.
2 strategies to overcome poor product utility. (Darkside of Marketing)
1) Create perceptions of uniqueness.
2) Prevent consumers from discovering lack of uniqueness.
4 ways firms can increase perception of uniqueness
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.
4 concepts where psychology and price are intertwined.
1) Sunk Investment Effect
2) Value Function: a dollar is a dollar.
3) Enhance high price attractiveness
4) Multiple Mental Accounts
Sunk Investment Effect
Wanting to get your money’s worth. Example: cover charge at bar.
Explain the value function or what “a dollar is a dollar” means.
The value of a dollar doesn’t change based on context. You’re still out the same amount of money.
Even though $5 for a beer at a resort is considered “fair” it wouldn’t be fair at the grocery store.
Draw the Value Function:
X-axis: ($) 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
4 applications of the value function (losses & gains)
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
Acquisition Utility
Value of the good you receive relative to its cost.
Transaction Utility
Value consumers get based on reference points. It’s the world we live in. No one asks what are socks actually worth to me.
Secret to happiness.
Choose your reference points.
3 challenges with references points.
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.
5 tactics to enhance attractiveness of high price
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)
Multiple mental accounts
Money is fungible. There’s no such thing as “vacation account”. A dollar is a dollar.
3 considerations for ethics (price)
1) Collusion
2) Price discrimination (against unsavvy)
3) Gouging
4 perspectives of gouging.
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.
