Session 6 - Price Discrimination & Hedges & Structure Flashcards
price Segmentation
Discrimination
even well-informed customers value products differently
cost to serve them is differently (wtp distribution)
Price Discrimination
Examples
Consequences
E.g. demand for services, timing of their needs, procurement process, speed of payments
C: reflects different uses, urgency of the need, availability, alternatives in the market, motivations
Unsegmentation
Consequences
single price leaves excess money in he table from
a) many users who are willing to pay more
b) unsatisfied users that will not pay such a high price
By ignoring b) buyers it leaves the opportunity wide open for low cost competitors to enter the market
Price Metrics/Hedges
units to which the price is applied
they define the term of exchange
what exactly C. receives pero unit of price paid
Gym C. segmentation: per hour, visit, membership
Ideal Metric
definition
would reflect what the customer pays directly
a) to the economic value received
b) incremental cost to serve
Ideal Metric
Performance Based Price Structure
Example
Price structure
Lawyer –> expenses + success fee (share of the award that is won)
b) CTR –> internal ads
Improving Metrics
1st CONSIDIRATION
= you need to first understand the extent to which existing metrics align with values &cost to serve
Ideal Metric
Performance Based Price Structure
Disadvantages
It shifts performance Risk from buyer –> seller
But (in most cases) it´s very impractical
a) it requires too
much info
b) leaves buyer uncertain regarding the cost of purchase
Improving Metrics
2nd CONSIDIRATION
understand how metrics makes your pricing appear compared with competitors pricing
Improving Metrics
3rd CONSIDERATION
customer
if C. behaviour influences the incremental cost to serve
—> these costs become significant
profit maximising price metrics have to reflect these
if one adds service charge or at least for those who are excessively costly to serve
—> firms are able to keep their core product price competitive
—> avoid attracting customers who high cost to serve (only if willing to pay extra charge)
Multiparty- Pricing
2 or more metrics instead of 1
right to use + per-hour fee
two-part tariffs
Two-Part Tariff
general rule:
a) price the by-us at VC level
b) price the enter price at Total Value created
but sometimes very high (unreasonable) entry price
Price Fences
key components of segmentation and revenue management
designed such that those who can afford and willing to pay higher prices are not tempted by the lower priced versions
easiest way to charge diff. prices to reflect diff. levels of value
Price Fences
Derivation
often cost to serve &value differ across C. for reasons that have nothing to do with what they want or need
Thus, we need define criterias which make C. decide to go for higher prices
- Price Fences
High Revenue
Low Cost to Serve
best customers
profit divers
product/service is crucial
retain &protect from competitors
- Price Fences
High Revenue
High Cost to Serve
Demanding Customers
costly to serve
but pay high prices
monitor these
- Price Fences
Low Revenue
Low Cost to Serve
Commodity Customers
price sensitive but cheap to serve
doesn´t hurt to have them but try to cross sell/up sell
- Price Fences
Low Revenue
High Cost to Serve
Worst Customers Little or Negative Profitability leverage buying power buying at low margin try to shift up or out
Limits to Segmentation
1. imperfect segmentation
the best that can be done is to create M.S such that average wtp in each segment
Limits to Segmentation
2. cannibalisation
under differential pricing there is powerful motivation for C. in high-price segments to find ways to pay a lower price
Limits to Segmentation
3. arbitrage
price differentials create a strong incentive for 3rd parties to arbitrage
(buy at low price and resell to high wtp C.)
Price Fences
Example
Distribution channel
different levels of products/services
