Session 6 - Price Discrimination & Hedges & Structure

Question 1

price Segmentation

Discrimination

Answer 1

even well-informed customers value products differently

cost to serve them is differently (wtp distribution)

Question 2

Price Discrimination
Examples
Consequences

Answer 2

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

Question 3

Unsegmentation

Consequences

Answer 3

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

Question 4

Price Metrics/Hedges

Answer 4

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

Question 5

Ideal Metric

definition

Answer 5

would reflect what the customer pays directly

a) to the economic value received
b) incremental cost to serve

Question 6

Ideal Metric
Performance Based Price Structure
Example

Answer 6

Price structure
Lawyer –> expenses + success fee (share of the award that is won)
b) CTR –> internal ads

Question 7

Improving Metrics

1st CONSIDIRATION

Answer 7

= you need to first understand the extent to which existing metrics align with values &cost to serve

Question 8

Ideal Metric
Performance Based Price Structure
Disadvantages

Answer 8

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

Question 9

Improving Metrics

2nd CONSIDIRATION

Answer 9

understand how metrics makes your pricing appear compared with competitors pricing

Question 10

Improving Metrics
3rd CONSIDERATION
customer

Answer 10

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)

Question 11

Multiparty- Pricing

Answer 11

2 or more metrics instead of 1
right to use + per-hour fee
two-part tariffs

Question 12

Two-Part Tariff

Answer 12

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

Question 13

Price Fences

Answer 13

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

Question 14

Price Fences

Derivation

Answer 14

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

Question 15

1. Price Fences
   High Revenue
   Low Cost to Serve

Answer 15

best customers
profit divers
product/service is crucial
retain &protect from competitors

Question 16

2. Price Fences
   High Revenue
   High Cost to Serve

Answer 16

Demanding Customers
costly to serve
but pay high prices
monitor these

Question 17

3. Price Fences
   Low Revenue
   Low Cost to Serve

Answer 17

Commodity Customers
price sensitive but cheap to serve
doesn´t hurt to have them but try to cross sell/up sell

Question 18

4. Price Fences
   Low Revenue
   High Cost to Serve

Answer 18

Worst Customers
Little or Negative Profitability
leverage buying power
buying at low margin
try to shift up or out

Question 19

Limits to Segmentation

1. imperfect segmentation

Answer 19

the best that can be done is to create M.S such that average wtp in each segment

Question 20

Limits to Segmentation

2. cannibalisation

Answer 20

under differential pricing there is powerful motivation for C. in high-price segments to find ways to pay a lower price

Question 21

Limits to Segmentation

3. arbitrage

Answer 21

price differentials create a strong incentive for 3rd parties to arbitrage
(buy at low price and resell to high wtp C.)

Question 22

Price Fences

Example

Answer 22

Distribution channel

different levels of products/services