Workshop on Pricing Raj Echambadi

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Workshop on PricingRaj Echambadi
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Importance of Pricing

• A complete pricing program has many components.
• Consider the pricing decisions surrounding the
  launch of a new MP3 player. These might include
• The unit price of the MP3 player to dealers and
  distributors
• The accompanying terms and conditions, such as
  whether and to what degree there will be a
  quantity discount, the schedule of payments
  (i.e., when payments are due), whether there will
  be discounts for early payments or penalties for
  late payments.
• The manufacturers suggested retail price (MSRP)
  to the end consumer.
• Any trade promotions? Whether there will be any
  consumer pricing promotions (e.g., mail-in
  rebates)?

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Implications of Pricing

• Consider Coca-Cola.
• If Coca-Cola could increase its prices by an
  average of 1 (without affecting demand for its
  products), it would increase its net income by
  6.4. Thus, an average price increase of less
  than 1 on a can of cola would translate to an
  increase in net income of about 300 million.
• Profits (Unit Price Unit COGS) Unit Sales

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Value Pricing approach
Objective Value
Marketing efforts
Perceived Value
Price of substitutes
Price
COGS
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Determine Objective Value (TEV)

• TEV Cost of the Next-Best Alternative Value
  of Performance Differential of alternatives
• What is the TEV of a flight on a Delta shuttle
  for a banking executive to travel from Orlando to
  Miami?

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What if there is a performance differential?

• Next-Best Alternative
• Operating Cost/Hour 10
• Probability of System Crash is 20 over one year
• Price
• 75,000

• New Product
• Operating Cost/Hour 15
• Probability of System Crash is 1 over one year
• Price
• To be determined

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What happens in this scenario?

• Consider a customer who needs such a system for a
  single year (after which it will be scrapped) and
  plans to use it for 2,500 hours over the course
  of that year. If the cost of a system crash to
  the buyer is 100,000, what is the TEV?

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Savings due to system crash

• 100,000.
• 20 in the next best alternative 0.2 100000
  20,000.
• 1 in the new product 0.01 100000 1,000.
• Savings using the new product 19,000.

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Expenses due to increased op. costs

• 2500 hrs.
• Op. costs using the next best alternative 2500
  10 25,000.
• Op. costs using the next best alternative 2500
  15 37,500.
• Loss of savings -12,500

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Determining perceived value

• Consider a major camera maker that used a survey
  method to set the price for a new camera. In a
  survey, a set of respondents were provided a
  description of the new camera and were asked to
  indicate their purchase intention on a
  seven-point scale, from Definitely Not Buy to
  Definitely Would Buy.
• One-third of the respondents were told the camera
  would cost 150, one-third were told it would
  cost 80, and one-third were told it would cost
  40. Results of the survey were

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What should we charge?
Sensitivity?
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Integrating price into the marketing mix
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• Zantac, which is similar to Tagamet, is not a
  revolutionary ulcer treatment.
• Paul Girolami (Glaxo) says any good product
  which makes money doesn't sell itself, a vital
  principle which nobody at Glaxo was allowed to
  forget.
• The Zantac strategy of premium pricing was thus
  doubly bold, and required heavy support from
  other elements in the marketing mix in meeting
  sales and achieving dominance.

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Pricing Cues to affect reference prices

• Sales signs in retail stores increase demand,
  however, overuse in a category results in
  decreased demand.
• Prices that end in a 9 increase demand.
  Experiments show a 33 increase in demand by
  increasing price from 34 to 39. Whereas a 34
  to 44 price increase lead to drop in demand.
• Clothing catalog increased demand by 8 by
  changing price to end in 99 cents as opposed to
  00 cents.
• Price matching guarantees. MFN price guarantees
  in B2B.

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Willingness to Pay

• Only 21 of managers understand their consumers
  willingness to pay.
• From our discussions, we know that, on average,
  consumers buy when the perceived value is greater
  than (or equal to) the price charged.

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Scenario 1

• You are lying on the beach on a hot day. All you
  have to drink is ice water. For the past hour,
  you have been thinking about how much you would
  enjoy a nice cold bottle of your favorite beer.
  A friend gets up to make a phone call and offers
  to bring back a bottle of your favorite beer from
  the only nearby place where beer is sold a
  small, run down-grocery store. He says that the
  beer might be expensive and asks how much you are
  willing to spend. He says he will not buy the
  beer if it costs more than the price you state.
  What price do you tell your friend?

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Scenario 2

• You are lying on the beach on a hot day. All you
  have to drink is ice water. For the past hour,
  you have been thinking about how much you would
  enjoy a nice cold bottle of your favorite beer.
  A friend gets up to make a phone call and offers
  to bring back a bottle of your favorite beer from
  the only nearby place where beer is sold a
  fancy resort hotel. He says that the beer might
  be expensive and asks how much you are willing to
  spend. He says he will not buy the beer if it
  costs more than the price you state. What price
  do you tell your friend?

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Scenario 3

• You set off to buy a Sony Walkman at what you
  believe to be the cheapest store in the area.
  Upon arriving, you find that the Walkman you want
  costs 29, a price consistent with your prior
  expectations. As you are about to make the
  purchase, a reliable friend tells you that the
  very same Walkman is selling for 10 less at a
  store approximately 10 minutes away. Do you go
  to the other store to buy the Walkman?

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Scenario 4

• You set off to buy a Sony Camcorder at what you
  believe to be the cheapest store in the area.
  Upon arriving, you find that the Camcorder you
  want costs 495, a price consistent with your
  prior expectations. As you are about to make the
  purchase, a reliable friend tells you that the
  very same Walkman is selling for 10 less at a
  store approximately 10 minutes away. Do you go
  to the other store to buy the Camcorder?

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Update 1

• Willingness to pay is impacted by relative
  incentives.

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Scenario 5

• Your favorite sports team has made the playoffs.
  Its first-round playoff series is a best-of-seven
  series with Games 1, 2, 5, and 7 played on your
  teams home field. General admission tickets had
  been priced at 20 during the regular season.
  The team decided to raise general admission
  prices to 40 for these four playoff games. Is
  this price increase fair or unfair?

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Scenario 6

• Your favorite sports team has made the playoffs.
  Its first-round playoff series is a best-of-seven
  series with Games 1,2,5, and 7 played on your
  teams home field. General admission tickets had
  been price at 20 during the regular season.
  General admission tickets were also priced at 20
  for Games 1 and 2 of the playoffs. After Game 2,
  the team decided to raise prices to 40 for Games
  5 and 7. Is this price increase fair or unfair?

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Update 2

• Willingness to pay is impacted by salient
  reference prices (consistency between the actual
  price and a salient price).

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Scenario 7

• A grocery store has no peanut butter in stock,
  but is about to received a new shipment. Prior
  to delivery, the owner finds out that the
  wholesale price of peanut butter has increased
  20 and will affect this new shipment. The owner
  decides to increase the price of the new peanut
  butter by 20. Is this retailers actions fair
  or unfair?

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Scenario 8

• A grocery store has one week supply of peanut
  butter in stock, and is due to receive a new
  shipment. Prior to delivery, the owner finds out
  that the wholesale price of peanut butter has
  increased 20 and will affect the new shipment.
  The owner decides to immediately increase the
  shelf price on his current stock of peanut
  butter by 20. Is this retailers actions fair
  or unfair?

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Update 3

• Willingness to pay is impacted by perceptions of
  COGS.

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Scenario 9

• In 1996, baseballs Seattle Mariners made it to
  the American League playoffs. During the season,
  general admission to a Mariners game cost 15.
  For the playoffs, the Mariners raised the price
  of general admission tickets to 20. Is this
  fair or unfair?

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Scenario 10

• A hardware store had been selling snow shovels
  for 15. The morning after a large snowstorm,
  the store raises the price of its snow shovels to
  20. Is this fair or unfair?

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Update 4

• Perceptions of fairness varies across product
  categories.

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Strategy

• Manage price expectations
• Establish credible reference prices
• Encourage favorable comparisons
• Avoid unfavorable comparisons.
• Manages perceptions of COGS
• Focus attention on fully loaded products
• Bundle products
• Focus attention on consumer value