Module 7 Pricing

Objective for Module 7 Gain a sound understanding of the psychological effects of pricing strategies. Differentiate between the economic and behavioral approaches to pricing. Know the unique characteristics of services and the implications of such for pricing. Understand the relationship between pricing, demand, and consumption.

Benefits Benefits Value = ___________ Costs Costs

How does pricing strategy add value to the customer? Zeithaml’s Four Value Definitions: Value is low price. Value is whatever I want in a product. Value is the quality I get for the price I pay. Value is what I get for what I give.

The money or other considerations (including other goods and services) exchanged for the price of ownership or use of a good or service. What is price?

 Numerous factors to consider when trying to set the optimal price.  Economic traditional and more well-known “How good a deal am I getting?” Consumer’s incentive to purchase = customer’s max price – actual price. Consumers buy when this incentive to buy > 0. The Psychology of Pricing: Good Deal vs. Fair Deal

 Behavioral AKA psychological variables Consumer’s willingness to pay “How fair a deal am I getting?” Consumer’s incentive to purchase = perceived benefit – perceived costs. Consumers buy when this incentive to buy > 0. The Psychology of Pricing: Good Deal vs. Fair Deal

Product Price Cost of Goods Sold Perceived Value Objective Value Consumer’s Incentive to Purchase = [Perceived Value – Price] Firm’s Incentive to Sell = [Price – COGS] Marketing Efforts Price of Substitutes

Product Price Cost of Goods Sold Perceived Value Objective Value Consumer’s Incentive to Purchase = [Perceived Value – Price] Firm’s Incentive to Sell = [Price – COGS] Marketing Efforts Price of Substitutes The Economic Perspective: Consumers Buy When Perceived Value Exceeds Price

 Lying on a beach, hot day.  Would love a cold bottle of favorite beer (insert PBR/Keystone/Nattie Light here)  Friend goes to find a restroom and offers to bring you a beer.  Only outlet near is a rundown grocery store.  He asks how much you are willing to spend. The “Beer” Scenario

 in both scenarios, the ultimate consumption is identical – the same beer is consumed on the same beach.  no atmosphere from the fancy resort or the run- down grocery store is being consumed by the beer drinker to justify the different prices. Economic Factors

1.Willingness to pay is impacted by relative incentives (Sony scenario).  Consumers will consider both absolute economic utility (customer’s max price – actual price) as well as relative incentive (customer’s max price – actual price)/(actual price).  The psychological utility of a fixed amount of money is relative. Behavioral Hypotheses

2.Willingness to pay is impacted by reference price (Playoff scenario).  Consumers will consider both absolute economic utility as well as consistency between actual price and a reference price. Behavioral Hypotheses

3.Willingness to pay is impacted by cost of goods sold.  Consumers will consider both absolute economic utility as well as that of the firm.  Consumers are concerned about a firm’s motive to sell. Behavioral Hypotheses

4.Perceptions of fairness vary across product categories.  Degree to which a consumer will rely on absolute economic utility depends on product category. Behavioral Hypotheses

Capture and Communicate Value in the Pricing of Services Berry and Yadav

The Four I’s of Services Intangibility Intangibility Inconsistency Inconsistency Inseparability Inseparability Inventory Inventory The Uniqueness of Services

When the service provider is available but there is no demand. Idle Production Capacity

Inventory carrying costs of services

Clearly relate the price that customers pay to the value that they receive. Key To Services Pricing

Provides value by recognizing and reducing customers’ perceptions of uncertainty, which the intangible nature of service magnifies. This can be implemented as:  service guarantees  benefit-driven pricing  flat-rate pricing Satisfaction-based Pricing

Provides value by encouraging long-term relationships with the company that customers view as beneficial. This can be implemented as:  long-term contracts  price bundling Relationship Pricing

Provides value by sharing with customers the cost savings that the company has achieved by understanding, managing, and reducing the costs of providing the service. This can be implemented as:  cost-leader pricing Efficiency Pricing

Pricing and the Psychology of Consumption Gourville and Soman

The Psychology of Consumption Higher consumption means higher sales Awareness of costs drives consumption Pricing (nature of payment) drives perceptions of costs

Strategic Pricing Issues Timing – Payment made Before point of consumption. Before point of consumption. At point of consumption. At point of consumption. After point of consumption. After point of consumption. Price Bundling

Linking Price and Consumption Practice yield management Stagger payments to smooth consumption Time payments to maximize consumption. Psychologically link payments to benefits. Reduce consumption.