Lecture 1: Introduction AEM 4160: Strategic Pricing Prof. Jura Liaukonyte 1

Strategic Pricing: AEM 4160  All Course materials can be found here: 

Bundling  Time-Warner Cable NY offers many packages of its services.  Microsoft bundles MS Word and MS Excel into a package MS Office.  Theaters bundle single tickets with seasonal packages.  Why don’t they just offer a smorgasbord of services/products, each at a price, and let you buy the ones you want?

Two-part tariff  "membership discount retailers" such as shopping clubs  cover charge for bars combined with per drink fees  telephones where there is a fee to use the service ('line rental') and also a fee per call.  personal seat licenses in professional sports, in which fans of a team pay an up-front lump sum fee for the right to purchase tickets at face value  Menu of two part tariffs or menu of price-quantity bundles (e.g. cell phone plans) – which is more profitable?

Versioning  Turbotax, offers:  TurboTax for US$29.95 and  TurboTax Deluxe, which includes additional features including "more money saving advice" and Internal Revenue Service publications for $39.95.

Crimped or damaged good pricing  Companies with market power occasionally engage in intentional quality reduction for one version of the product. Why?

Price Matching Guarantee  A price-matching policy seems the epitome of cutthroat competition  What could be more competitive than seller’s guarantee of lowest price?  However…  Under the cover of a matching offer, firm can price- discriminate poorly informed buyers.  Several studies, have argued and shown that some sellers use PMGs as a device for facilitating tacit collusion.

Psychological pricing  ~ 60% of prices in advertising material end in the digit 9,  30% end in the digit 5,  7% end in the digit 0  the remaining seven digits combined accounted for only ~ 3% of prices.  Why? Many Theories…  Consumers subconsciously ignore the least significant digits rather than do the proper rounding.

Digital Goods Pricing  Marginal cost of production ~= 0  How does it change the traditional pricing landscape?  What is the lifetime value of a customer acquisition?  Freemium pricing of Dropbox  Netflix pricing scandal of 2011

How to price  So many pricing strategies exist!  How to figure out how to segment the individuals?  How to ensure that consumers self select (in terms of menu offered prices) in the most profitable way?  Is one pricing strategy more profitable than another?

Common Mistakes in Pricing  Cost-Plus approach  Charging the same price for everyone  Undercut Competitors’ price  And many more…