1. Customers Chapter 4

2. Reference Price What is the value (utility) What is perceived Alternative? –“Reference value” What are the differentials –Positive(+)/Negative(-) (quality, features) Effect on pricing strategy –“Suggested Retail” –Order of Presentation (Top Down) –Initial Price sets bar

3. Economic Value Value based on use Value varies with customer –Risk –Cost of error/failure –Price sensitivity (see below) –Education of customer part of pricing plan Value determines what cost is justified

4. Reference Price Effect Perceived value is key Factors affecting –Location Store (Nordstom’s vs BJ’s) Within Store (Generic aisle) High vs low placement –eye level vs low End-cap (assumed on sale) Order of presentation Pricing metric (payment, cost, …)

5. Difficult Comparison Effect New Products (have no way of judging value) Odd shapes or sizes (BJ’s) Similar packaging of generics to brand names Per ounce vs per pound (toothpaste) Add-ons to make product unique (cars)

6. Switching Cost Effect Compatibility (Word, Internet Explorer) Training (ibm) Familiarity (Jello, McCormack) “Try free for a month” Bundling (computer system/box)

7. Price-Quality Effect Perceived quality related to price (e.g., Pledge training) Affected by Familiarity with product –New product, what’s it worth? Prestige may be associated with good –Gucci Ability to perceive quality low (phones) May be related to risk and cost of problems (lawyer’s fees)

8. Expenditure Effect Effect on budget is issue Less income or higher price will increase sensitivity –WalMart vs Nordstrom customer Affected by quantity (large families more price sensitive) Ex: Construction unions divide & conquer

9. End-Benefit Effect Product gives multiple values Focus on value received rather than price If end-benefit high, look at % of cost, not $ Construction unions again –Electrical/plumbing probs –Severe consequences =>want quality Michelin ad/Centrino Ad

10. Shared-Cost Effect If customer pays only part of cost Business-class travel Health care (copay, etc.) –Poor use emergency room

11. Fairness Effect Price evaluated within its context –Income –Past prices –“Necessity” vs “Luxury” –Raise reference price and discount (coupons, rebates, etc.)

12. Framing Effect Is purchase seen as a “gain” or a “loss?” Diminishing marginal utility to gains Losses more heavily weighted Diminishing marginal disutility to losses Implications: Frame purchase –“opportunity costs” Price high and discount Unbundle gains –“service added free” Bundle Losses –“total cost is”

13. Use of Value Perception Identify segments (use/value/customer) –Table wine vs cooking wine Identify starting price –Alternatives? Percentage of Cost? Determine what can affect demand –Labeling/packaging affects perceived value –Cork vs screw-off cap

14. Customer Segmentation Value Diff.: Low Perceived Pain High Price Buyer Value Diff.: Low Perceived Pain Low Convenience Buyer Value Diff.: High Perceived Pain High Value Buyer Value Diff.: High Perceived Pain Low Relationship Buyer Percieved Pain of Price Value of Differentiation Low High Low High Price Value

15. Price Elasticity Elasticity = (ΔQ/Q)/(ΔP/P) Elasticity = (ΔQ/ΔP)/(Q/P) Notice role of current levels of Q and P Relationship of P and MR is P = MR ( 1 + (1/Elasticity) ) The higher the elasticity, the closer P to MR Example: –P 1 =100, Q 1 =50, P 2 =90, Q 2 =60, –ε = (10/55)/(-10/95) = -1.73 => Elastic

16. Why Care about Elasticity? TR = P * Q Price Elasticity is effect of P on Q Elastic (>1) => Quantity moving faster Inelastic ( Price moving faster