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Berkeley EWMBA 206 - Pricing Strategies

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Pricing StrategiesAnalysis FrameworkEconomics of Pricing Two Problems with Single Price StrategyPrice Discrimination Customization by Observable CharacteristicsPrice Discrimination Purchase LocationCustomize By Time of PurchaseElectronic Road PricingPrice Discrimination Palm Pilot: Product-line in ActionMicrosoft Office: Product Line (Versioning) in ActionHow to Price Discriminate Using through Product Line Design?Slide 11Slide 12Slide 13Slide 14Slide 15Key PrinciplesProduct Line Design: Disabling AttributesSlide 18Disabling AttributesSlide 20Slide 21Controlling Cannibalization Two MethodsLearning: Optimal Product Line DesignPsychology in Pricing StrategySlide 25Psychology in PricingProspect Theory (Kahnemann and Tversky)Prospect Theory ApplicationsKey MessagesPricing Strategies Homework1Ganesh IyerPricing StrategiesWeek 6EWMBA 2062Ganesh IyerAnalysis FrameworkMarketCustomer AnalysisCompetitor AnalysisCompany AnalysisMarketing MyopiaMarketing StrategyProductPricePromotionPlaceMarketing OrientationPerceptual mappingSegmentation PositioningFirst mover advantagesBrandingPricing processPricing and innovation3Ganesh IyerEconomics of PricingTwo Problems with Single Price Strategy Leave money on the table Some customers are willing to pay more Pass-up ProfitSome potential customers were not served even though the firm could have served them at prices above the marginal cost4Ganesh IyerPrice DiscriminationCustomization by Observable Characteristics•Based on observable characteristics that signal buyers’ price sensitivityhttp://www.chessclub.com/ : Students: $29.95/year; Adults: $59.95AMC theaters can observe the consumer-type using his student ID, seniors»Customer 1 No student ID $6.75»Customer 2 Haas student ID $4.75»Customer 3 Haas student ID $4.75»etc.5Ganesh IyerPrice DiscriminationPurchase LocationConsumers at different purchase locations have different price sensitivityCure for anthrax: $450 in the U.S. $190 in Canada http://www.canadadrugs.com Staples website asks for zip code http://www.staples.com/ Select segmentation variables that ensure different segments purchase at different locations high enough shipping cost to prevent arbitrage6Ganesh IyerCustomize By Time of PurchasePeak-load pricing: designed to re-distribute usage from peak time to off-peak timeRedeye flight.Electronic road pricing.7Ganesh IyerElectronic Road Pricing8Ganesh IyerPrice DiscriminationPalm Pilot: Product-line in ActionPalmm505Color$449Palmm500$399Palm VIIx$399Palm IIIxe$179Palm m100$129Palm Vx$2999Ganesh IyerMicrosoft Office:Product Line (Versioning) in ActionOffice 2000DeveloperOffice 2000PremiumOffice 2000ProfessionalOffice 2000Small BusinessOffice 2000Standard10Ganesh IyerHow to Price Discriminate Using through Product Line Design?Key to Successful VersioningIdentify the best ways to distinguish the different versions of the product/service Need to determine which features will be highly valuable to some customers but of little value to others. Goal: Create the “right” # of versions -- targeted at the “right” customer segments by setting the “right” prices.Strategic Issue -- Cannibalization: Will the high-end customers buy the higher priced version? How to dissuade them from buying the lower priced version?11Ganesh IyerExample 1: Pricing Dell LaptopsTable: Perceived Economic Value Personal Users Business UsersSegment Size 60 40Dell 350 MHz $ 500 $ 750Dell 550 MHz $ 750 $ 2500Product Line (Versioning) Segmentation, Targeting & Cannibalization12Ganesh IyerExample 1: Pricing Dell Laptops Option I: Dell 350 MHz only:Targeting: Business Users–Price $ 750–Total Revenue $ 30,000Targeting: Business Users & Personal Users–Price $ 500–Total Revenue $ 50,000Optimal targeting if introducing 350 MHz: Business Users + Personal UsersProduct Line (Versioning) Segmentation, Targeting & Cannibalization13Ganesh IyerExample 1: Pricing Dell LaptopsOption II: Dell 550 MHz only:Targeting: Business Users–Price $ 2500–Total Revenue $ 100,000Targeting: Business Users & Personal Users–Price $ 750–Total Revenue $ 75,000Optimal targeting if targeting 550 MHz: Business UsersProduct Line (Versioning) Segmentation, Targeting & Cannibalization14Ganesh IyerOption III: Both 350 MHz & 550 MHz :What will be the price of 350 Mhz = 500What are the options available to Business Users?Buy 350 MHz at $ 500 or 550 MHz at $ X?Surplus from 350 MHz = $ 750 - $ 500 = $ 250 Thus, price of 550 MHz must satisfy $ 2500 - $ X = $ 250–Price $ 2250 (at most)–Segment Revenue $ 90,000–Total Revenue $ 120,000Product Line (Versioning) Segmentation, Targeting & Cannibalization15Ganesh IyerExample 1 (Revised): Pricing Dell Laptops_______________________________________________ Product Line Optimal Total Targeting Revenues_______________________________________________ Dell 350 MHz only Business & Personal $ 50,000 Dell 550 MHz only Business $100,000 Both 350 MHz 350 MHz at Personal & 550 MHz 550 MHz at Business $120,000_______________________________________________Product Line (Versioning) Segmentation, Targeting & Cannibalization16Ganesh IyerKey PrinciplesConsumers are heterogeneous in their willingness to pay»Charge according to consumer price sensitivity. Make sure that people with inelastic demand pay more and people with elastic demand pay less.Key ProblemCannibalization: Ensuring self-selection.»Make sure that prices directed at one segment cannot be taken advantage of by the other.How did you achieve this for Dell?17Ganesh IyerProduct Line Design: Disabling AttributesTRUE STORYIntel sells 486DX chip for $1000.Intel disables the math coprocessor of the DX chip and makes the SX chip (thus incurring a cost of $50).Intel sells the 486SX chip for $800!So Intel sells a damaged product that actually costs more to make for a lower price.What is going on here?18Ganesh IyerProduct Line Design: Disabling AttributesProblem facing Intel when it introduced 486 chip (two types of early adopters):E, G (50% of each type), E is willing to pay more and performs lots of math calculationsRes. Price Buyer Revenues$1000 E $1000 $800 E & G $1600What should Intel price the 486?19Ganesh IyerDisabling AttributesIf Intel can charge different prices to different users»$800 to G»$1000 to E»Total: $1800Price discrimination


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