Product could still be cheap to make but if there is a high value for the product the company can charge more cid 127 Goal is not to recover cost but to capture the value of the product in the consumer s mind Pricing Setting Prices 3 25 14 cid 127 Why pricing is important Can increase sales if price is decreased Administered pricing USA price is set and customer has buy or not buy decision Participative pricing Haggling over the price Common names for prices tuition rent premium fee dues fare wage interest Value is a function of perceived benefit cid 127 What is the consumer going to get out of it Pricing objectives Sales objectives Dollar revenue unit volume profit objectives cid 127 maximization satisficing cid 127 Market share This is how much profit we want so this is where we set our price set a price to maximize your market share price might be low and not that profitable Stability Social responsibility Pricing approaches cost based break even analysis Contribution margin cid 127 Markup based BE price total FC Units Unit VC cid 127 markup is most often expressed as of selling price NOT as of cost of goods p cost of goods 1 MarkUp cid 127 markup expressed as a decimal Target profit pricing TVC unit VS x Number of units Target ROI pricing ROI return on investment investment ROI target profit P TFC TVC pi what you want to make in profit total of units P TFC TVC investment ROI total of units cid 127 General problems with pure cost and profit based pricing Internal focus ignores demand and competitive factors assumes all that is produced is sold at full price Fails to account for for economies of scale Cost based may not be capturing as much value as you could be Target profit based may be charging more benefits than you deliver Demand Based Pricing Skimming ex iphone Penetration Prestige pricing Prices are high and then the prices go down over time usually in technology reverse of above start low and increase price over time cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 MP RP 100 retail markup 100 100 Distr Markup 100 Backward bending demand curve Price indicates products value Bundle pricing price is usually lower to buy all the parts together expedia buy a hotel with your flight sometimes has an item that you don t want Demand minus pricing cid 127 WP Wholesale price retailer s cost of goods RP retail price cid 127 WP RP x 1 MarkUp Chain Markup cid 127 Given RP 600 Retail Markup 50 Distributor markup 20 cid 127 MP 600x 1 5 x 1 2 cid 127 MP 600 x 5 x 8 240 Value Based Pricing Three illustrative cases of perceived value PV PV price cost Price pv cost Price cost pv value does not equal low price Understand cost benefit tradeoff Critical strategic pricing ration Value total perceived benefit price parity price price that allows you to divide the market equally x s total paved benefit x s price value y s total lcvd benefit y s price How Consumers Perceive and Respond To Prices 3 27 14 standard of comparison agains which an observed price is compared How is a price evaluated in isolation Reference price Internal reference price cid 127 memory fairness External reference price cid 127 may be introduced at point of sale was 59 99 now 29 99 cid 127 may be influenced by the choice set side by side comparison panasonic 179 99 emerson 109 99 cid 127 may be influenced by incidental prices would you buy this CD for 13 higher likelihood if more expensive things around the store Signpost pricing Implications of reference prices consumer responses to price changes delight vs sticker shock sticker shock is stronger emotion Consumer responses to ending promotions 30 off price become reference price when the promotion ends Consumer purchase timing ex buying the 2013 model when the 2014 comes out Transaction utility difference between reference price and the price you had to pay Price lead to inferences about quality price quality relationship cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 high price high quality but low price doesn t always lead to perception of low quality if you have a strong brand that people trust this doesn t have to be the case ex trader joes ex people took placebos and told what prices were higher prices better perceived pain relief even Price placebo effects Impact of the word sale Left digit effect seeing something on sale can increase demand by up to 50 How are price differences perceived 2 99 perceived lower than 3 00 much more disproportionately sensitive to change in left digit of price Station A Gas is 3 50 gallon with a 10 cent gallon cash discount better response Station B Gas is 3 40 gallon with a 10 cent gallon credit surcharge How to communicate price changes try to avoid price increases start with low visibilty moves unbundling removing discounts etc cid 127 Maintain a sense of fairness costs are going up so I have to increase prices Even price cuts may not be met with favorable reactions if your a luxury product could be perceived as a quality drop How can Prices be framed different Surcharge vs Discount cid 127 Gains vs losses Discounts can motivate desired behavior cash quantity seasonal Bundling vs unbundling Ski vacation A 6 day trop to colorado 6 one day lift tickets for 40 each Ski vacation B 6 day trip to colorado one six day ski pass for 240 bundled theater tickets bundled packages not as much unbundled packages encourages you to use the product gym membership gym doesn t want a crowded gym Integrate Losses but segregate gains purchase add ons leather seats bundled with the car purchase extended warranty offers billing better done all at once rebates and discounts hide bundle costs but highlight discounts Flat rate plans ex netflix cid 127 much more attractive than per use plans better if you can find a way to give them to …