MAR3023 Exam 3 Material Live Lecture March 27th 2014 Part 1 and 2 How Consumers Perceive and Respond to Prices Still talking about PRICING How do consumers respond to changes in price Example Dr Robyn starts by showing an article that talks about how Amazon introduced a new service called Amazon Prime which might have been a bad idea because consumers have to pay to subscribe gives you free two day shipping access to movie streaming It is the fist price hike in 9 years which had a lot of backlash to consumers whether it is worth paying the 79 Can t always predict how consumers will respond Outline How are prices evaluated in isolation How are price differences perceived How are price changes perceived How can prices be framed differently Prime discrimination How is Price Evaluated in Isolation Reference price o Standard of comparison against which an observed price is compared A person is at a restaurant and sees a burger for 8 they ask is this a good price compared to what I know about other burger prices Internal Reference Price o Memory What is the usual price of a burger What is the last price I paid What is the most least I would pay o Fairness What is a fair price for this burger External Reference Price o May be introduced at point of sale Our burger is usually 8 but now it s only 5 99 o Ex TJ Maxx Compare at 90 Now 39 00 o May be influenced by the choice set by what other products are being offered near it o May be influenced by incidental prices o Ex Would you buy this CD for 13 If 80 sweatshirt nearby if 10 sweatshirt nearby 60 would buy if the 80 sweatshirt is nearby o Signpost pricing Looking at the price of a familiar item in the store to determine if that place has good prices If a convenient store sells bottle of water for 1 instead of 3 How is Price Evaluated in Isolation Implications of reference prices o Consumer responses to price changes Consumer responses to ending promotions If during promotion the product is 2 and after it s 4 the consumer would have the 2 as a reference price and wait for it to go on sale again Consumer purchase timing watch product until the price comes down best chance to get a deal on a new car is at the end of its model year Transaction utility people calculate the price they pay to the reference price might buy something simply because it s a good deal even though you don t necessarily need it could go the opposite way too Example of pajama jeans commercial showing that the jeans look just like regular jeans but are more comfortable and lightweight good for traveling fit everyone 60 day money back guarantee etc Price leads to inferences about quality o Price quality relationship o High price High quality o But low price doesn t always lead to perception of low quality o Price placebo effects Take this pain killer say retail price is 250 retail value when it s actually 10 cents o Shock consumer and ask if it hurt 80 of people said it didn t because of their perceived price of the pain killer 250 o Impact of the word sale even if it isn t on sale will increase demand most of the time How Are Price Differences Perceived Left digit effect consumers look at the left digit when determining if the price is fair 2 99 vs 3 00 Relative differences not only absolute differences matter Example If you can save 100 on a phone vs saving 100 on a Toyota Camry 100 has a different relative impact on the consumer and determines how far the consumer will go to get the discount How to communicate price changes Try to avoid price increases Start with low visibility moves try to get rid of discounts first if it doesn t work then you might have to raise the price or shrink the product number of sheets on a toilet paper roll or cheaper ingredients or removing features or services by unbundling Maintain a sense of fairness Amazon raising price because cost have gone up for them Even price cuts may not always be met with favorable reactions How Can Prices be Framed Differently Surcharge vs Discount Gains vs Losses Example Station A Gas is 3 50 gallon with a 10 cents gallon cash discount Station B Gas is 3 40 gallon with a 10 cent gallon credit surcharge Which would you choose 60 chose the Station A because it didn t charge extra to your credit card Discounts can motivate desired behavior cash quantity seasonal Losses seem worse than gains to a consumer have to determine what will be coded as a loss to the consumer Ending a discount is better than raising the price Bundling vs Unbundling o Ski Vacation A 6 day trip to Colorado Six one day lift tickets for 40 each unbundled package encourages people to buy this product o Ski Vacation B 6 day trip to Colorado One six day ski pass o Most people choose A if they are more likely to skip a day of o When options are unbundled people are more likely to be for 240 skiing sensitive to cost Integrate losses but segregate gains Losses weigh more heavily than gains If you re going to get 10 bills throughout the month you want them all at once If you re going to get 10 gift cards in a month you want them spread out over the month o Purchase add ons If you add the GPS to the car when you buy it it s much cheaper than adding it on later add ons are much more attractive during the time of purchase o Billing if you get permission to charge the person s credit card every month as opposed to sending them a separate bill every month it impacts the consumer less o Rebates and discounts better to give them to the consumer later sending them a discount in the mail Hide bundle costs but highlight discounts Flat rate plans are much more attractive because you bundle all the costs into one bill Price Discrimination changing what you charge Dimensions along with willingness to pay can differ o Usage Heavy users of a product are willing to pay more o Timing Higher willingness to pay during peak hours Movies cost more at night o Consumer characteristic early adopters will pay more than those who don t need it right away o Availability of competitive offerings if Netflix is the only way to watch movies in your town you will pay more o Product different versions of a product might influence what you will pay When is Price Discrimination Legal o If discount of allowance is available to all or almost all customers o Discrimination is based in services instead of goods o The differently priced goods are different o Based in legitimate cost differences o Price disparity is necessary to meet the price of a competitive …