Download Customers

Customers
Chapter 4
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
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
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, …)
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)
Switching Cost Effect
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Compatibility (Word, Internet Explorer)
Training (ibm)
Familiarity (Jello, McCormack)
“Try free for a month”
Bundling (computer system/box)
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)
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
End-Benefit Effect
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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
Shared-Cost Effect
• If customer pays only part of cost
• Business-class travel
• Health care (copay, etc.)
– Poor use emergency room
Fairness Effect
• Price evaluated within its context
– Income
– Past prices
– “Necessity” vs “Luxury”
– Raise reference price and discount (coupons,
rebates, etc.)
Framing Effect
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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”
Framing Effect
• Price high and discount
• Unbundle gains
• Bundle Losses
– “total cost is”
100
0
Utility
– “service added free”
200
-1500
-1000
-500
-100
0
-200
-300
-400
Gains
500
1000
1500
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
High
Customer Segmentation
• Value Diff.:
Low
• Value Diff.:
Percieved Pain of Price
• Perceived Pain High
• Price Buyer
• Value Diff.:
•
• Perceived Pain High
• Value Buyer
Low
• Value Diff.:
Perceived Pain Low
• Convenience Buyer
Low
High
High
• Perceived Pain Low
• Relationship Buyer
Value of Differentiation
High
Price Elasticity
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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:
– P1=100, Q1=50, P2 =90, Q2=60,
– ε=
(10/55)/(-10/95) = -1.73
=> Elastic
Why Care about Elasticity?
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TR = P * Q
Price Elasticity is effect of P on Q
Elastic (>1) => Quantity moving faster
Inelastic (<1) => Price moving faster