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Module 7
Pricing
Objective for Module 7
Gain a sound understanding of the
psychological effects of pricing strategies.
Differentiate between the economic and
behavioral approaches to pricing.
Know the unique characteristics of services
and the implications of such for pricing.
Understand the relationship between pricing,
demand, and consumption.
Value
=
Benefits
___________
Costs
How does pricing strategy add
value to the customer?
Zeithaml’s Four Value Definitions:
Value is low price.
Value is whatever I want in a product.
Value is the quality I get for the price I
pay.
Value is what I get for what I give.
What is price?
The money or other considerations
(including other goods and services)
exchanged for the price of ownership or
use of a good or service.
The Psychology of Pricing:
Good Deal vs. Fair Deal
 Numerous factors to consider when trying to
set the optimal price.
Economic
•traditional and more well-known
•“How good a deal am I getting?”
•Consumer’s incentive to purchase =
customer’s max price – actual price.
•Consumers buy when this
incentive to buy > 0.
The Psychology of Pricing:
Good Deal vs. Fair Deal
 Behavioral
•AKA psychological variables
•Consumer’s willingness to pay
•“How fair a deal am I getting?”
•Consumer’s incentive to purchase =
perceived benefit – perceived costs.
•Consumers buy when this incentive to buy
> 0.
The “Beer” Scenario
Lying on a beach, hot day.
Would love a cold bottle of favorite beer (insert
PBR/Keystone/Nattie Light here)
Friend goes to find a restroom and offers to bring you
a beer.
Only outlet near is a rundown grocery store.
He asks how much you are willing to spend.
Economic Factors
 in both scenarios, the ultimate consumption is
identical – the same beer is consumed on the same
beach.
 no atmosphere from the fancy resort or the rundown grocery store is being consumed by the beer
drinker to justify the different prices.
Behavioral Hypotheses
1. Willingness to pay is impacted by relative incentives
(Sony scenario).
 Consumers will consider both absolute economic
utility (customer’s max price – actual price) as well
as relative incentive (customer’s max price – actual
price)/(actual price).
 The psychological utility of a fixed amount of money
is relative.
Behavioral Hypotheses
2. Willingness to pay is impacted by reference price
(Playoff scenario).
 Consumers will consider both absolute economic
utility as well as consistency between actual price
and a reference price.
Behavioral Hypotheses
3. Willingness to pay is impacted by cost of goods
sold.
 Consumers will consider both absolute economic
utility as well as that of the firm.
 Consumers are concerned about a firm’s motive to
sell.
Behavioral Hypotheses
4. Perceptions of fairness vary across product
categories.
 Degree to which a consumer will rely on absolute
economic utility depends on product category.
Capture and Communicate
Value in the Pricing of Services
Berry and Yadav
The Uniqueness of Services
The Four I’s of Services




Intangibility
Inconsistency
Inseparability
Inventory
Idle Production Capacity
When the service provider is
available but there is no demand.
Inventory carrying costs of services
Key To Services Pricing
Clearly relate the price that customers pay to
the value that they receive.
Satisfaction-based Pricing
Provides value by recognizing and reducing
customers’ perceptions of uncertainty, which
the intangible nature of service magnifies. This
can be implemented as:
 service guarantees
 benefit-driven pricing
 flat-rate pricing
Relationship Pricing
Provides value by encouraging long-term
relationships with the company that customers
view as beneficial. This can be implemented
as:
 long-term contracts
 price bundling
Efficiency Pricing
Provides value by sharing with customers the
cost savings that the company has achieved by
understanding, managing, and reducing the
costs of providing the service. This can be
implemented as:
 cost-leader pricing
Pricing and the Psychology
of Consumption
Gourville and Soman
The Psychology of Consumption
Higher consumption means higher sales
Awareness of costs drives consumption
Pricing (nature of payment) drives
perceptions of costs
Strategic Pricing Issues
Timing – Payment made



Before point of consumption.
At point of consumption.
After point of consumption.
Price Bundling
Linking Price and Consumption
Practice yield management
Stagger payments to smooth consumption
Time payments to maximize consumption.
Psychologically link payments to benefits.
Reduce consumption.