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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 • • • • • 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 • • • • 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 • • • • • • 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 • • • • • • • 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? • • • • TR = P * Q Price Elasticity is effect of P on Q Elastic (>1) => Quantity moving faster Inelastic (<1) => Price moving faster