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Pricing Strategies
Session 7
XMBA 206.1
Ganesh Iyer
1
Analysis Framework
Perceptual mapping
Company Analysis
Marketing Myopia
First mover advantages
Customer Analysis
Competitor
Analysis
Positioning
Segmentation
Marketing Strategy
Pricing process
Pricing and innovation
Product
Marketing Orientation
Branding
Price
Promotion
Place
Market
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Economics of Pricing
Two Problems with Single Price Strategy
 Leave money on the table
 Some customers are willing to pay more

Pass-up Profit
 Some potential customers were not served even though the firm could
have served them at prices above the marginal cost
Ganesh Iyer
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Price Customization:
Price Discrimination and Self-selection
Iyer’s Carwash Example
Price
3
4


# of Car washes
5000
3000
How to Price ? What is the best single price?
Can you increase revenues? If so to what level?
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Price Discrimination and Self-Selection
Consumer Couponing

Why coupons:
Time
Cost
Number of Revenue
consumers
Low
Willing to
pay
`
3
High
4
3
3

People who are willing to pay more tend to have a higher personal time cost and
are therefore less likely to clip coupons

Disadvantage is non-redemption costs
»
Companies spent approx. $6 B on distributing 257 B coupons of which 3.6 B were
actually redeemed.
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Key Principles

Consumers are heterogeneous in their willingness to pay
» Charge according to consumer price sensitivity. Make sure that people with
inelastic demand pay more and people with elastic demand pay less.
Key Problem
 Ensuring self-selection…segmentation fences
» Make sure that prices directed at one segment cannot be taken advantage of by
the other.

How should you achieve this?
» Identify a “bad” for the high willingness to pay segment and bundle it with the
product to create a product for the low segment
» This is where product design and pricing comes together.

Segmentation fences in airline pricing
»
significant increase in prices < 14 days before departure.
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Price Customization
Observable Characteristics
•
Based on observable characteristics that signal buyers’ price
sensitivity
 http://www.chessclub.com/ : Students: $29.95/year; Adults: $59.95

AMC theaters can observe the consumer-type using his student ID, seniors
» Customer 1
No student ID
$6.75
» Customer 2
Haas student ID
$4.75
» Customer 3
Haas student ID
$4.75
» etc.

Select the segmentation variables that
 Separate consumers based on observable characteristics into groups with different
sensitivities (e.g., ability to pay (tuition), age (movie))
 Are observable and targetable without great expense (e.g., Lotus 1-2-3 $325 for
first time buyer, $99 for upgrades)
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Price Discrimination
Purchase Location
 Consumers at different purchase locations have different price
sensitivity
 Cure for anthrax: $450 in the U.S. $190 in Canada
http://www.canadadrugs.com
 Staples website asks for zip code http://www.staples.com/
 Select segmentation variables that ensure
 different segments purchase at different locations
 high enough shipping cost to prevent arbitrage
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Customize By Time of Purchase

Peak-load pricing: designed to re-distribute usage from peak
time to off-peak time
 Redeye flight.
 On demand computing.
 Electronic road pricing.
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Electronic Road Pricing
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Psychology in Pricing Strategy

Jeans: $42…$32;
http://www1.macys.com/catalog/product/index.ognc?ID=204004&CategoryID=
11221&LinkType=EverGreen

Rolex watch: $10,000 http://www.rolex.com/en/
» 9,990
» 9,975

Relative price difference matters not the absolute matters

Weber-Fechner law: Relative price difference and not the absolute
matters.
» Weber gradually increased the weight that a blindfolded man was holding
and asked him to respond when he first felt the increase.
» Response was proportional to a relative increase in the weight.
» If the weight is 1 kg, an increase of 10 grams will not be perceived.
» If weight is 20 grams, an increase in 10 grams is perceived
» Applies to sound, vision etc.
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Psychology in Pricing Strategy
Mental Categorization

I will show you two numerical differences. Look at them quickly!
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Psychology in Pricing

Which difference do you think is greater?

Odd number pricing ($0.99 vs. $1.00).
» Why Nike shoes are priced at $79.99, not $80!
» Theoretical underpinning: Mental categorization.

Price quality perceptions
» Toronto flea markets
» http://www.toronto.com/shopping/listing/000-211-237

Pricing and visibility
» Mark Laracy: “If you like Opium you will like Ninja”

Pricing and social networks
» Pricing Trump towers
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Prospect Theory (Kahnemann and Tversky)

One additional dollar gives a lesser increase in
satisfaction or value than the dissatisfaction caused
by a one dollar decrease

Giving or taking a dollar

People feel the pain of losses much more than they
feel the happiness of equivalent gains.
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Prospect Theory
Applications
Unbundle gains: Sports Illustrated, offer additional benefits rather than a discount
Bundle Losses: Sellers of consumer durables and warranties. Example, a $50 warranty for
$700 appliance.
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Managing Competition
Price Matching (Crazy Eddie)
In the New York city stereo wars Crazy Eddie had made his trademark
“We cannot be undersold. We will not be undersold. Our prices are
the lowest….guaranteed. Our prices are insane.”
His main competitor Newmark & Lewis is no less ambitious. With any
purchase you get the store’s “Lifetime low-price guarantee”.
It
promises to rebate double the difference if you can find a lower price
elsewhere. If after your purchase from Newmark you find the same
item at a lower price (proof of purchase required), in the marketing
area, during the lifetime of your purchase, Newmark will give you a
200% gift certificate refund (100% of the price difference plus an
additional 100%).

What would happen to prices when firms compete by offering these guarantees?

What could be the reasons why these retailers adopted these policies in the first
place?

Would these price matching guarantees claims increase competition between
the two retailers and reduce their profits or would it do the opposite?
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Key Messages

Developing profitable pricing strategies is a critical and creative
exercise.

Pricing is the only element of the marketing mix whose cost is
getting it wrong.

Pricing’s impact on profitability is often more significant and
more immediate than the impact of other elements of the
marketing mix.
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