Module 7Module 7

Pricing Pricing

Objective for Module 7Objective for Module 7Gain a sound understanding of the Gain a sound understanding of the psychological effects of pricing strategies. psychological effects of pricing strategies.

Differentiate between the economic and Differentiate between the economic and behavioral approaches to pricing. behavioral approaches to pricing.

Know the unique characteristics of services Know the unique characteristics of services and the implications of such for pricing. and the implications of such for pricing.

Understand the relationship between pricing, Understand the relationship between pricing, demand, and consumption. demand, and consumption.

BenefitsBenefits

Value = ___________Value = ___________

CostsCosts

How does pricing strategy add How does pricing strategy add value to the customer? value to the customer?

Zeithaml’s Four Value DefinitionsZeithaml’s Four Value Definitions::

Value is low price.Value is low price.

Value is whatever I want in a product. Value is whatever I want in a product.

Value is the quality I get for the price I pay.Value is the quality I get for the price I pay.

Value is what I get for what I give. Value is what I get for what I give.

The money or other considerations The money or other considerations (including other goods and services) (including other goods and services) exchanged for the price of ownership or exchanged for the price of ownership or use of a good or service.use of a good or service.

What is price?

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: The Psychology of Pricing: Good Deal vs. Fair DealGood 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 Psychology of Pricing: The Psychology of Pricing: Good Deal vs. Fair DealGood Deal vs. Fair Deal

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.

The “Beer” ScenarioThe “Beer” Scenario

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 run-down grocery store is being consumed by the beer drinker to justify the different prices.

Economic FactorsEconomic Factors

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 HypothesesBehavioral 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 HypothesesBehavioral 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 HypothesesBehavioral Hypotheses

4.Perceptions of fairness vary across product

categories.

Degree to which a consumer will rely on absolute

economic utility depends on product category.

Behavioral HypothesesBehavioral Hypotheses

Capture and Communicate Value Capture and Communicate Value in the Pricing of Servicesin the Pricing of Services

Berry and YadavBerry and Yadav

The Four I’s of ServicesThe Four I’s of Services IntangibilityIntangibility InconsistencyInconsistency InseparabilityInseparability InventoryInventory

The Uniqueness of Services

When the service provider is When the service provider is available but there is no demand.available but there is no demand.

When the service provider is When the service provider is available but there is no demand.available but there is no demand.

Idle Production Capacity

Inventory carrying costs of servicesInventory carrying costs of services

Clearly relate the price that customers pay to

the value that they receive.

Key To Services PricingKey To Services 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

Satisfaction-based PricingSatisfaction-based 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

Relationship PricingRelationship 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

Efficiency PricingEfficiency Pricing

Pricing and the Psychology Pricing and the Psychology of Consumptionof Consumption

Gourville and SomanGourville and Soman

The Psychology of Consumption The Psychology of Consumption

Higher consumption means higher salesHigher consumption means higher sales

Awareness of costs drives consumptionAwareness of costs drives consumption

Pricing (nature of payment) drives Pricing (nature of payment) drives perceptions of costsperceptions of costs

Strategic Pricing Issues Strategic Pricing Issues

Timing – Payment madeTiming – Payment made Before point of consumption.Before point of consumption. At point of consumption.At point of consumption. After point of consumption.After point of consumption.

Price BundlingPrice Bundling

Linking Price and Consumption Linking Price and Consumption

Practice yield managementPractice yield management

Stagger payments to smooth consumptionStagger payments to smooth consumption

Time payments to maximize consumption.Time payments to maximize consumption.

Psychologically link payments to benefits.Psychologically link payments to benefits.

Reduce consumption.Reduce consumption.