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 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                                            200


• Unbundle gains
                                                                     100

                                                                       0
    – “service added free”
                                    Utility
                                              -1500   -1000   -500          0   500   1000   1500
                                                                     -100

• Bundle Losses                                                      -200


    – “total cost is”                                                -300

                                                                     -400
                                                                       Gains
      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
                                Customer Segmentation
             High



                          • Value Diff.:   Low                   • Value Diff.:   High
                          • Perceived Pain High                  • Perceived Pain High
                          • Price Buyer                          • Value Buyer
Percieved Pain of Price




                          • Value Diff.:   Low                   • Value Diff.:   High
                          •   Perceived Pain Low                 • Perceived Pain Low
                          • Convenience Buyer                    • Relationship Buyer

                          Low                                                        High
                                                 Value of Differentiation
                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

				
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posted:10/17/2011
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