pricing

3 Cs

Economic Value Pricing

DefinitionEconomic Value to the Customer (EVC) is based on the insight that a customer will buy a product only if its value to them outweighs the value of the closest alternative,

or when the utility of a product depends on its value to the customer minus its price.

Therefore, to sell a product, a firm needs to price at or below its competitor’s price plus the value advantage its product has to the customer over the rival product.

Pricing below EVCUncertainty effect – people don’t believe the

benefits you claim

Newness effect – people don’t understand the benefits

Temporary Discount effect –discounting from list drives sales, vs lower price

Expenditure effect – large single purchase

Its just not right – Price gouging

Strategic – winner takes all market

EVC for AdvertisingIs EVC a good model for advertising?

Is there an EVC for advertising?

EVC as a Pricing Diagnostic

Is a product priced correctlyOverpricedValue message misaligned to differentiation value

Price Elasticity Price Elasticities. The price elasticity of a product measures the responsive

ness of sales to a change in price. Price elasticity is defined as the percent change in quantity sold given a 1% change in price.

This helps analysts figure out whether revenues will be the same, higher or lower after a change in price. If elasticity=1, revenues will be the same from a price change. If elasticity is >1, revenues will be higher with a price decrease. If elasticity<1, revenues will be higher with a price increase.

Estimating a constant price elasticity. One problem with the formula ΔQd/Qd for the price elasticity is that it can take two different values for whether

ΔPd /Pd P or Q are the original or final values. This shouldn’t matter if you are comparing

price elasticities across segments and are always consistent about what values you use (for example the value that is used in the denominator, should be the one used to calculate the numerator).

Pricing Analysis Ways of improving historical pricing analysis.

(1) CRUCIAL. Calculate different price elasticities for each type of customer, each region, each product.

(2) Use more data than just aggregate sales and prices • DHL employed software that included the reactions of customers who

called and got a quote but didn’t ship - that is, a failed sale. By in cluding data from this group of customers, they improved their ‘quote to book ratio’ from 17 percent to 25 percent.

(3) Use panel data econometrics where you include controls for places and times in your regression analysis. The problem is that this can get very expensive both in terms of personnel and costs of acquiring data.

Pricing along the demand curve

In the last lecture, we thought hard about how to measure the demand curve. But it is important to also think about why it slopes downwards. The answer is variation in how much our customers value our product.

The most crucial insight of this class is that we shouldn’t think about where we should price along our demand curve. Instead we should think, how many different prices to different customers can I charge along my demand curve?

Segmentation ModelsProduct attribute based

Customer based

Customer Based Segmentation

National (big brannd) vs local

International vs home market

Are there ther opportunities?

Product attribute based segmentation

Must be able to structure price to meet key attribute

Creating different products based on the atributeRemnant vs premiumOptional extras – can be burdensome over time

Price Erosion ThreatsFalling demand

Low differentiation

Increasing supply and substitutes

Pricing powerMarket has limited capacity

Increasing demand

Strong differentiation

In April, 2009, in the UK, Amazon offered 100 popular MP3s at just 29p (0.50c) per download. Apple’s iTunes store responded by raising prices on the most pop ular MP3s to 99p, or $1.50. Apple could do this because of switching costs and superiority of iTunes experience.

Out PricingUsing 3 Ps

ProductPromotionPlace

Lowering price may be a trap less revenues Indicate low qualityFragile market – disloyal customers