15.810 Marketing Management

Session 13: Pricing (Customers, Competition)1. Economic theory

2. Marketing affects the realized price• perceived value vs. perceived price• higher price if “own” a dimension

3. When is the price right?• 3Ps and 5Cs influence price and provide structure

4. Focus on customers’ emotional response

5. Focus on competitive implications

15.810 Marketing Management

Local monopolies are better than commodity markets

Perfect competitionlobsters are caught by small boatssold at market pricewhy not “Prelude” lobsters?

15.810 Marketing Management

Differentiation makes for “local monopolies”

Imperfect competition (“local monopolies”)

Perdue chickensBay State Distributors

15.810 Marketing Management

Making competition imperfectBarco?

Intuit?

SWA?

Brita?

Swatch?

BMW?

• Brand M

Brand 1

Brand 2

Brand M

Brand 1

Brand 2

= price changes

= repositioning

15.810 Marketing Management

Once competition is imperfect, raising perceived value can have high leverageAnnual demand = 100M unitsVariable costs = $196Current price = $200Current profit = $400M

What if we could raise perceived value by 1%? 10%?Profit increases by ________%?

value = benefits vs. price

marketing raises perceived benefitsmarketing lowers perceived price

15.810 Marketing Management

Lens model helps us understand how to change perceived value.

Differentiated product features

Advertising, framing, gains vs. losses, etc.

Preferences(perceived value)

PerceivedPrice

Perceived relative benefit

Choice

15.810 Marketing Management

Marketing structure helps us select tactics to increase perceived value

Perceived value

Perceived price

Customers

Competitors

Company skills

Collaborators

Context

Product

Promotion

Place

15.810 Marketing Management

Knowing when the price is right(Dolan reading: eight steps to better pricing.)

Perceived value(lens model,

own adimension)

Perceived price(optimal pricing

structure)

Customers(variation in customers,

emotional response,price sensitivity)

Competitors(competitive reaction)

Company skills(returns vs. costs)

Collaborators(quantity discounts)

Context(issues of fairness)

Product(assess value)

Promotion(assess value)

Place(realized price)

15.810 Marketing Management

Cumberland Metals IncorporatedExpect Value in Use (EVIU)

$150Product Cost

$6,334Net @ $200/hour

= 31 2/3 hours

???$80/setPrice

Curled metalAsbestosRecycling

250 degrees700 degreesHandling temp

15 pounds40 poundsWeight

16 2/3 hours6 minutes16 2/3 hoursSet-up time

15 hours60 hours75 hoursHours to drive 55’

SavingsCMI Pile-driving Pads

Current Solution

EVIU =

15.810 Marketing Management

Perceived customer value Michelin Tires

Because so much is riding on your tires.

15.810 Marketing Management

Variation in customers (Dolan)Ford and the River Rouge Plant

2,000 acres, 120,000 employees, 53,000 machine tools, 90 miles of track, 27 miles of conveyorspower plant, glass plant, cement plant, paint, rubber, etc.Model A

General MotorsAlfred P. SloanBuck Weaver

Assess price sensitivity (Dolan)

Laptop bags (conjoint analysis)

Exec Ed (conjoint analysis)

Spreadsheets, microprocessors, and operating systems

Assess price sensitivity

VOC gives insight on uses among a variety of customers.

(Image of Pulmonary Products Price List fromthe Puritian-Bennett Corporation.)

15.810 Marketing Management

Emotional response (Dolan)Coca-Cola

at Sloanat the Bayside Expoat an exclusive baron a really hot day

Price discrimination

15.810 Marketing Management

Emotional responseCoca-Cola has quietly begun testing a vending machine that can automatically raise prices for its drinks in hot weather. The process appears to be done simply through a temperature sensor and a computer chip. The potential was heralded by the company’s chairman and chief executive officer in an interview with a Brazilian magazine.

“the desire for a cold drink can increase during a sports championship final held in the summer heat. So, it is fair that is should be more expensive. The machine will simply make this process automatic.”

Source: Hays, Constance L. "Variable-Price Coke Machine Being Tested."The New York Times, 28 October 1999.

15.810 Marketing Management

Emotional response – mental accounting

You have decided to see a play and bought a ticket for $30. As you enter the theater, you discover you have lost the ticket. Would you pay another $30 to see the play?

You have decided to see a play where the admission is $30 per ticket. You have not yet bought the ticket. As you enter the theater, you discover that you have lost $30 from your wallet. Would you still buy a ticket?

15.810 Marketing Management

Emotional response – who is happier?

Monika wins $50 in the Mass State Lottery in the morning, then finds $25 on the ground on the way from the subway.

Rolandas wins $75 in the Mass State Lottery.

15.810 Marketing Management

Emotional response – New England Journal of Medicine

Of 100 people having surgery, 10 will die during surgery, 32 will have died by one year, and 66 will have died by five years. Of 100 people having radiation therapy, none will die during treatment, 23 will die by year one, and 78 will die by five years. Which treatment do you prefer?

Of 100 people having surgery, 90 will survive the surgery, 68 will survive past one year, and 34 will survive past five years. Of 100 people having radiation therapy, all will survive the treatment, 77 will survive year one, and 22 will survive past five years. Which treatment do you prefer?

15.810 Marketing Management

Storer Cable Communications(Louisville, Kentucky)

"It’s not often you get good news instead of a bill, but we’ve got some for you. If you’ve heard all those rumors about your basic cable rate going up $10 or more a month, you can relax: it’s not going to happen! The great news is the rate for basic cable in increasing only $2 a month."

Source: Russo, J. Edward, and Paul J. Schoemaker. Decision Traps: The Ten Barriersto Brillant Decision-Making and How to Overcome Them. Simon & Schuster, 1990.ISBN: 0-671-72609-9.

Emotional response – prescriptionsSegregate gains (in you act now …)

Integrate losses (charge cards, car stereos)

Integrate mixed gains (voluntary transactions)

Segregate large loss and small gain (rebates)

Framing (luxury boxes) raise reference price

Fairness (Red Sox tickets)long-term relationshipavoid transaction disutility

15.810 Marketing Management

Emotional response – compromise effects (e.g., Simonson article)

Regular

1599

Mid-grade

1759

Super

1839

Octane89

Octane87

Octane93

(2/3)Regular + (1/3)Super = 89 Octane at 1678?

15.810 Marketing Management

Context – some lawsSherman Act – agreements between competitors to distort the natural forces of competition are illegal. Fix prices, allocate markets, need only try. Can advertise MSRP, but not coerce.

Clayton Act – can not use monopoly power to manipulate price or restrain competition.

Robinson-Patman Act – Precludes price discrimination to lesson competition. However, can meet competitor, cost-justified, quantity discounts if not unique to a retailer.

Rule of reason (Sylvania case) – can limit retailers, restrict territories, etc. if the net is more interbrand competition.

15.810 Marketing Management

Dolan’s other issues were covered previously or in channels (place) session

realized pricereturns, damage, repair (e.g., Swatch)pitchers and filters (e.g., Brita)

optimal pricing structurequantity discounts (see channels’ reading)bundling (e.g., MasterCard)

strategic accounts“fire” your customer if necessary (e.g., Calyx)

15.810 Marketing Management

Summary:consumer behavior and pricing

Lens model indicates how to affect perceived value and price

Mental accounting indicates how to frame and bundle benefits and costs

Behavioral decision theory indicates how to present alternatives

15.810 Marketing Management

Summary – Marketing theory shows how to get maximal prices.

differentiation leads to imperfect competition

consumer behavior theory changes value equation

3Ps and 5Cs influence perceived value and perceived price

market research tools can set the right priceconjoint analysisvoice of the customer analysesexpected value in use (EVIU)