Promotional and psychological pricing: the Future of ......Discover the world at LeidenUniversity Some Imaginable Developments • AI/ML driven dynamic pricing is a computer-guided

Discover the world at Leiden UniversityDiscover the world at Leiden University

Promotional and psychological pricing: the Future of Revenue Management?

Prof. Jean-Pierre van der Rest | HotelTech 2019, Bunnik, 18 November

Discover the world at Leiden University 2

Source: unknown.


Discover the world at Leiden University

Some Imaginable Developments• AI/ML driven dynamic pricing is a computer-guided pattern-seeking real-time form of demand pricing.

Patterns are unveiled by analyzing a variety of sources, to predict what customers are willing to pay and how responsive they might be to special offers.

• Personalized pricing can be a discriminatory form of behavior-based dynamic pricing. Is this a consumer’s worst nightmare? The question still remains to what degree it currently is personalized, and how this will be in the future. Don’t be too optimistic…

• Psychological pricing is a strategic approach that is seeks to exploit a particular psychological price or pricing effect on consumer buying behavior.

4

Context: effects of indirect price discrimination, where the seller relies on some proxy (e.g., usage quantity, coupon) to structure a choice that indirectly segments the buyers, are accepted throughout society. Will this (or direct price discrimination) be combined with psychological pricing?

Also, what about search discrimination? Moreover, how consumer trust is affected remains largely unknown, especially in terms of how consumers respond to unfair pricing practices. Moreover, what are there reputational effects?


What is Pricing?“Pricing is a contest between the individual seller and the

individual buyer. The market is the referee; the competitors the jeering section. But unlike sports contests, there are

very few ground rules.”

Pricing for Higher Profit (Tucker, 1966, p.1)



Pricing as a Strategic Capability

System Capital

Strategy

Human Capital and Social Capital

Setting Selling Monitoring



Importance of Pricing“Pricing is the moment of truth – all of marketing comes to

focus in the pricing decision.”

E. Raymond Corey (1962)


1. Importance for Companies

Source: adapted from Simon, H., Butscher, S.A. and K-H. Sebastian, Better Pricing Processes for Higher Profits (Business Strategy, 2003), pp.64-67.


2. Importance for society• Collusion, deceptive price advertising, predatory pricing impact consumer behavior and

public welfare (e.g., Grewal & Compeau, 1999).• Bargain assurances (BAs) change consumers' purchasing behavior and create public policy

concerns. First, “BA misleads consumers regarding the degree to which the offering represents a bargain. Second, the use of BAs partially substitutes for actual price competition” (Lindsey-Mullikin & Petty, 2011, p. 67).


Pricing is Psychological“Price is an important aspect of our lives. We respond to

various forms of price everyday. Studying buyer responses to price is an integral part of understanding buyer behavior […] At the core of examining buyer response to price is the

recognition that there are “behavioral” characteristics specific to each individual.”

Lillian L. Cheng & Kent B. Monroe (2013, p. 103)


Example: Reference Price Advertising

13

Source: Booking.com.


Source: Nickkolenda.com


Theoretical Framework …

ActualRoom Rate

PerceivedRoom Price

PerceivedQuality

PerceivedMonetarySacrifice

PerceivedValue

PerceivedReference

Price

Willingnessto Book a Room

(a)

(b)

(c)

TransactionValue

(e)

(e)(d)

Source: Adapted from van der Rest (2006).


Possible Inferences

Source: Kaufmann, Smith and Ortmeyer (1994).


Kolenda’s Psychological Pricing Tactics

https://www.nickkolenda.com/psychological-pricing-strategies/


https://www.nickkolenda.com/psychological-pricing-strategies/





https://www.jstor.org/stable/10.1086/429600?seq=1#page_scan_tab_contents

https://www.jstor.org/stable/10.1086/429600?seq=1#page_scan_tab_contents


http://www.sciencedirect.com/science/article/pii/S1057740811001082Source: Nickkolenda.com

http://www.sciencedirect.com/science/article/pii/S1057740811001082



http://www.sciencedirect.com/science/article/pii/S1057740811001082Source: Nickkolenda.com










Maximising Reference Price: classic

25

Source: bigtexan.com


Source: unknown.

Maximising Reference Price: modern variant


https://msbfile03.usc.edu/digitalmeasures/jnunes/intellcont/Incidental%20Prices-1.pdf



https://msbfile03.usc.edu/digitalmeasures/jnunes/intellcont/Incidental%20Prices-1.pdf












http://radio.shabanali.com/predictable.pdf



http://radio.shabanali.com/predictable.pdf


When the Psychophysics of Pricingis Deceptive

“Deception, a basic and pervasive biological phenomenon, takes many forms, variously referred to as mimicry,

trickery, seduction, pretense, feigning, masquerading, impersonation, distraction, or false promises … .”

Francis Mechner (2010, p. 516)


Source: Internet


Deception is an essential and pervasive biological function that evolved as an integral part of the behavioral repertoires of most animal and some plant species (Bergstrom, 2008). In all instances of deception, the deceived organism responds to a stimulus event as if it were a different one, often to its detriment.

The multiple forms of deception are described by such terms as mimicry (nabootsing), trickery (bedrog), seduction (verleiding), pretense (voorwendsel), feigning (veinzen: doen alsof), concealment (verbergen), masquerading (vermommen), distraction (afleiding), obfuscation (versluiering), and diversion of attention (afleiding van aandacht).

What is deception?

“A symbolic language for the codification and analysis of behavioral contingencies shows that all instances of deception are based on a misperception, misprediction, non-perception, or non-prediction by the deceived party, and can be further categorized based on features of the contingencies that define them. Instances of particular interest are those in which a deceiving party predicts (and in that sense “intends”) the deception. In those instances, the effect of the deception is usually to the deceiving party’s benefit and to the deceived party’s detriment” (Mechner, 2010, p. 516).

Source: Mechner, (2010).


When is Deceptive Pricing Illegal?“In affirming the dismissal of a pair of deceptive-pricing

class actions, the U.S. Court of Appeals, First Circuit, said the plaintiffs failed to demonstrate that they suffered any

injury.”

Finding No Injury, First Circuit Tosses Deceptive Pricing Suits, Manatt Phelps (August 2017)


Legality of bargain assurances (Mulliken & Petty, 2011)

Bargain assurance Legality *Loyalty/frequency program rewards

If a retailer fails to honor a loyalty reward program, the failure represents false advertising or breach of contract.

Every day low pricing (EDLP) Law enforcement agencies rarely challenge EDLP claims.

Price-matching refunds Both the BBB Code and Missouri law suggest that price guarantee advertising must clearly disclose all material conditions and limitations and notplace an unrealistic or unreasonable burden on consumers.

Partitioned prices Authorities generally allow sellers to advertise partitioned prices if the advertiser clearly discloses any additional charges without obscuring themthrough small print or confusing language.

Bundling products and prices Because consumers evaluate the value of the bundle on the basis of the dominant product, FTC Guides suggest that retailers cannot raise the priceto accommodate the second product. The Better Business Bureau (2003) further notes that a free offer should be temporary; otherwise, thebundle becomes a regular offering, and no part is free.

Vague referent price comparisons

Some states require advertisers to identify the basis for any price comparison or savings, unless the comparison refers to the seller's former price.The general rule for comparisons to vague reference prices, such as comparable value or list price, requires advertisers to base a reference price onfacts so that the referent price does not exceed the price at which substantial sales occur in the area. A second common referent is product cost orwholesale price, which should be the price the seller paid to acquire the product.

Comparison to rival prices When making comparisons with competitor prices, all guidelines and state regulations mandate that the marketer must substantiate thecompetitor's prices before running the ad. The cited competitor's prices may not exceed those of representative retailers in the area. An advertiseris liable if it compared its limited time promotional price with a rival's regular price or includes the rival's distribution fee but not its own.

* This overview is based on American research. Laws, rules and guidelines generally differ per state.


Bargain assurance Legality *Comparison with seller’s own, former, or future prices

Both the BBB and FTC (16 CFR § 233.1) require that the former price must be bona fide and in effect for a reasonably substantial time period inthe regular course of business. State laws heavily regulate comparisons with former prices in a similar fashion. Some states impose specific timeperiods (30–90 days) or require a minimum percentage of sales in the past year at the regular price

Percentage-off claims Although New Jersey requires that claims specify the amount of savings for goods over $100 in dollars as well as the percentage off, minimalregulation applies to such claims beyond general state prohibitions of misleading statements.

Up to claims Advertising law requires that an appreciable number of consumers must be able to obtain the maximum savings in normally expectedcircumstances. According to the Better Business Bureau Code (2003) the number of items available at the maximum savings must constitute atleast a significant percentage of the offering — typically 10%. The Code further requests that advertisers include both a minimum and maximumamount off without an undue emphasis on the latter. Several states enforce similar requirements.

Sale signs The Better Business Bureau Code (2003) advises that price reductions should be significant compared with the advertiser's customary andreasonable price (e.g., not advertising a product at $9.99 when the usual price is $10) and should comply with any stated expiration period. If thesale exceeds 30 days, the seller must substantiate that the prices are special reductions, not regular prices. Any reason for a sale (e.g., clearance,liquidation, going-out-of business) should be accurate. Several states enforce similar requirements.

Quantity limitations As with other promotional pricing tactics, the primary consumer policy concern is whether the use of the tactic is genuine. If an advertisementpromises or suggests a limit on the quantity a consumer can purchase at a particular low price and the marketer actually has a large stock, thecommunication deceives consumers into perceiving urgency to obtain one of the few available items at the bargain price, comparable to a falsegoing-out-of-business sale. Most regulations in this area address the opposite problem. Namely, advertising a sale without sufficient quantities tomeet reasonably anticipated demand is a possible prelude to bait-and-switch tactics.

Legality of bargain assurances (Mulliken & Petty, 2011)

* This overview is based on American research. Laws, rules and guidelines generally differ per state.


Challenges and Critical Concerns“If 'dynamic pricing' is combined with segmentation

targeting, there is price discrimination. There are people who call this 'value-based pricing'. With the growth of the Internet, big data and high-tech marketing, personalized

value-based pricing (i.e., first degree, direct, or individual price discrimination) for both existing and new customers is

no longer a theoretical issue.”

Jean-Pierre I. van der Rest (2017, p. 13)


Source: unknonwn.


1. Deceptive Pricing will be more Difficult to Detect in the Future

• In this case, the complainant wanted to buy a receiver from Onkyo at the MediaMarkt on 21 January 2016. At that time the price was €436.99. An employee of MediaMarkt advised the complainant to wait (i.e., to await the VAT-free action).

• On 27 January 2016, the complainant returned to the store and the receiver price, including the VAT discount, was €453.69.

• The price of the receiver without the discount was €549 at that time, a price increase of €112.01.

• Is this fraudulent behavior of MediaMarkt?

Source: unknonwn.


2. Indirect Price Discrimination will Increase due to Smart Algorithms

• Because behaviorally-targeted individual price discrimination may be difficult to maintain in the face of arbitrage, “firms can offer all consumers the same set of choices, but allow consumers to sort themselves (“self select”) into groups with differing levels of demand” (McAfee, 1998, p. 473). Examples:

- Quantity discounts, Coupons, Bundling

- Performance-based (i.e., crimping)

- Placing restrictions on purchase and use (hotels)

- Knowledge-based discrimination (hotels)

- Nonlinear pricing

NB welfare increases if quantity sufficiently rises. Consumers may however be worse off.

Source: McAfee (1998).


3. Personal Pricing: a consumer’s worst nightmare

Source: unknonwn.

45

Source: unknonwn.

What do we worry about when we worry about future ethical and legal challenges in pricing? Deception, unfairness, and social injustice (Miller, 2014). Key issues will be: ‘informed choice’ & ‘right to choose’, ‘trust in markets’ & fairness, ‘consumer search & competitive ideal’, and of course … ‘privacy’ …..


Funny Take-Away!

Source: unknonwn.

Discover the world at Leiden UniversityDiscover the world at Leiden University

Thank you!

Documents

Promotional and psychological pricing: the Future of ......Discover the world at LeidenUniversity Some Imaginable Developments • AI/ML driven dynamic pricing is a computer-guided