The Behavioral Side of Pricing

MKT 750Dr. West

Agenda

Issues associated with product pricing

Defining termsCapturing valueBehavioral pricing

Discuss Paradise Parks caseShould they offer a preferred customer card?

Product Pricing

Objective Value

Marketing Efforts

Perceived Value Price of Consumer’s Incentive Substitutes to buy

Product Price

Firm’s Incentive to sell

Cost of Goods Sold

$0

Firm’s Perspective on Pricing

Cost of Goods Mark-up pricing – tack a percentage onto COGS

Price of Substitutes Competitive “going rate” pricing – evaluate your price relative to what your competitor is charging for similar goods and services

Firm’s Perspective on Pricing

Market ValueValue Pricing – measure the perceived value of the good or service

What if consumers differ in their “willingness to pay”? How can you frame your price to enhance its perceived value?

Entry Strategies

Factors to consider: Forecasted market size Competitive Threats Price sensitivity of consumers

Skimming versus Penetration Innovators & Early Adopters Early Majority

Entry Strategies

Two-Part Pricing: TivoHardware = List Price $249Service = $12.95 per monthLowering the hardware price might pay off in the long run if more consumers adopt the product

Strategies to Capture Value

Tiered Pricing Airlines and Hotels Movie Theaters Restaurants

Consumer’s perception of fairness Pricing based on ambient temperature

Strategies to Capture Value

Setting your price: Maximum Price

Theater A Theater B Matrix Reloaded $10,000 $9,000

Down with Love $8,000 $8,500Total $18,000 $17,500

Cost per film per theater to distributor $2000

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Strategies to Capture Value

High Road: Set your price to capture the maximum value

Matrix = $10,000 Down with love = $8,500

Outcome Theater A will only buy Matrix Reloaded Theater B will only buy Down with Love

Profits ($10K-$2K)+($8.5K-$2K) = $14.5K

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Strategies to Capture Value

Low Road: Set your price based on the lowest willingness to pay

Matrix = $9,000 Down with Love = $8,000

Outcome Theaters A and B will buy both movies!

Profits 2($9K-$2K)+2($8K-$2K) = $26K

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Strategies to Capture Value

Bundling: Set your price based on the combined value

Bundle price at $17,500 for both films

Outcome Theaters A and B will buy the package.

Profits 2($17.5K-$4K) = $27K

Enhancing Perceived Value

Pay-per-use Music downloading services

“All-in-one” versus “two-part” pricing

Theme parks/cruise lines

Rebates and coupons The secret with rebates is that they influence a purchase decision but are rarely redeemed

Scenario 1

Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people.  Two alternative programs to combat the disease have been proposed.  Assume that the exact scientific estimates of the consequences of the programs are as follows. Program A: If Program A is adopted, 200

people will be saved. Program B: If Program B is adopted, there is

1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.

Scenario 2

Imagine that the US is preparing for the outbreak of an unusual Asian disease, which is expected to kill 600 people.  Two alternative programs to combat the disease have been proposed.  Assume that the exact scientific estimates of the consequences of the programs are as follows. Program C:  If Program C is adopted 400

people will die. Program D:  If Program D is adopted there is

1/3 probability that nobody will die, and 2/3 probability that 600 people will die.

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Behavioral Pricing

Scenario 1Imagine that you are about to purchase a calculator for $20 when a friend tells you that the same calculator is on sale at another store five blocks away for $15. Would you go to the other store to buy the calculator?

Scenario 2Imagine that you are about to purchase a television for $620 when a friend tells you that the same television is on sale at another store five blocks away for $615. Would you go to the other store to buy the television?

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Behavioral Pricing

Scenario 1Imagine that you are about to purchase a desk. You are trying to decide whether to use a credit card or pay cash. The dealer tells you that the price of the desk is $550 if you use a credit card but that there is a $15 discount for cash.

Will you use a credit card or pay cash?

Scenario 2Imagine that you are about to purchase a desk. You are trying to decide whether to use a credit card or pay cash. The dealer tells you that the price of the desk is $535 if you pay cash but that there is a $15 surcharge if you use your credit card. Will you use a credit card or pay cash?

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Behavioral Pricing

Scenario 1Imagine that Sheri and Susan went to the track last weekend.

Sheri won two $50 bets Susan won one $100 bet.

Who do you think is happier?

Scenario 2Imagine that Bob and Bill went to the track last weekend.

Bob lost two $50 bets Bill lost one $100 bet.

Who do you think is more upset?

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Behavioral Pricing

Consumers make relative, not absolute judgments Value is defined in terms of gains and

losses, not final wealthThe pleasure from a gain is less

than the pain associated with an equivalent loss.

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Behavioral Pricing

GainsLosses

Value

Awarded the Nobel Prize in 2002

Prospect Theory

Pleasure

$100 $200

Pain

-$200 -$100

Implications

Our evaluation of a promotion depends on the base price (percentage change)To maximize pleasure one should:

Frame an offering in terms of a gains Segregate gains and integrate losses

Willingness to pay is affected by the perceived fairness of the transaction

Are All Customers Created Equal?

Should Paradise Parks institute a preferred guest card to supplement its revenues?How might this new pricing strategy impact the experience for its guests?Are there other alternatives that can help to achieve the objective of increasing revenues?What would you recommend that they do?

Assignment

Prepare for your team presentation!