MKT558:PRICING STRATEGIESProfessorBaojunJiang

Segmentationandpricediscrimination Rationaleforpricediscrimination(segmentedpricing) Pricemetricsandpricefences Typesandmethodsofpricediscrimination

REASON FOR SEGMENTED PRICING

2

High

Low

WTP

Segment Size

A B C D

Setting price here

leaves money on the table for these customers and communicates that value does not have to be paid for

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2

and misses growth opportunities by pricing these customers out of the market

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3Quantity

MC

Demand

MR

P*

Profit

Lost OpportunityDeadweight Loss

Charging a single price when facing a downward-sloping demand curve leaves two areas of profit opportunity untapped.

Price Consumer SurplusMoney Left on the Table

PRICE DISCRIMINATION (OR SEGMENTED PRICING)

FirstDegreeo Consumerspaytheir(maximum)WTPo Companyextractsallconsumersurplus

SecondDegree: customersselfselectdifferentpricepointso Sellersofferthesamesetofproductandpricingoptionstoall

customers(passiveprograms)o Pricecustomizationisachievedthroughthecustomersownchoices

ThirdDegree: sellersselectthepricepointsfordifferentcustomersorsegmentso Thefirmattemptstopursuedifferentpricesfordifferentcustomerso Requiresactive(versuspassive)programstoidentifycustomer

segmentsandrealizeongoingpricecustomization4

PRICE METRICS AND PRICE FENCES

Pricemetricsaretheunitstowhichthepriceisapplied. Goodpricemetricsshould

o trackwithdifferencesinvalueacrosssegmentso trackwithdifferencesincosttoserveo beeasilymeasurableandenforceableo createfavorablepositioningversuscompetitiono alignwithhowbuyersexperiencevalueinuse

Examples? Pricefencesareameanstopricediscrimination(chargedifferentcustomersdifferentprices)

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BY QUANTITY

Largequantitybuyersareusuallymorepricesensitive volumediscount orderdiscount stepdiscount

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BY PRODUCT

Someconsumerswantuniquefeatureandarelesspricesensitiveo productlinedifferentiationatthesametime

Horizontaldimension(taste) Verticaldimension(quality)

o introducedifferentversionsatdifferenttime Key

o Understandconsumerneedstosortconsumerso Buildpricefences

Method1:cutpriceofhighendversiontoensurehighvaluecustomersbuyhighend

Method2:Damageyourlowendversionenoughtomakeitunattractivetothehighvaluecustomers

o Pricedifferencecanbemuchhigherthancostdifference Sometimeslowerqualityversionmayevencostmore

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EXAMPLE:BUILDING FENCESProblemfacingIntelwhenitintroduced486chip(twotypesofearlyadopters) E,G(50%ofeachtype),Eiswillingtopaymoreandperformsalotofmathcalculations

WTP Buyer Revenue$1000 E $1000$800 E&G $1600

HowshouldIntelpricethe486chip?

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BUNDLING

Differentbundlesorunbundledproductsfordifferentsegments

Reasonsforbundling Complementarityindemand Complementarityinsupply Extendingmonopolypowerinoneproducttoinfluencesalesintheother

Negativelycorrelatedvaluationsacrosssegments

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BUNDLING EXAMPLE

FirmMownsproductsWandE.FirmFownsproductP.Variablecostforallproducts=0.001Question:WhatmighthappentofirmF?

Adam Bob CindyOptimal

Price ProfitW 100 50 25E 25 100 50P 50 25 100

V(W+E) 125 150 75V(all) 175 175 175

BY CONSUMERS

SegmentationbasedonobservableconsumercharacteristicsthatsignalorarecorrelatedwithconsumersWTP

Key:selectsegmentationvariablesthato separateconsumersintogroupswithdifferentWTPo areeasilyobservablewithouthavingtoincurhighcostso arenotsociallysensitiveo Canbesmartwaytoinduceconsumerstovolunteerobjective

information

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BY PURCHASE LOCATION

ConsumersatdifferentpurchaselocationsmayhavedifferentWTPo multipleoffices/storesindifferentlocationso examples

Key:selectsegmentationvariablesthatensureo differentsegmentspurchaseatdifferentlocationso highshipping(transaction)costtopreventarbitrage

Example:Pricingbulkyindustrialproducts(e.g.steelorcoal)

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BY TIME OF PURCHASE

Chargedifferentpricesbecausecostandpricesensitivityaredifferentatdifferenttimeso peakloadpricing:designedtoredistributeusagefrompeaktime

tooffpeaktime(costbased)o yieldmanagement:pricingseatsatdiscountweeksbeforeaflight

andstillhaveenoughseatslefttoserveitsbestcustomersatfullfare?(costandcustomerbased)

o Prioritypricingorskimmingpricingfornewproduct Key

o avoidresale nontransferableairlinetickets

o justifiedbycostdifference(tomakeitseemfairtoconsumers)

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TAKEAWAY FROM THIS LECTURE

Pricediscriminationcansignificantlyincreasesprofit.Itmayreflecto Differentconsumerwillingnesstopayo Differentcostofservingconsumero Intentionoflockinfuturesalestowincompetition

Buildfencesforpricediscriminationo Byquantityo Byproductorbundleso Byconsumero Bypurchaselocationo Bytimeofpurchase

Paycloseattentiontoarbitrage,competition,&legalissues14

NEXT SESSION

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EVC,WTP,andValuebasedPricing Economicvaluetothecustomer Factorsinfluencingactualwillingnesstopay ValuebasedpricingandEVCanalysis