module 7 pricing. objective for module 7 gain a sound understanding of the psychological effects of...
TRANSCRIPT
Objective for Module 7Objective for Module 7Gain a sound understanding of the Gain a sound understanding of the psychological effects of pricing strategies. psychological effects of pricing strategies.
Differentiate between the economic and Differentiate between the economic and behavioral approaches to pricing. behavioral approaches to pricing.
Know the unique characteristics of services Know the unique characteristics of services and the implications of such for pricing. and the implications of such for pricing.
Understand the relationship between pricing, Understand the relationship between pricing, demand, and consumption. demand, and consumption.
How does pricing strategy add How does pricing strategy add value to the customer? value to the customer?
Zeithaml’s Four Value DefinitionsZeithaml’s Four Value Definitions::
Value is low price.Value is low price.
Value is whatever I want in a product. Value is whatever I want in a product.
Value is the quality I get for the price I pay.Value is the quality I get for the price I pay.
Value is what I get for what I give. Value is what I get for what I give.
The money or other considerations The money or other considerations (including other goods and services) (including other goods and services) exchanged for the price of ownership or exchanged for the price of ownership or use of a good or service.use of a good or service.
What is price?
Numerous factors to consider when trying to set the optimal price. Economic
•traditional and more well-known•“How good a deal am I getting?”•Consumer’s incentive to purchase = customer’s max price – actual price. •Consumers buy when this incentive to buy > 0.
The Psychology of Pricing: The Psychology of Pricing: Good Deal vs. Fair DealGood Deal vs. Fair Deal
Behavioral•AKA psychological variables•Consumer’s willingness to pay•“How fair a deal am I getting?” •Consumer’s incentive to purchase = perceived benefit – perceived costs.•Consumers buy when this incentive to buy > 0.
The Psychology of Pricing: The Psychology of Pricing: Good Deal vs. Fair DealGood Deal vs. Fair Deal
Lying on a beach, hot day.Would love a cold bottle of favorite beer (insert
PBR/Keystone/Nattie Light here)Friend goes to find a restroom and offers to bring you
a beer. Only outlet near is a rundown grocery store. He asks how much you are willing to spend.
The “Beer” ScenarioThe “Beer” Scenario
in both scenarios, the ultimate consumption is identical – the same beer is consumed on the same beach.
no atmosphere from the fancy resort or the run-down grocery store is being consumed by the beer drinker to justify the different prices.
Economic FactorsEconomic Factors
1.Willingness to pay is impacted by relative incentives
(Sony scenario).
Consumers will consider both absolute economic
utility (customer’s max price – actual price) as well
as relative incentive (customer’s max price – actual
price)/(actual price).
The psychological utility of a fixed amount of money
is relative.
Behavioral HypothesesBehavioral Hypotheses
2.Willingness to pay is impacted by reference price
(Playoff scenario).
Consumers will consider both absolute economic
utility as well as consistency between actual price
and a reference price.
Behavioral HypothesesBehavioral Hypotheses
3.Willingness to pay is impacted by cost of goods
sold.
Consumers will consider both absolute economic
utility as well as that of the firm.
Consumers are concerned about a firm’s motive to
sell.
Behavioral HypothesesBehavioral Hypotheses
4.Perceptions of fairness vary across product
categories.
Degree to which a consumer will rely on absolute
economic utility depends on product category.
Behavioral HypothesesBehavioral Hypotheses
Capture and Communicate Value Capture and Communicate Value in the Pricing of Servicesin the Pricing of Services
Berry and YadavBerry and Yadav
The Four I’s of ServicesThe Four I’s of Services IntangibilityIntangibility InconsistencyInconsistency InseparabilityInseparability InventoryInventory
The Uniqueness of Services
When the service provider is When the service provider is available but there is no demand.available but there is no demand.
When the service provider is When the service provider is available but there is no demand.available but there is no demand.
Idle Production Capacity
Clearly relate the price that customers pay to
the value that they receive.
Key To Services PricingKey To Services Pricing
Provides value by recognizing and reducing
customers’ perceptions of uncertainty, which
the intangible nature of service magnifies. This
can be implemented as: service guarantees benefit-driven pricing flat-rate pricing
Satisfaction-based PricingSatisfaction-based Pricing
Provides value by encouraging long-term
relationships with the company that customers
view as beneficial. This can be implemented
as: long-term contracts price bundling
Relationship PricingRelationship Pricing
Provides value by sharing with customers the
cost savings that the company has achieved by
understanding, managing, and reducing the
costs of providing the service. This can be
implemented as: cost-leader pricing
Efficiency PricingEfficiency Pricing
Pricing and the Psychology Pricing and the Psychology of Consumptionof Consumption
Gourville and SomanGourville and Soman
The Psychology of Consumption The Psychology of Consumption
Higher consumption means higher salesHigher consumption means higher sales
Awareness of costs drives consumptionAwareness of costs drives consumption
Pricing (nature of payment) drives Pricing (nature of payment) drives perceptions of costsperceptions of costs
Strategic Pricing Issues Strategic Pricing Issues
Timing – Payment madeTiming – Payment made Before point of consumption.Before point of consumption. At point of consumption.At point of consumption. After point of consumption.After point of consumption.
Price BundlingPrice Bundling
Linking Price and Consumption Linking Price and Consumption
Practice yield managementPractice yield management
Stagger payments to smooth consumptionStagger payments to smooth consumption
Time payments to maximize consumption.Time payments to maximize consumption.
Psychologically link payments to benefits.Psychologically link payments to benefits.
Reduce consumption.Reduce consumption.