pricing by preston mcafee

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Microsoft Confidential 2


Professional Experience • Microsoft, Chief Economist & CVP• Google, Research Director• Yahoo, Chief Economist

Economics Professor • UWO• UTexas • CalTech

• MIT • U of Chicago

Expert Testimony • Exxon-Mobil• BP-Arco • FTC v. Rambus

• Peoplesoft-Oracle • US Congress

Author & Editor • Articles: 100+ on Auctions, Pricing, Strategy, Antitrust, ML, Computational Advertising• Books: Competitive Solutions, Introduction to Economic Analysis• Editor: Am Econ Rev, JET, Econ Inquiry, TEAC

Market Design • Co-designer, U.S. Spectrum auction• Mexican spectrum, microwave auctions

Pricing strategy determines customer segmentationand price points


Engineering

EconomicsSales & Marketing

Engineering enables product features and generates core consumer valuations

Sales & Marketing goes to market, conveys value proposition to customer base


I. Pricing 101II. Monopoly PricingIII. Price DiscriminationIV. Psychology of PricingV. CompetitionVI. Dynamics


Pricing 101

“all phone prices are offered only with activation of a new line of service with verizonwireless, under the terms and conditions of selected service plan.”

“prices exclusive to t-mobile.com and valid only with new service activation.”


Pricing 101


Pricing 101


Pricing 101

Complex,Difficult,Inscrutable Offer

prices depend on customer characteristics

offer discounts to elastic (price sensitive) customersdiscounts offered on basis of factors correlated with price sensitivity


Monopoly Pricing


Monopoly Pricing

mcmcmcp 25.145

1

mcmcmcp 67.15.15.2

1

For different demand segments, typically want different pricesor price discrimination (AKA value-based pricing)


Price Discrimination

Mar 2005 July 2005 June 2006Large Business $289.99 $334.99 $294.95GSA/DOD $266.21 $334.99 $294.95Home $275.49 $267.99 $265.45Small Business $246.49 $267.99 $265.45



Part Number A 019 3405


Example “Damage” Pharmaceutical pricing • Same active in ingredients in veterinary and human meds, quality assurance only given for humans version 486SX, 487SX Chips • Disabled math co-processor IBM LaserPrinter E • Added chips to slow processing Sony 74, 60 minute mini-discs • Differ by instructions on disc Amazon “super saver” free shipping (7-10 days) • Hold the item in the warehouse for a few days

• Copied by many online retailers, price sensitive consumers willing to wait



IBM LaserPrinter 10L(4029-040) IBM LaserPrinter 5E(4029-010)

Added chips to slow processing




High: $59.95 (3x Low Price)

Low: $21.73(66% off High Price)


AWS Spot Market PricesWhen price spikes, VM evicted and work lost


http://www.oddee.com/item_96454.aspx

http://www.guns.com/2012/09/07/buy-diamond-get-free-rifle/




Types: Prices End in 9 • Helps customers convince themselves it’s worth buying

• Works best with luxury goods Anchoring • Establish a high a reference price (so lower price looks like a great deal) Present Bias (TCO) • Significantly discounting future costs (purchase price vs. TCO) Survivorship Bias • Discounting failures or missing observations

• Examples: Movie stars, pro athletes & tech startup entrepreneurs Consideration Sets • People use “consideration sets” to make decisions

• Offer three alternatives (GBB: good, better, best)• Branding to put product in consideration sets

Salient Attributes • Focus on most “important” factor and ignore the rest Shrouded Attributes • Neglect to read the fine print

Psychology


Psychology

• Value (and price) of storage is based several factors:


Psychology


Psychology

$ Per Millions StandardStorage InfrequentAccess AdditionalChargeReads $0.40 $1.00 +150%Writes $5.00 $10.00 +100%

2) Pricing info below is “buried” in pricing page1) AWS Access Fees:

Retrieval: same as monthly per GB price+ more fine print

Weekly Circulars


Grocery prices vary dramatically from week to weekWhy?Turkeys are cheapest when demand is highest

Competition

Grocery prices vary dramatically from week to weekWhy?Turkeys are cheapest when demand is highest

Weekly Circulars


Competition


Competition

Source: camelcamelcamel.com

Acer 24” Monitor$109.99

$179.99

Amazon Price


Acer 24” Monitor

Competition

Source: camelcamelcamel.com

Amazon Price3rd Party Price


Competition

2¢ difference is a 30% profit increase for retailer Ten cent differences common nearby


Competition

1

SeatsRemainingCustomersRemainingE*

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