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Review Skim, Penetration and Neutral pricing strategy Finding Optimal Price(s) using Solver.

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Presentation on theme: "Review Skim, Penetration and Neutral pricing strategy Finding Optimal Price(s) using Solver."— Presentation transcript:

1 Review Skim, Penetration and Neutral pricing strategy Finding Optimal Price(s) using Solver

2 Determinants of Price Sensitivity The Reference Price Effect The Difficult Comparison Effect The Switching Cost Effect The Price-Quality Effect The Expenditure Effect The End-Benefit Effect The Fairness Effect The Framing Effect The Shared-Cost Effect

3 Price Sensitivity Illustration For each of the following purchase decisions, what factors are likely to affect the consumer's price sensitivity? A diamond engagement ring Automobile repairs Which university to attend A company car Text books Health insurance plan

4 Price Sensitivity Questions What can a company do to decrease its customer's price sensitivity? Would all of the company's customers be likely to react in the same way?

5 Price Sensitivity Questions Would a company ever want to do anything to increase its customers' price sensitivity? Why? What steps might it take?

6 Price Sensitivity Questions Which of the following statements are always true, sometimes true, never true? Why? Price elasticity is generally the same for all brands in a product category. Advertising increases price sensitivity. As a product category matures, the consumers become more price sensitive. Each consumer has different price sensitivities for different products.

7 Price Sensitivity Questions The gasoline service stations in Rochester, New York convinced the City Council to ban signs displaying gasoline prices Why would they want to do this? What effect do you think this law had on gasoline prices? Why?

8 Price Sensitivity Questions Despite the fact that rental rates for commercial space and labor costs are generally higher in big cities than in small towns, the prices of many products--such as stereo equipment and clothing--are higher in small towns than in large cities.

9 Price Sensitivity Questions Many local rental car agencies rent late model cars at substantially lower prices than national companies such as Hertz and Avis. Despite their higher prices, the national companies still retain most of the market Explain why most renters patronize the national car rental companies despite their higher prices. How have the national companies encouraged this price insensitivity? If you were a small, local company, what factors would you look for to identify the price-sensitive segment of renters likely to be attracted to your lower price? If you were a small company trying to become national, how might you overcome the low price sensitivity of customers to induce them to try your cars and evaluate the quality of your service?

10 Price Promotion

11 Various Sales Promotion Techniques Point of purchase SweepstakesCoupon and price promotion Advertisement

12 A Few Facts about Promotions Price promotion effect is much stronger than price effect. Deals are more effective for new brands Consumers wait for deals

13 A Few Facts about Promotions Marginal return of “Sales” sign is diminishing. Too-frequent price promotions train consumers to be price sensitive Too frequent sales can cast doubt on regular prices. Deals are not cures for generally “sick” products Consumers wait for deals.

14 Timing of Price Promotion Suppose that you are running a local mountain bike store and knows that you are looking at two types of customers. 10% are casual shoppers, who are willing to pay $3,000 for the bike. Yet they are happy to pay a discount price. Casual shopper only shops on Saturday & Sunday. 90% are deal seekers, who are only willing to pay $300 for the bike. Deal seekers check out the stores for prices 7 days a week. Your goal is to maximize the overall profit.

15 How many price levels to use? What are the price levels? When do you want to do the sale? What will the total profit under the optimal pricing strategy?

16 Which Day to Do Sale? MondayTuesdayWednesdayThursdayFridaySaturdaySunday Sale? Deal seekers Casual shoppers

17 Suppose that you are running an online mountain bike store and knows that you are looking at two types of customers. 10% are casual shoppers, who are willing to pay $3,000 for the bike. Yet they are happy to see a discount price. Casual shopper shop online with equal probability in either of the 7 days. 90% are deal seekers, who are only willing to pay $300 for the bike. Deal seekers are online looking for deals 7 days a week. Your goal is to maximize the overall profit.

18 How many price levels to use? What are the price levels? When do you want to do the sale? What will the total profit under the optimal pricing strategy?

19 MondayTuesdayWednesdayThursdayFridaySaturdaySunday Probability of sale Deal seekers Casual shoppers

20 Forms of Price Promotion 1. Special Package: price incentive to induce trial offer in a form that minimize initial outlay Criterion benefit the end user, not distributor's margin end user perceive price cut as a special offer to first time buyer, not repeat buyers

21 Forms of Price Promotion 2. Free sample/sampling Good for products that are frequently purchased, high margin, benefit can be realized after one usage Soaps, cigar, software Advantages Induce trial quickly and broadly 70% gain rate

22 Forms of Price Promotion 3. Coupon Advantages Most popular Go to ultimate customer, maintain price image, can be directed to first time buyers Disadvantages Inconvenient, costly, retailer fraudulent Fact: about 25% of coupon redeemed do not have purchase ($250M)

23 Forms of Price Promotion 4. Rebate Advantages avoid coupon counterfeiting and fraudulent redemption by retailers limit the offer to one per family lower administration cost multiple products: help develop a list a deal prone consumers many consumers fail to redeem it

24 Forms of Price Promotion 5. Reward program 6. Refund 7. Buy-now-pay-later 8. Price matching 9. be creative!!!

25 Next Lecture Demand curve and price elasticity


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