Presentation is loading. Please wait.

Presentation is loading. Please wait.

Pricing and Revenue Management (c) Stowe Shoemaker, Ph.D.

Similar presentations


Presentation on theme: "Pricing and Revenue Management (c) Stowe Shoemaker, Ph.D."— Presentation transcript:

1 Pricing and Revenue Management (c) Stowe Shoemaker, Ph.D

2 Les Miserables The duty of the innkeeper is to sell to the first comer, food, rest, light, fire, dirty linen, servants, fleas, and smiles; to charge for the open window, the closed window, the chimney corner, the sofa, the chair, the stool, the bench, the feather bed, the mattress, and the straw bed; to know how much the mirror is worn and to tax that; and by five hundred thousand devils, to make the traveler pay for everything, even the fleas that is dog eats. (c) Stowe Shoemaker, Ph.D

3 Objective of this section Understand steps to better pricing Understand Competitive Value Analysis Review basics of revenue management Understand price customization Understand Value (c) Stowe Shoemaker, Ph.D

4 The Challenge of Pricing Taxi (c) Stowe Shoemaker, Ph.D

5 “There is no easy way to find out what the actual true price of any car is. Oh sure, there is a “sticker price,” but only a very naïve fungal creature just arrived from a distant galaxy would dream of paying this. In fact, federal law now requires that the following statement appear directly under the sticker price: WARNING TO STUPID PEOPLE DO NOT PAY THIS AMOUNT -- Dave Barry (c) Stowe Shoemaker, Ph.D

6 60.3% claimed they definitely would ask about the room rate the next time they made a reservation 35.7% claimed they would definitely check rates at other properties the next time they planned to visit this hotel Assume that you go to make a reservation at the luxury hotel you are loyal to and you find out that they are charging you $50 per night more than they usually do because they have only a few rooms left. Please answer each of the questions based on this knowledge. (c) Stowe Shoemaker, Ph.D

7 Steps to Better Pricing 1.Assess what value your customers place on a product or service -How to create value -What is the economic value of this product or service to customers -Case study on Coca-Cola 2.Look for variation in the way customers value the product -Do customers vary in their intensity of use -Do customers use the product differently -Does product performance matter more to some customers, even if the application is the same (c) Stowe Shoemaker, Ph.D

8 Steps to Better Pricing 2.Look for variation in the way customers value the product - continued -How do differences in both perceived value and non value factors influence price sensitivity and divide customers into market segments -How can members of different segments be identified prior to purchase -How can fences between segments be established -How can the firm avoid violating legal constraints (c) Stowe Shoemaker, Ph.D

9 Steps to Better Pricing 3.Assess customers’ price sensitivity - How could an effective marketing and positioning strategy influence the customers’ willingness to pay -Market research techniques using Excel -Behavioral aspects of pricing 4. Identify an optimal pricing structure -Bundle pricing (c) Stowe Shoemaker, Ph.D

10 Steps to Better Pricing 5.Consider competitors reactions -Who are key current and potential competitors -If competitors are currently in this market, what actual transactional prices do they charge -Given competitors’ past behavior, personalities, and organization structures, what is their goal in pricing (c) Stowe Shoemaker, Ph.D

11 Steps to Better Pricing 5.Consider competitors reactions - continued -What are competitors’ strengths and weaknesses relative to the firm -How might a firm use information to influence competitors’ behavior in ways that would make its goals more achievable or profitable (c) Stowe Shoemaker, Ph.D

12 Steps to Better Pricing 6.Monitor prices realized at the transaction level - pricing across different channels 7.Assess customers’ emotional response 8.Analyze whether the returns are worth the cost to serve (c) Stowe Shoemaker, Ph.D

13 Steps to Better Pricing 9.Understand costs What is the incremental variable cost of sales At what levels of output will additional expenditures on semi-fixed costs be required, and how much will they be What are the avoidable (not yet sunk) fixed costs involved to offer this product at the proposed price (c) Stowe Shoemaker, Ph.D

14 Steps to Better Pricing 10.Understand Supply Cost structure Capacity utilization Product perishability Extent of product differentiation Number and diversity of competitors Impact of sales volume on cost (c) Stowe Shoemaker, Ph.D

15 Steps to Better Pricing 11.Understand Demand Price sensitivity of selective demand Efficiency of price shopping Degree of brand loyalty Industry growth rate Buyer concentration Complementary product (c) Stowe Shoemaker, Ph.D

16 Steps to Better Pricing 12.Understand Distribution Channels (c) Stowe Shoemaker, Ph.D

17 Competitor Analysis and Positioning: Key to Pricing

18 (c) Stowe Shoemaker, Ph.D The competitive advantages and disadvantages which are shown in the matrix of competitive advantages can be condensed into one single index, the index of competitive strength. All relative performances of the product on the individual factors are weighted with their importance and summed up. Index of Competitive Strength

19 (c) Stowe Shoemaker, Ph.D Example: Importance Question Next, please think for a moment about the reason for visiting a specific hotel in Las Vegas for gambling. Please tell me how important each reason is for you in your decision to visit one specific property over another. Please use a 1 to 10 scale, where a “1” means the reason is not at all important and a “10” means the reason is very important in your decision to choose one establishment over another for gambling. You may use any number on this 1 to 10 scale. [Ask questions in random order] How important is…_______________…in your decision to choose one place to visit over another? –It is a place my friends like to go

20 (c) Stowe Shoemaker, Ph.D Example: Attitude Question Now I am going to read you a list of features that may or may not describe some of the hotels in the Las Vegas area. We’ll use a 1 to 10 scale, where a 1 means it “does not describe the hotel at all” and a 10 means “describes the hotel perfectly”. If you have not been to the hotel personally, please base your answers on what you have heard, or what you believe to be true. [Ask questions in random order] How well does this feature describe…(brand to be rated)? –It is a place my friends like to go

21 (c) Stowe Shoemaker, Ph.D Calculation of Competitive Index 1.Sum the importance ratings for all features and multiply by the number of scale points. (The numbers are in column A in Table on next page) 2.For each attribute, multiple average importance x average performance. Answers in Column C 3.Sum all numbers in column C 4.Calculate the CSI as -- Total C/Total in A 5.Repeat steps for competitor's: see columns D and E

22 (c) Stowe Shoemaker, Ph.D Calculation of Competitive Index

23 (c) Stowe Shoemaker, Ph.D Relative Performance Example: Casino Level of Importance high low Brand Feel Safe Good Entertainment Value of Promotions Slot Club Non Smoking Friendly Staff Service Package Price Matrix of Competitive Advantages

24 (c) Stowe Shoemaker, Ph.D Steps to Developing a Positioning Strategy 1.Identify the competitors –From customer’s point of view –Different competitors in different segments

25 (c) Stowe Shoemaker, Ph.D Best Way to Define True Competitors Ask 50 – 100 customers at check-in, “If you did not stay here tonight, where would you stay?” Those hotels who, if they took a pricing action, would force you to take a pricing action Where do you currently “walk” guests?

26 (c) Stowe Shoemaker, Ph.D Best Way to Define True Competitors Based upon a definition of the core customer; different competitors for different segments Avoid emotional opinions

27 (c) Stowe Shoemaker, Ph.D Steps to Developing a Positioning Strategy 2.Determine how the competitors are perceived and evaluated 3.Determine the competitors’ positions Critical to also have reference points for data analysis

28 (c) Stowe Shoemaker, Ph.D 1.Identify competitive set Upper tier: member of competitive market with a rate premium above our hotel Direct tier: member of our competitive market, with a rate price point approximately “equal” to our hotel Lower tier: member of our competitive market, with a rate price point below our hotel

29 (c) Stowe Shoemaker, Ph.D Calculate for your three core customers in all three competitive tiers: a total of nine analysis Three core customers Business transient Pleasure transient Group customer Thee competitive tiers Upper tier Direct tier Lower tier

30 (c) Stowe Shoemaker, Ph.D 2.Conduct competitive pricing analysis Shops for –Local hotel reservations office –Hotel 800 number –GDS system –Internet Shop for leisure peak, leisure non-peak, business peak, business non-peak, group peak, and group non-peak

31 (c) Stowe Shoemaker, Ph.D 3.Use chart to plot each competitors’ overall value –Horizontal axis: plot each competitors’ overall value assessment –Vertical axis: plot each competitors lowest available retail rate obtained via blind shop –Center axis: your hotel with rate equal to lowest available retail price point

32 (c) Stowe Shoemaker, Ph.D

33 $179 $185 $189 $180 $159 $155 $140 59.97 Rio 47.91 Bally 63.92 Boulder 53.16 Caesar 43.41 Circus Circus 52.07 Excalibur 54.3 Fiesta

34 Creating Loyalty (44) Process Value (Added and Recovery) Communication Fluid Exit (c) Stowe Shoemaker, Ph.D

35 Value-Based Pricing Involves choosing a price after developing estimates of market demand based on how potential customers perceive the value of the product or service. Can satisfy diverse product strategies, including, for example, market penetration or profit maximization. Should be the preferred pricing methodology (c) Stowe Shoemaker, Ph.D

36 Question: Where Would You Buy Gas? Station A: Sells gasoline for $ 2.30 per gallon, and gives a $ 0.10 discount if the buyer pays with cash. Station B:Sells gasoline for $ 2.20 per gallon, and charges a $ 0.10 surcharge if the buyer pays with a credit card. (c) Stowe Shoemaker, Ph.D

37 Examples Which do you choose? A____ or B____ –A. Receive $50 –B. 55% chance of receiving $100; 45% chance of earning nothing (c) Stowe Shoemaker, Ph.D

38 Examples Which do you choose? C____ or D____ –C. Loose $20 –D. 20% chance of loosing $100; 80% chance of losing nothing (c) Stowe Shoemaker, Ph.D

39 Answer to Previous Question Pertains to Prospect Theory (c) Stowe Shoemaker, Ph.D

40 Daniel Kahneman Toasting Noble Prize (c) Stowe Shoemaker, Ph.D

41 Prospect Theory: Basic Idea Value is associated not with actual levels of consumption, but with anticipated changes in well being Buyer assesses prospective decision outcomes (prospects) by mentally categorizing them as either gains or losses relative to reference point (c) Stowe Shoemaker, Ph.D

42 Explanation Station A sets reference point at $2.30 and then rewards buyers who pay cash; that is; a gain relative to the reference point; Station B first establishes a reference point at $2.20 and then penalizes buyers who use credit cards; a loss relative to the reference point This is in contrast to economic theory that predicts that gains and losses of equal size are valued the same (c) Stowe Shoemaker, Ph.D

43 Losses Gains Positive Value Negative Value Reference Point (state of well being) Station A ( $ 2.30 – 0.10) Station B: ( $ 2.20 +.10) Value Function 1.6 1.0 (c) Stowe Shoemaker, Ph.D

44 Examples Which do you choose? A____ or B____ –A. Receive $50 –B. 55% chance of receiving $100; 45% chance of earning nothing Which do you choose? C____ or D____ –C. Loose $20 –D. 20% chance of loosing $100; 80 chance of loosing nothing (c) Stowe Shoemaker, Ph.D

45 Answer If you chose A in Question 1, then you should choose C in Question 2 If you chose B in Question 1, then you should choose D in Question 2 How many had a reversal? (c) Stowe Shoemaker, Ph.D

46 Rationale for Answers Prospect theory states that people are risk adverse (e.g., conservative) when considering gains; in contrast, more naturally inclined to risk a loss than to pay even the expected value of avoiding it. (c) Stowe Shoemaker, Ph.D

47 Losses Gains Positive Value Negative Value Reference Point (state of well being) Value Function (c) Stowe Shoemaker, Ph.D

48 Economic Theory versus Prospect Theory Economic Theory –Gains and losses of equal size treated the same (e.g., £100 gain = to £100 loss) Prospect Theory –loss judged more painful than a gain of equal value (e.g., loss of £100 more painful than a gain of £100) (c) Stowe Shoemaker, Ph.D

49 Economic Theory versus Prospect Theory Economic Theory –People are consistent in their decision making Prospect Theory If people perceive they are in the gain domain, they will act conservatively If people are in the loss domain, they will tend to take more risks (c) Stowe Shoemaker, Ph.D

50 Economic Theory versus Prospect Theory Economic –Expected utility of uncertain outcome is weighted by its probability Prospect –Expected utility of uncertain outcome is multiplied by a decision weight  (p) where  : –1. Impossible events are discarded  (0)=0 –2. Low probabilities are over weighted while moderate and high probabilities are under weighted (e.g., odds of being involved in an airline crash versus car accident) (c) Stowe Shoemaker, Ph.D

51 Prospect Theory – Implications Increasingly larger gains are incrementally less pleasurable (10 to 20 great; 110 to 120 not as great) Increasingly larger losses are incrementally less painful (and smaller losses are almost as painful as slightly larger losses) The displeasure associated with losing a certain amount (e.g., of money) is generally greater than the pleasure associated with winning the same amount (e.g., of money) (c) Stowe Shoemaker, Ph.D

52 Implications Once consumers have agreed to spend a certain amount of money, getting to pay more is easier than one would think Goal for is to move the reference point beyond “price” to something that can gain a competitive advantage – e.g., brand, type of ingredients, service, etc. (c) Stowe Shoemaker, Ph.D

53 Losses Gains Positive Value Negative Value Reference Point (state of well being) Value Function (c) Stowe Shoemaker, Ph.D

54 Prospect Theory Leads to Framing (c) Stowe Shoemaker, Ph.D

55 Framing Buyers frequently form frames of reference when making buying decisions, and these frames of reference in turn influence how buyers respond to price and product information. (c) Stowe Shoemaker, Ph.D

56 Goal of Understanding Frames of Reference 1. Change the relationship between what customers perceive they pay and what they perceive they get in return. And manage this relationship (c) Stowe Shoemaker, Ph.D

57 Example -1 Change the relationship between what customers perceive they pay and what they perceive they get in return. Option 1: Oliva Cameroon Cigar for $15 Option 2: Oliva Cameroon (Figurado, 6 ½ inch x 60 ring); made by Oliva Cigar Co. – Nicaragua The Authentic Cameroon Wrapper gives this boxed pressed figurado a pronounced aroma of nuts, with hints of cocoa and coffee. It is medium-bodied, but not exceedingly strong. $15 (c) Stowe Shoemaker, Ph.D

58 Example-2 Change the relationship between what customers perceive they pay and what they perceive they get in return. Option 1: Selection of teas from wooden box $1.95 Option 2: Fresh pot of Lapsang Souchong black- smoked tea: From the Fujian province of China, this black tea is full ancient history and flavor! Smoky smooth character is achieved through the smoking process over pine and oak fires. $3.95 (c) Stowe Shoemaker, Ph.D

59 Example-3 Change the relationship between what customers perceive they pay and what they perceive they get in return. Option 1: Our standard room for $240 Option 2: Or, an upgrade to superior from for only $15 more. How is a better way to write this? (c) Stowe Shoemaker, Ph.D

60 Example-4 Change the relationship between what customers perceive they pay and what they perceive they get in return. Research shows that a significant number of consumers DO place a value on the X brand; e.g., for a £10 premium 56% of business travelers and 38% leisure travelers are very likely to choose Brand A Goal is to concentrate not on the price, but the components of the brand that consumers desire Give customer choice (c) Stowe Shoemaker, Ph.D

61 Example-5 Change the relationship between what customers perceive they pay and what they perceive they get in return. Focus on the features of the menu item that are different from what consumer can buy at home; e.g., Kobe beef (c) Stowe Shoemaker, Ph.D

62 Ways To Frame Purchase Decisions 1.Structure transactions to reflect gains and avoid losses –Present price last after descriptions –endow potential buyers (c) Stowe Shoemaker, Ph.D

63 # 2 Change Way Frame Decisions (c) Stowe Shoemaker, Ph.D

64 Example 1 Let customer know the cost of not booking and paying now; that is, give the difference between current booking class and the next level up (c) Stowe Shoemaker, Ph.D

65 Examine How We Quote Rates We always quote low to high, which sets reference point low and the other prices a “loss” If we quote high price first, then other prices are a “gain” (c) Stowe Shoemaker, Ph.D

66 Example 2 Make it simple for customer to see options – and trade-offs (c) Stowe Shoemaker, Ph.D

67 This slide shows how prices change depending upon day of flight; key here is that customer sees the options and can make choices (c) Stowe Shoemaker, Ph.D

68 Figure 3 (c) Stowe Shoemaker, Ph.D

69

70

71 Note: departure and return are bundled Customers knows price but has to buy prepackaged schedule (c) Stowe Shoemaker, Ph.D

72 Customer chooses by schedule but does not know price (c) Stowe Shoemaker, Ph.D

73 Customer can easily get both price and schedule and therefore it is easy to make choice (c) Stowe Shoemaker, Ph.D

74 Example 3 Frame decision outcomes in terms of gains or losses –do not discuss benefits of buying the product, but discuss the consequences of not buying the product (c) Stowe Shoemaker, Ph.D

75 Example 4 Frame by Bundling Gains and Losses –un-bundle gains –bundle losses (c) Stowe Shoemaker, Ph.D

76 Frame by Un-bundle Gains Packages such as “London for Free” – use of free bundles gain; list all the components separately Ability to purchase upgrades by segment (e.g., seat on UK to USA different utility than seat on USA to UK) Check-in time; use of lounge (c) Stowe Shoemaker, Ph.D

77 Frame by bundle losses Should we quote rates that include all taxes and airport fees? What losses that can be bundled? (c) Stowe Shoemaker, Ph.D

78 Hotel Examples? (c) Stowe Shoemaker, Ph.D

79 Example of Research Study Undertaking Test Condition: Bundling Added: 1.Utilize proper opening dialogue 2.Listen to caller’s requests 3.Ask repeat guest question and determine reason for stay 4.Provide normal sales strategy 5.At time of purchase, ask the following: (c) Stowe Shoemaker, Ph.D

80 Example of Research Study Undertaking For an extra $15 we can offer an amenities package that includes: no phone access charge, 10 free local phone calls, free received faxes, free sent faxes, free internet access, one 3-minute call to call home (may call anywhere in the world). (c) Stowe Shoemaker, Ph.D

81 Examples of current research Test Condition: Willingness to Pay for Guaranteed Bed Type: At time of purchase, read the following: As you are probably aware, hotels only guarantee a room, they never guarantee what the bed type in the room will be. The reason for this pertains to the fact that the bed inventory is limited and fixed. Since guests arrive at different intervals, room assignments are made on a first come first serve basis. This means that the bed type you would like to have may not be available. For an extra $20 we can guarantee that no matter what time you arrive, the bed type you requested will be available. (c) Stowe Shoemaker, Ph.D

82 Examples of current research Test Condition: Willingness to Pay for Guaranteed Bed Type: Other test conditions: At what price would this guarantee service be so expensive that you would not consider purchasing this service? At what price would this guarantee service be expensive, but you still would consider purchasing this service? What price would you expect this hotel to charge for the guarantee of a bed type? (c) Stowe Shoemaker, Ph.D

83 Framing and Reference Price Formation (c) Stowe Shoemaker, Ph.D

84 Hotel Example: Would You Choose? Staying at the Venetian Hotel in Las Vegas for a vacation; Staying two nights; 3036 rooms Which Would You Choose? –A: Luxury suite room at $159 and then for an additional $30 you get guaranteed room on a high floor with a strip view –B: Luxury suite room with guaranteed room on a high floor for $189, or room for $30 less anywhere in the hotel (c) Stowe Shoemaker, Ph.D

85 Hotel Example Venetian Hotel in Las Vegas Manipulation –Quote $159 first (option A previous slide) –Quote $189 first (option B previous slide) Two Teams –Team 1: conversion 21.9%; calls 1813 –Team 2: conversion 21.2%; calls 1654 (c) Stowe Shoemaker, Ph.D

86 Hotel Example Upgrades: –$159 quoted first: 13.59% upgraded (option A) –$189 quoted first: 20.55% upgraded (option B) –Translates $31,878 extra revenue for the month to the bottom line (c) Stowe Shoemaker, Ph.D

87 Restaurant Study (c) Stowe Shoemaker, Ph.D

88 Study Design Eight different menus –Type of description Modest/Detailed –Number of items Three per category/Two per category –Prices High prices/Low prices 2323 (c) Stowe Shoemaker, Ph.D

89 Spinach and Feta Dip Modest Description: Spinach and Feta Cheese with Tomatoes and Pinenuts Detailed Description: Organic Spinach Sautéed in Garlic and Combined with Authentic Athenian Feta Cheese, Sun Ripened Yellow Tomatoes and Toasted Pinenuts (c) Stowe Shoemaker, Ph.D

90 Menu One: Detailed Menu Descriptions, High Price, 3 Choices Menu Two:Detailed Menu Descriptions, Low Price, 3 Choices Menu Three:Detailed Menu Descriptions, High Price, 2 Choices Menu Four:Detailed Menu Descriptions, Low Price, 2 Choices Menu Five:Modest Menu Description, High Price, 3 Choices Menu Six:Modest Menu Description, Low Price, 3 Choices Menu Seven: Modest Menu Description, High Price, 2 Choices Menu Eight:Modest Menu Description, Low Price, 2 Choices MENU DESIGN (c) Stowe Shoemaker, Ph.D

91 HypothesisTwo Items Each Menu Category Ho 1 X value (high price with detailed description) = X value (high price with modest description) Mean 4.74 4.26 p=.083 Ho 2 : X value (low price with detailed description) = X value (low price with modest description) Mean 4.99 4.74 P=.369 Ho 3 : X value (high price with detailed description) = X value (low price with detailed description) Mean 4.74 4.99 P=.315 Ho 4 : X value (high price with modest description) = X value (low price with modest description) Mean 4.26 4.74 p=.113 Ho 5 : X value (high price with detailed description) ≥ X value (low price with modest description) Mean 4.74 4.74 p=1.00 (c) Stowe Shoemaker, Ph.D

92 What Influence Buyers’ Reference Prices 1.Current Price Influences 2.Past Price Influences 3.Purchase Context Influences 4.Prices of similar items 5.Price considering cost of making item yourself (c) Stowe Shoemaker, Ph.D

93 1. Current Price Influences Product-Line Pricing –Adding a premium product to the product line may not necessarily result in overwhelming sales of the premium product itself. It does, however, enhance buyer’s perceptions of lower-priced products in the product line and influences low-end buyers to trade up to higher-priced items (c) Stowe Shoemaker, Ph.D

94 Product Line Pricing Example: Wine $38 $48 (c) Stowe Shoemaker, Ph.D

95 $38 $48 $58 Product Line Pricing Example: Wine (c) Stowe Shoemaker, Ph.D

96 Anchoring The idea is that when a person must make a judgment, he or she starts with an initial, approximate judgment - an “anchor.” This judgment gets the person ‘in the ball-park.” Then, in view of other considerations, the person arrives at a final judgment by adjusting away from that initial assessment (c) Stowe Shoemaker, Ph.D

97 Our top room is a Park Avenue Suite decorated with an elegant European accent. This suite is 900 Sq. Ft. The suite is designed with the business traveler in mind. Suites feature a separate parlor with a wet bar and refreshment center, an oversized working desk, 2 multi-line speaker phones with call waiting, voicemail, data-port, fax machines, Lodgenet Entertainment System with movies and CD Library. These rooms overlook 56 th street or the city view of 57 th street. The bedroom can be closed off from the living room. The king size bed includes five down pillows with satin-banded Egyptian cotton Pillowcases. Suites sell for $995.00. Position following second: Our 2 nd room type is the Metropolitan Suite. This suite is 700 Sq. Ft. Position following third: Our 3 rd room type is the Executive Suite. This suite is 600 Sq. Ft. (c) Stowe Shoemaker, Ph.D

98 Current Price Influences - continued Suggested Reference Prices –State a price charged previously –State a price charged by a competitor –State suggested retail price (c) Stowe Shoemaker, Ph.D

99 Example of item being tested If consumers are always told the normal rate, and then provided with a discount from that rate, they will remember the normal rate, not the discount rate. In addition, when the invoice is provided to the client at check-out, the normal price will be printed. At the end the discount will be subtracted. We should see a rise in "overall price value" compared to when customer only sees the price paid. (c) Stowe Shoemaker, Ph.D

100 Current Price Influences - continued Consider the following airline prices seen on Internet for round-trip London to Paris £ 310 Paris to Prague £ 288 Nice to Prague £ 289 London to Nice £ 310 Given above prices, answer following questions: 1. What price would you expect to pay to fly from London to Prague _____ 2. What is the most you would pay _____ 3.What is a fair price _____ (c) Stowe Shoemaker, Ph.D

101 2. Past Price Influences Past price paid has a particularly strong influence on the reference price because it is more likely to be recalled as a frame of reference than past prices that were observed in advertising (c) Stowe Shoemaker, Ph.D

102 2. Past Price Influences - continued Implications of Previous Slide –Numerous small price increases for frequently purchased items more likely to be accepted than are infrequent large increases –Need to always state actual price and discount from that; otherwise, low promotional prices can establish low reference prices for judging the value of later purchases (c) Stowe Shoemaker, Ph.D

103 3. Purchase Context Influences You are lying on the beach on a hot day. All you have to drink is warm water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite imported beer. A companion gets up to make a phone call and offers to bring back a beer. The only near by place where beer is sold is a small, run-down grocery store. He asks what the maximum price you are willing to pay. If the price is higher, he will not buy it. What price do you tell him? _____ (c) Stowe Shoemaker, Ph.D

104 3. Purchase Context Influences You are lying on the beach on a hot day. All you have to drink is warm water. For the last hour you have been thinking about how much you would enjoy a nice cold bottle of your favorite imported beer. A companion gets up to make a phone call and offers to bring back a beer. The only near by place where beer is sold is a resort hotel. He asks what the maximum price you are willing to pay. If the price is higher, he will not buy it. What price do you tell him? _____ (c) Stowe Shoemaker, Ph.D

105 3. Purchase Context Influences continued Use context as a frame of reference that makes the price seem fair or reasonable e.g., 8 hours tossing and turning trying to get comfortable, versus good night sleep e.g., a day at the office e.g., What is your time worth to drive versus to fly to airport that is not convenient? (c) Stowe Shoemaker, Ph.D

106 4. Prices of similar items (e.g., if consumers think there is no difference, then there is a problem) 5.Price considering cost of making it yourself (c) Stowe Shoemaker, Ph.D

107 Scenario A: You are a purchasing agent for a large organization. You have ordered for your own use a new electric typewriter with special features, which will cost £ 1,000. A friend discovers that the identical typewriter is available from another vendor for £ 600. Would you cancel the current order and switch to the other vendor? (Assume that canceling the current order and initiating a new one will take one of the purchasing clerks who works for you about one-half day. Assume that there are no other costs such as a loss of good will or delay in delivery.) Would you cancel the current order and switch to the other vendor? Yes _______No _________ 6. Price Differentials (c) Stowe Shoemaker, Ph.D

108 Scenario B: You are a purchasing agent for a large organization. You have ordered a new word processor with special features, which will cost £ 20,000. Your purchasing department discovers that the identical word processor is available from another vendor for £ 19,600. Would you cancel the current order and switch to the other vendor? (Assume that canceling the current order and initiating a new one will take one of the purchasing clerks who works for you about one-half day. Assume that there are no other costs such as a loss of good will or delay in delivery.) Would you cancel the current order and switch to the other vendor? Yes _______No _________ (c) Stowe Shoemaker, Ph.D

109 Scenario A the difference is 40%, whereas in Scenario B the difference is 2%, even though the absolute difference in both is £ 400 Implications –the perception of a price change depends on the percentage, not on the absolute difference –there is a threshold above and below a product’s price at which price changes are ignored (c) Stowe Shoemaker, Ph.D

110 When quoting rates, quote price differences instead of whole rate; e.g., $320 versus $290. For $30 less get…. (c) Stowe Shoemaker, Ph.D

111 7. Framing Price Differences Look at the two pairs of prices below and quickly answer the question: For which pair of prices is the lower price more of a bargain? Higher PriceLower Price First Pair$0.89$0.75 Second Pair$0.93$0.79 Your answer _____ (c) Stowe Shoemaker, Ph.D

112 Perceptions of Odd Price Endings –Buyers use left most digits in a price and round up to form a quick reference point to evaluate the actual price against. –Previous example: second pair seems to have better discount. (first pair: 8-7 = 1; second pair 9-7 = 2; if figure same in first column, then look at second column) In reality, difference is a greater percentage of the price in the first pair (18.6% vs. 17.7%) (c) Stowe Shoemaker, Ph.D

113 Objective of this section Understand steps to better pricing Understand Competitive Value Analysis Review basics of revenue management Understand price customization Understand Value (c) Stowe Shoemaker, Ph.D


Download ppt "Pricing and Revenue Management (c) Stowe Shoemaker, Ph.D."

Similar presentations


Ads by Google