1. 12-1 Pricing: Where psychology meets economics Tonight’s GOALS: you could explain how to: Use behavioral research to set an initial price for a new product (211-213). And we’ll practice. Reduce the price elasticity of a product (214) and consider experience curve pricing for a new manufactured product (215-216) Charge some buyers less without cutting a price (222-224) Respond to competition without cutting a price (226)

2. 12-2 Research tells us that prices are perceived in context. So to maximize profit, realize that: Potential buyers are judging whether your price is one that their company or they as consumers are willing to pay. They will, consciously or not, employ: reference prices price-quality inferences price cues

3. 12-3 Factors Leading to Less Price Sensitivity Expenditure is small portion of income, or small compared to total cost of product. Others pay part of the purchase price. The cost of switching suppliers is high. It’s hard to compare suppliers. Failing to get the expected benefits will be costly The product is a small fraction of the cost to obtain an important benefit. Price communicates quality to buyers. The price fits within buyer perceptions of “fair.”

4. 12-4 Let’s Price CocoaVia bars Product has plant sterols and flavanols It will be placed in the health food aisles in the supermarket 2 bars, 1.56 oz., 100 calories each. Package holds five.

5. 12-5 Let’s make a product less price elastic. Choose one marketed to organizations In plain language….when you raise your price by a given percentage, demand will not decrease by as large a percentage. That means demand is “price inelastic.” Worth considering – does that mean when you cut your price by that same percentage, demand will not increase by as large a percentage? Back to the slide that answers the “it depends” question.

6. 12-6 When might we consider “experience curve” pricing? The issue is introducing a new product at a high price --- “skimming” – or introducing it at a low price – “penetration pricing.” Skimming boosts margin, but presumably lowers volume, all things equal Penetration pricing makes better sense if the idea of experience curve pricing may apply to our new product. Then our objective will be high volume, quickly.

7. 12-7 What happens to costs as we have produced more?

8. 12-8 How do you reduce the cost a customer pays without cutting a price? We think price discrimination is sensible: Everybody doesn’t need to pay the same price. Consider: Geographic differences Promotional pricing Pricing differently based on group, form of product, channel, time …. The relevant “will this work?” answers are on p. 224: “price discrimination works when….”

9. 12-9 If you are a brand leader, matching competitive price cuts is your LAST choice See Figure 12.4 on pp 226-227. Note how it sequences the decision process: Maintain price; consider how to add value Not working? Maybe buy a rival Or…set up a new competitor that’s your own low-price fighter line Or…? Notice that “match the price cut” is not on this list.