1. 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. 1
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2. When to Price Promote? Mon Tue Wed Thur Fri Sat Sun Sale? Deal seekers
Casual shoppers 2
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3. Your goal is to maximize the overall profit.
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. 3
Dr. Yacheng Sun, UC Boulder

4. When to Price Promote? Mon Tue Wed Thur Fri Sat Sun Sale? Deal seekers
Casual shoppers 4
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5. Exam 1 Review 5 Dr. Yacheng Sun, UC Boulder Dr. Yacheng Sun UC Boulder

6. Price & Profit Profit = Total Revenue – Total Costs
= (Unit Price x Quantity Sold) – Total Costs
= (Unit Price x Quantity Sold) – Fixed Costs – Variable Costs
= (Unit Price x Quantity Sold) – Fixed Costs – (Unit Cost x Quantity Sold) 6
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Dr. Yacheng Sun UC Boulder 6

7. Example
Projected Costs and Revenues at Expected Sales = 1,000,000 units
Total
Direct Variable Costs $3,000,000
Direct Fixed Costs $4,000,000
Administrative Overhead $1,500,000
Full Cost $7,500,000
Revenue $10,000,000
Profit
$1,500,000 7
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8. Unit contribution, Margin and Markup
Unit contribution is the difference between the price and the variable cost
Margin: (Unit contribution)/(Unite Price)
Markup: (Unit contribution)/(Unite Cost) 8
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9. Margin Manufacturer’s margin Retailer’s margin Manufacturer Retailer
Consumer
Cost of sales: $1
Selling price: $1.50
Unit contribution: $.50
Margin: 33%
$1.50
$2.00
Cost of sales: $1.50
Selling price: $2.00
Margin: 25% 9
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10. Markup Manufacturer’s markup Retailer’s markup Manufacturer Retailer
Consumer
Cost of sales: $1
Unit contribution: $.50
Markup: 50%
$1.50
$2.00
Cost of sales: $1.50
Markup: 33% 10
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11. Relationship between Markup and Margin
1/Markup = (1/Margin) -1
A 25% markup = % margin
A 20% markup = % margin
A 25% margin = % markup
A 50% margin = % markup
Practice 11
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12. Psychological Aspects of Pricing
Perception Bias
Weber-Fechner Law
Status Quo Bias
Prospect Theory 12
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13. Shape of the Value Function (Prospect Theory)
#1 V(w) <V(x)<V(y)
#2 V(y)-V(x) <V(x)-V(w)
Reference point
Utility(+)
#3 V(x) <-V(-x)
Value function
V(x) -x
gains
losses w x y
V(-x)
Disutility(-) 13
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14. A Numerical Example What is the Utility for Option A?
Option B: Straight $799.99
What is the Utility for Option A?
Option A: $ and $200 mail-in rebate
What is the Utility for Option B? 14
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15. Aggregate multiple losses Separate multiple gains
Implications of PT
Aggregate multiple losses
Separate multiple gains
Separate small gain and big loss
Aggregate small loss and big gain 15
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16. Price consumer is willing to pay
Transaction Utility
Reference price
Price
Transaction Utility $0
Economic Value
For the consumer
Price consumer is willing to pay 16
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17. Formation of Reference Price
Purchase context
Cost
Current price
Past price
Advertised price 17
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18. Flanking Brands/Products18
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19. Alternative Approaches to Price
Product Led
Product
Price
Cost
Customers
Value
Customer Led
Customers
Products
Costs
Prices
Values
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Dr. Yacheng Sun UC Boulder 19

20. Savings gained from using a product/service offering
Defining VALUE
Use Value (Utility)
Savings gained from using a product/service offering
Monetary gain from using a product/service offering
Satisfaction received from using a product/service offering
Economic Value/Exchange Value
Value based on substitutes/alternatives in marketplace
Calculated using reference value and differentiation value 20
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21. Illustrating Value: Pricing of Market Research
market research helps to provide information and reduce uncertainty in decision making 21
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22. Calculation
1. Identify the status quo course of action when no market research is available, by calculating expected revenue and/or expected cost.
2. Identify the scenario in which market research can change the course of action and the associated odds.
3. Determine the gain conditional on that scenario.
4. Multiply the conditional gain and the probability for the occurrence of the scenario. 22
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23. Prob. of Success Value of MR 1.0 0.8 0.6 0.4 0.2 0.8 0.6 0.4 0.2 2323
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24. Techniques for Measuring Price Sensitivity
Variable Measured
Uncontrolled
Experimentally Controlled
Actual Purchases
• Historical Sales Data
• Panel Data
• Store Scanner Data
• In-store Experiments
• Laboratory purchase experiments
Preferences and Intentions
• Direct Questioning
• Buy-response Survey
• Depth Interview
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis 24
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25. Methods of Obtaining Data from respondents
Pair-wise evaluation
Rank-ordering product bundles
Evaluating products on a rating scale 25
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26. Conjoint Study Process
Stage 1 —Designing the conjoint study:
Step 1.1: Select attributes relevant to the product or service category,
Step 1.2: Select levels for each attribute, and
Step 1.3: Develop the product bundles to be evaluated.
Stage 2 —Obtaining data from a sample of respondents:
Step 2.1: Design a data-collection procedure, and
Step 2.2: Select a computation method for obtaining part-worth functions.
Stage 3 —Evaluating product design options:
Step 3.1: Segment customers based on their part-worth functions,
Step 3.2: Design market simulations, and
Step 3.3: Select choice rule. 26
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27. Conjoint Utility Computationsk m j
U(P) = S S aijxij
j=1
i=1
P: A particular product/concept of interest
U(P): The utility associated with product P
aij: Utility associated with the jth level (j = 1, 2, 3...kj) on the ith attribute
kj: Number of levels of attribute i
m: Number of attributes
xij: 1 if the jth level of the ith attribute is present in product P, 0 otherwise 27
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28. Market Share and Revenue Share Forecasts
Define the competitive set – this is the set of products from which customers in the target segment make their choices. Some of them may be existing products and, others concepts being evaluated. We denote this set of products as P1, P2,...PN.
Select Choice rule
Maximum utility rule
Share of preference rule
Logit choice rule 28
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29. Market Share Computation (Frozen Pizza)
Utility (Value) of each product for each customer.
Maximum Utility Rule: If we assume customers will only buy the product with the highest utility, the market share for Meat Lover’s treat is 2/3 and for Veggie Delite is 1/3.
Share of preference rule: If we assume that each customer will buy each product in proportion to its utility relative to the other products, then market shares for the three products are: Aloha Special (27.2%), Meat Lover’s Treat (27.9%) and Veggie Delite (44.9%). 29
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30. Buyer Types 30
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31. Cues for Identifying Customer Type
Relationship Value Price Convenience
Desire for interaction
Emotional Involvement
Loyalty
Number/type of considered vendors
People involved in decision
Fast decisions
Switching Costs
Operational importance of differentiation 31
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32. Conditions for Alternative Pricing Objectives
SKIM
PENETRATION
NEUTRAL
Low CMs
Low Volumes
Changes in Unit Price Drive Profit
Large BE Sales Changes
At or near capacity
High CMs
High volumes
Changes in volume drive profitability
Small BE Sales Changes
Excess capacity
Costs similar to competitors
Sufficient CM to finance adv, etc.
Little excess capacity
Incremental capacity is expensive
COSTS
Low Price Sensitivity
Reference Price Effect
Price Quality Effect
Difficult Comparison Effect
High price sensitivity
Total Expend Effect
Large Part of End- Benefit
Little differentiation
Customers are more sensitive to other elements of the marketing mix
CUSTOMERS
This slide is a summary of the conditions leading to various pricing objectives that is discussed in detail in the chapter
Limited threat of opportunism
Limited opportunity for scale economies
Sustainable differentiation
Low threat brands
Sustainable cost & resource advantage
Competitors not willing to retaliate
Financial strength
Aggressive small share brands
Avoid threat of retaliation
Large share brands with a lot to lose
Sustainable mktg mix advantages
Oligopolies
COMPETITION 32
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33. Analytical Approaches to Profitability Analysis33 33

34. Incremental Percent Breakeven Sales Changes34
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