Pricing Strategy1. Why is pricing important to a company?a. It creates a significant impact on the profitability of the company. Among the 4P, its the only factor that directly affects company revenue2. Where does pricing fit in the marketing mix?a. Reinforces and helps communicate brand manage by providing product quality (e.g high price=premium product)b. Determines segmentation 3. How can a good price be determined?a. Price floor= variable cost

Market/Pricing Segmentation ReviewQuadGraphics-big printing press

Product value development V=summation (a*b)/P

V=value of producti-product attribute

STP Process

1. Determine customers behavior that gives impact on income statementa. Price: if somebody pays more, do we get more revenue? i. Segmentation variable: Segment per price sensitivityb. Quantity: how much do they use?i. Segmentation variable: Usage (Heavy users, moderate users)c. Repurchasei. Segmentation variable: LoyaltyImpact on Income StatementSegmentation Variable

PricePrice Sensitivity

QuantityUsage

RepurchaseLoyalty

2. Find Descriptors (Variables that describe the very segment)a. Psychographicsi. AIO (Design communication messages; to figure out what they think about and what they know/believe; Design Market Plan): Attitudes, Interests, Opinionii. VALS (Used for branding in the following way; this product for people like me): Values, Lifestyle

b. Demographics (Media Sched)c. Geographic (Delivery and targeting)

Segmentation and Pricing1. Pricing the same or similar products differently for different customer segments2. Different customers value products different3. Differences in willingness to pay are differences in demand

Strategic or Tactical Tactical price segmentation (categorized customers right when they meet the customers= real time segmentation) Strategic price segmentation

Must Have:Segmentation Hedges Segmentation hedges: keep less price sensitive customers from paying a lower prices Needs to be a BARRIER Requirements for Effective Hedge -Value-conguruent (price points) -Implementation policies needs to be obvious, enforceable (need some way to keep people from one market), market acceptance

Psychological Price Segmentation

Brain as a predictive Machine

Human Brain makes predictions

Loss Aversion Feel worse about a loss than feel good about a gain of the same size

Problem: We are OVERCONFIDENT About our abilitiesPsychology of Pricing Segmentation

Slicing and Dicing Your Pricing Understand customer goals Bundle low- and high end benefits together Low-end free if market norms allow Change Value Perceptions Educate customers Change attribute weightsBehavioral Effects that Influence Price SensitivityTrue Economic Costs1. Shared cost effect- efers to the reduction inprice sensitivityof a customer orcustomer segmentcreated through the perception, real or unreal, that part of the purchase price is paid for by a third party of the firm itself.2. Switching cost- cost of going from one supplier to another3. Expenditure effect4. Difficult comparison- we have troube figuring out how to evaluate attributes properly; cause us to pay more because we dont know the alternatives

Perceptual Challenges1. Price endings in 9s2. Fairness effect3. Overconfidence in Future economic efficiency4. Small pie bias5. Promotional influence

Prospect Theory-Our losses weigh heavier than a gain-as our loss increases, the pain that they feel stabilizes (gambler example)

Act based upon what we expect to gain Loss weigh heavier than gains Diminishing sensitivity Risk aversion in the positive frame and risk seeking in the negative frame Pricing effects related to prospect theory Reference price effects Endowment effect Anchoring Comparison set effect Framing effect Order bias

CERTAINTY AND PRICING Pricing Guarantees

MINI CASE DISCUSSION (Target the right market)SAMSMARYS

Owners usersSenior Marketing Manager

SmallerLarger

Spends lessSpend more

Larger # of customerFewer # of customers

Buy for shorter timeStay longer with the company; More technically sophisticated

Lighter user, lower profit, fewer competitors, cheaper to sell 10KAcquisition cost $50,000

We can pursue both segments because both are proven profitable but the question is how hard it would be to target each segment. -Where is the biggest nugget in the gold mine?-Marys, then capture Sams that are closer to the Marys

Estimating Price Sensitivity Segments

WHY CONJOINT ANALYSIS? Allows you to estimate the value elasticity of price Can be used to segment the market Estimates customer perceived value of attribute levels and productsHOW IT WORKS Conjoint treats a product as a bundle of attributes, features, and benefits The resulting attribute to value relationship is called a part-worthy utility functionCustomer Valuations vary Conjoint analysis can reveal the value customers place on a product or its features Differences in valuation used to enhance profitability though price-value segmentation: Premium Market Penetration (Low cost)Marketing Manager Skill