Customers

Chapter 4

Reference Price

• What is the value (utility)• What is perceived Alternative?

– “Reference value”

• What are the differentials– Positive(+)/Negative(-) (quality, features)

• Effect on pricing strategy– “Suggested Retail”– Order of Presentation (Top Down)– Initial Price sets bar

Economic Value

• Value based on use

• Value varies with customer– Risk– Cost of error/failure– Price sensitivity (see below)– Education of customer part of pricing plan

• Value determines what cost is justified

Reference Price Effect

• Perceived value is key• Factors affecting

– Location• Store (Nordstom’s vs BJ’s)• Within Store (Generic aisle)• High vs low placement

– eye level vs low

• End-cap (assumed on sale)• Order of presentation

• Pricing metric (payment, cost, …)

Difficult Comparison Effect

• New Products (have no way of judging value)

• Odd shapes or sizes (BJ’s)

• Similar packaging of generics to brand names

• Per ounce vs per pound (toothpaste)

• Add-ons to make product unique (cars)

Switching Cost Effect

• Compatibility (Word, Internet Explorer)

• Training (ibm)

• Familiarity (Jello, McCormack)

• “Try free for a month”

• Bundling (computer system/box)

Price-Quality Effect

• Perceived quality related to price (e.g., Pledge training)

• Affected by Familiarity with product – New product, what’s it worth?

• Prestige may be associated with good– Gucci

• Ability to perceive quality low (phones)• May be related to risk and cost of

problems (lawyer’s fees)

Expenditure Effect

• Effect on budget is issue

• Less income or higher price will increase sensitivity – WalMart vs Nordstrom customer

• Affected by quantity (large families more price sensitive)

• Ex: Construction unions divide & conquer

End-Benefit Effect

• Product gives multiple values

• Focus on value received rather than price

• If end-benefit high, look at % of cost, not $

• Construction unions again– Electrical/plumbing probs – Severe consequences =>want quality

• Michelin ad/Centrino Ad

Shared-Cost Effect

• If customer pays only part of cost

• Business-class travel

• Health care (copay, etc.)– Poor use emergency room

Fairness Effect

• Price evaluated within its context – Income– Past prices– “Necessity” vs “Luxury”– Raise reference price and discount (coupons,

rebates, etc.)

Framing Effect• Is purchase seen as a “gain” or a “loss?”• Diminishing marginal utility to gains • Losses more heavily weighted• Diminishing marginal disutility to losses • Implications:• Frame purchase

– “opportunity costs”• Price high and discount• Unbundle gains

– “service added free”• Bundle Losses

– “total cost is”

Framing Effect

-400

-300

-200

-100

0

100

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-1500 -1000 -500 0 500 1000 1500

Gains

Uti

lity

Use of Value Perception

• Identify segments (use/value/customer)– Table wine vs cooking wine

• Identify starting price– Alternatives? Percentage of Cost?

• Determine what can affect demand– Labeling/packaging affects perceived value – Cork vs screw-off cap

Customer Segmentation• Value Diff.: Low• Perceived Pain High

• Price Buyer

• Value Diff.: Low• Perceived Pain Low

• Convenience Buyer

• Value Diff.: High• Perceived Pain High

• Value Buyer

• Value Diff.: High

• Perceived Pain Low

• Relationship Buyer

Pe

rcie

ved

Pa

in o

f Pri

ce

Value of DifferentiationLow

Hig

hLo

w

High

Price Value

Price Elasticity

• Elasticity = (ΔQ/Q)/(ΔP/P)• Elasticity = (ΔQ/ΔP)/(Q/P)• Notice role of current levels of Q and P• Relationship of P and MR is • P = MR ( 1 + (1/Elasticity) )• The higher the elasticity, the closer P to MR• Example:

– P1=100, Q1=50, P2 =90, Q2=60,

– ε = (10/55)/(-10/95) = -1.73 => Elastic

Why Care about Elasticity?

• TR = P * Q

• Price Elasticity is effect of P on Q

• Elastic (>1) => Quantity moving faster

• Inelastic (<1) => Price moving faster