MBAM 651 Pricing

1. MBAM 651 Pricing By Dr Freddy Lee Pepperdine University Week 2

2. Chapter 5 Behavioral Foundations For Pricing Management

3. Perception • Buyers’ perceptions of value represent a mental tradeoff between the quality or benefits they perceive in the product relative to the sacrifice they perceive by paying the price: Perceived Value = perceived benefits (gain) perceived sacrifice (give) Where perceived benefits are a function of perceived quality, perceived quality is positively related to price, and perceived sacrifice is positively related to price

4. Relationship of Price, Perceived Value, and Willingness to Buy

5. Multidimensional Role Of Price on Buyers’ Perceptions • Psychological price phenomena are the “irrational” effects of price on behavior • Customary prices • All price alternatives are excluded except for a single price • Price lines • Controls the price of an entire inventory of a particular item • Odd prices • Refers to a price ending in an odd number, or to a price just under a round number

6. Comparative Numerical Judgments • Distance Effect • Time to compare numbers is an inverse function of their numerical distance. • 8 vs. 6 8 vs. 2 • Magnitude Effect • For equal numerical distance, it is easier to discriminate small numbers. • 1 vs. 2 8 vs. 9 • Special status of numeral 5 • 1 to 4 “small” 6 to 9 “large”

7. Comparative Numerical Judgments • Size Congruency Effect • Response time is shorter when the “larger” numeral is displayed in larger font size. • Response time is shorter when the “smaller” numeral is displayed in smaller font size.

8. Comparative Numerical Judgments • The Odd Effect • Even digits are processed faster and/or more accurately than odd digits. • People can judge smaller vs. larger faster than odd vs. even. • In odd-even judgments, the powers of 2 (2, 4, 8) were judged faster than 0 and 6. • For odd numbers, 3, 5, 7 were judged faster than 1 and 9.

9. Comparative Numerical Judgments • Remembering Numbers • When not instructed to recall four-digit numbers digit by digit: • Remembered according to magnitude encoding, i.e., thousands recalled best, then hundreds, tens, and ones. • When instructed to recall four-digit numbers digitally: • Remembered interior numbers less well than end numbers.

10. Proportion of Digits Recalled by Serial Position

11. Remembering vs. Knowing • Remembering requires the conscious recollection of having encountered a piece of information • Remembering judgments demonstrate explicit memory • Knowing involves a sense of familiarity towards a previously encountered item • Knowing judgments demonstrate implicit memory

12. Conscious vs. Nonconscious Price Information Processing • When price information is being processed consciously: • Buyers pay attention to the price, make judgments regarding the value of the product relative to some other products that are either present in the external environment or retrieved from memory, and finally make a purchase decision • Actual price information, a magnitude representation of the price, and their evaluative judgment maybe be transferred from working memory into long term memory, and they would be more likely to recall the price of the product at a later time • Also possible that the actual price information may not be transferred into long term memory

13. Conscious vs. Nonconscious Price Information Processing • When price information is being processed nonconsciously: • The buyer is more likely to demonstrate a lack of “price awareness” and not be able to recall the price of the product at a subsequent time • The processing of price information may be more appropriately assessed by using an implicit memory task, such as ranking of the different products in terms of their relative expensiveness

14. Chapter 6 Pricing Practices That Endanger Profits

15. Adaptation-level Theory • Anchoring effect • Every new price encountered by an individual tends to move the adaptation-level price in its own direction • Contrast effect • New prices far above or below the original adaptation level may change the individual’s perception of other prices in the series

16. Assimilation-contrast Theory • Assimilation effect occurs when judgments of these previously perceived low prices in the category do not change when a new price is encountered • This occurs because the new price is perceived as similar to the reference prices • Contrast effect occurs when the new price displaces the reference price range sufficiently far and the original low prices will be perceived as lower than previously • This occurs because the new prices are perceived as different from the reference price, but as still belonging to the same price category

17. Prospect Theory and Transaction Utility • Prospect theory shows that an evaluation of an outcome is strongly influenced by a standard of comparison, reference point, or “zero” point • Determines whether outcomes are gains or losses • Stimuli equidistant from the reference point are perceived to be closer to the reference point if they are larger than if they are smaller

18. Product-Line Pricing • The lowest and highest prices in the product line are more noticeable than those between, and thus, anchor buyers’ judgments • The perception of a sale price may depend on the position of the price in the price range • Price is less dominant in purchase decisions if the price range is narrowed by shifting the end prices toward the middle of the range, or if there is little variation in prices

19. Order of Presenting Prices • Buyers who are exposed initially to high prices will perceive subsequent lower prices as less expensive than they would if they were initially exposed to low prices

20. Introductory Pricing Strategies and Tactics • Sellers introduce new products with short-term “introductory low-price promotions” • Facilitates market penetration • Produces lower long-run sales volume than if the product is introduced at its regular price • The introductory low price serves as a reference price for evaluating a perceived price increase when the price is raised to its normal price

21. Relative Price is More Important than Absolute Price • Buyers, in general, are more sensitive to perceived price increases, than to perceived price decreases. • This difference in sensitivity is most apt to occur when the price change originates from the vicinity of the market average.

22. Chapter 7 Price and Customers’ Perceptions of Value

23. Price and Perceived Value • The context of the place of purchase affects the purchase decision • Buying beer at a fancy hotel vs. a small, run-down grocery store • The availability of information affects the purchase decision • More weight on information that is most readily available, or easily recalled from memory

24. Price and Perceived Value • The anchoring affect has a direct impact on pricing • The order of price presentation, the low or high prices in a product line, and the original price of a product • People tend to choose an alternative they associate with some past success or refuse to choose an alternative they associate with a previous failure

25. Price-Perceived Quality Relationship • Buyers use cues to determine the product or service quality • Extrinsic cues are product-related attributes but they are not part of the product • Price, brand name, packaging • Intrinsic cues are are product-related attributes but they cannot be changed without altering the physical properties of the product

26. Price and Perceived Value

27. Price-Perceived Quality Relationship • The strength of the use of price or other external cues, such as brand or store name, as indicators of product quality, depends on the relative perceived differences between different cues and on the degree to which buyers know about the product and actual price-quality relationships

28. The Effect of Time Pressure on Buyers’ Perceptions of Value • When buyers are attempting to process all available information, they place greater weight on price as an indicator of sacrifice • When buyers process information using heuristics, they place greater weight on price as an indicator of product quality

29. Decomposing Perceived Product Value • The overall perceived value of a product being considered for purchase is its: • 1.Acquisition value – the expected benefit to be gained from acquiring the product less the net displeasure of paying for it • 2.Transaction value – the perceived merits or fairness of the offer or deal

30. Decomposing Perceived Product Value • The perceived benefit of the product is equivalent to the utility inherent in the maximum price the buyer is willing to pay for the product

31. Ways To Frame Offers • 1.Provide a price reduction with no comparison to previous price (or other external reference price) • No “deal perception” • Therefore, no transaction value and only acquisition value based on the regular price - perceived quality and price perceived sacrifice relationships

32. Ways To Frame Offers • 2. Price reduction with comparison to previous or other external reference price (e.g., regular price $xx.xx, sale price $yy.yy). • TV based on perceived price difference, i.e., Regular price - sale price. • AV based on regular price - perceived quality relation. • Therefore, TV enhances overall perceived (acquisition) value.

33. Tensile Price Claims For example, the seller may advertise: • A range of potential savings • “Save 30-70% off” • A minimum amount of price reduction • “Prices reduced 30% or more” • A maximum amount of savings • “Save up to 70%”

34. Chapter 8 Customer Value Analysis

35. Perceived Acquisition Value • Perceived =perceived benefits or quality acquisition value perceived total sacrifice • Perceived total sacrifice to the buyer is equal to purchase price + start-up costs + post-purchase costs • Perceived benefits or quality is equal to some combination of physical attributes, service attributes, and technical support available, as well as the purchase price and other indicators of quality

36. Components of Perceived Acquisition Value • 1. Sacrifice • 2. Equity • 3. Aesthetics • 4. Relative use • 5. Perceived transaction value

37. Chapter 9 Research Methods for Pricing Decisions

38. Basic Questions • 1. What are the benefits of the offering as perceived by customers? • 2. Do customers associate quality with price? • 3. Can buyers determine quality prior to purchase? • 4. What is the relative size of each market segment? • 5. What is the maximum amount that customers will pay?

39. Surveys • Basic objective is to elicit facts and opinions from respondents relating either to a predication of the quantity they would be willing to buy at various prices or to their intent to buy in the near future • Pros: • Easy to conduct • One of the least costly research methods • Con: • Unreliable responses

40. Experimentation • Basic objective is to isolate and control various market factors that may affect market demand and then to observe buyers’ reactions to changes in one or more of these factors • Cons: • Often conducted in not a natural shopping environment • Lack of control over factors in natural shopping environment

41. Panels • Household participating in the panel record their purchases by brand and price in a daily diary or their purchases are recorded when they are scanned at a store’s checkout counter • Pros: • Observations accumulate quickly to establish an adequate data base to develop and test models • Cons: • Not representative of the general population • Possibility of errors in recording

42. Price Level Sensitivity:Absolute Thresholds • Direct question approach: • 1. What is the minimum price you would be willing to pay? • 2. What is the maximum price you would be willing to pay? • Simple and easy, but may suggest to respondents that there is a price that is too low or a price that is too high. • Each respondent only responds for two prices. • Extension: use a price scale.

43. Price Limits: Direct Question