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Customer’s Reference Price Perceived Value

Customer’s Reference Price Perceived Value. Ted Mitchell. Various prices on a can of Coke that we see in different situations (in a grocery store, in a vending machine in Disneyland etc) and retrieve from our memory to assess whether Coke price is acceptable or not are called: Referent prices

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Customer’s Reference Price Perceived Value

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  1. Customer’s Reference PricePerceived Value Ted Mitchell

  2. Various prices on a can of Coke that we see in different situations (in a grocery store, in a vending machine in Disneyland etc) and retrieve from our memory to assess whether Coke price is acceptable or not are called: • Referent prices • Reference prices • Retrieved prices • Rented prices • Reversed prices • In most cases consumers cannot process accurately pricing information because they have: • unlimited resources • limited information • biases • limited cognitive resources • limited mathematical skills

  3. Various prices on a can of Coke that we see in different situations (in a grocery store, in a vending machine in Disneyland etc) and retrieve from our memory to assess whether Coke price is acceptable or not are called: • Referent prices • Reference prices • Retrieved prices • Rented prices • Reversed prices • In most cases consumers cannot process accurately pricing information because they have: • unlimited resources • limited information • biases • limited cognitive resources • limited mathematical skills

  4. Consumers perceive discounts: • In Relative terms • In Absolute terms • In Terms of overall expenditures on all discounted and non-discounted items • Only while Shopping in Stores • with skepticism • Partitioned pricing strategy - when product price is presented separately from a surcharge (e.g. shipping and handling surcharge in online purchase) is based on the fact that consumers anchor on product price and: • ignore a surcharge • overreact on a surcharge • insufficiently adjust for a surcharge • overestimate total price • underestimate total price

  5. Consumers perceive discounts: • In Relative terms • In Absolute terms • In Terms of overall expenditures on all discounted and non-discounted items • Only while Shopping in Stores • with skepticism • Partitioned pricing strategy - when product price is presented separately from a surcharge (e.g. shipping and handling surcharge in online purchase) is based on the fact that consumers anchor on product price and: • ignore a surcharge • overreact on a surcharge • insufficiently adjust for a surcharge • overestimate total price • underestimate total price

  6. Expected Price or Reference price

  7. Modify Demand Function • Classic Demand • Q = a-bP • Modified for Customer’s Reference Price, Pe • Q = a – bP + c(Pe-P) • Q = a - bP + bPe • If the customer has a high reference price (I.e., Pe >P), then the customer expects to pay more and is delighted to pay your relatively low price

  8. Pricing to the Customer’s Perceived Value Ted Mitchell

  9. Perceived Value Pricing Is A Form of Demand Based Pricing Great Value! Pack

  10. Perceived Value Pricing Customers respond to value To a customer Value = All Benefits to Customer Minus All Costs to Customer

  11. Axiom of Value Pricing IsIf you give your customer 50% more valuethan your competitorthen you should be able to charge a 50% higher pricebefore they switch.

  12. Measuring Perceived Quality of the Product BRAND A BRAND B BRAND C BRAND D STYLE WEIGHT ? ? ? ? ? POWER WEIGHT ? ? ? ? ? SPEED WEIGHT ? ? ? ? ? COMFORT WEIGHT ? ? ? ? ?

  13. Importance of Product Attributes to Customer BRAND A BRAND B BRAND C BRAND D STYLE 30% ? ? ? ? POWER 20% ? ? ? ? SPEED 15% ? ? ? ? COMFORT 35% ? ? ? ?

  14. Customers Perceive Different Levels in Different Brands BRAND A BRAND B BRAND C BRAND D STYLE 30% 1 2 5 6 POWER 20% 6 3 4 5 SPEED 15% 3 4 2 5 COMFORT 35% 5 6 4 2 OVERALL SCORE ? ? ? ?

  15. Compensatory Model Looks For BRAND A BRAND B BRAND C BRAND D STYLE 30% 1 2 5 6 POWER 20% 6 3 4 5 SPEED 15% 3 4 2 5 COMFORT 35% 5 6 4 2 OVERALL SCORE ? ? ? ?

  16. Weigh Each Level of Attribute by the Importance of the Attribute BRAND A BRAND B BRAND C BRAND D STYLE 30% .3 (1) =.3 .3(2) = 0.6 .3(5) = 1.5 .3(6) = 1.8 POWER 20% .2(6) =1.2 .2(3) = 0.6 .2(4) = 0.8 .2(5) = 1.0 SPEED 15% .15(3) = .45 .15(4) = 0.6 .15(2) = 0.3 .15(5) =0.75 COMFORT 35% .35(5) = 1.75 .35(6) = 2..1 .35(4) = 1.4 .35(2) = 0.7 OVERALL SCORE ? ? ? ?

  17. Sum the partial worth scores for the total perceived quality BRAND A BRAND B BRAND C BRAND D STYLE 30% 0.3 0.6 1.5 1.8 POWER 20% 1.2 0.6 0.8 1.0 SPEED 15% .45 0.6 0.3 0.75 COMFORT 35% 1.75 2.1 1.4 0.7 OVERALL SCORE ? ? ? ?

  18. BRAND A BRAND B BRAND C BRAND D STYLE 30% 0.3 0.6 1.5 1.8 POWER 20% 1.2 0.6 0.8 1.0 SPEED 15% .45 0.6 0.3 0.75 COMFORT 35% 1.75 2..1 1.4 0.7 OVERALL SCORE 0.3 + 1.2 +.45 + 1.75 = 3.75 ? ? ?

  19. Which one does the Customer Prefer? BRAND A BRAND B BRAND C BRAND D STYLE 30% 0.3 0.6 1.5 1.8 POWER 20% 1.2 0.6 0.8 1.0 SPEED 15% .45 0.6 0.3 0.75 COMFORT 35% 1.75 2..1 1.4 0.7 OVERALL SCORE 3.75 3.9 4.0 4.25

  20. Highest Preference Score Wins BRAND A BRAND B BRAND C BRAND D STYLE 30% 1 2 5 6 POWER 20% 6 3 4 5 SPEED 15% 3 4 2 5 COMFORT 35% 5 6 4 2 OVERALL SCORE 3.75 3.9 4.0 4.25

  21. Why Is this Basic Model so popular? • Forces us to be explicit on advertising/product decisions • It allows us to think about probabilities of purchase and using them as a measure of intention to purchase • Helps in Pricing and Forecasting Market Share

  22. Implications for Changing Strategy • Modify the product (real positioning) • Alter beliefs about amount of attributes in our brand • Alter beliefs about amount in competitor’s brand • Alter beliefs about the importance of an attribute • Call attention to neglected attributes

  23. Implications for Changing Strategy • Modify the product (real positioning) • alter beliefs about amount of attributes • alter beliefs about competitor’s amount • alter importance weights • call attention to neglected attributes • What degree of shift in beliefs about power is necessary to give us a 1% increase in market share? • What will it cost to gain this increase in beliefs? • Will the increase in Market share pay for the effort?

  24. Comfort Brand B Brand C Brand A Style Brand D

  25. Individual Customer may have an ideal product Comfort B C Ideal A Style D

  26. The Concept of An Ideal Brandis at the basis of many product positioning ideas. Comfort B C Ideal A Style D

  27. Small Dots are the ideals of individual customers . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . Comfort . : : . : . .. B . : : . : . .. . : : . : . .. C . : : . : . .. . : : . : . .. . : : . : . .. A . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. Style . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. D . : : . : . .. . : : . : . ..

  28. You are the manager of Brand A Where do you want to position your product? . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . . : : . : . .. . Comfort . : : . : . .. B . : : . : . .. . : : . : . .. C . : : . : . .. . : : . : . .. . : : . : . .. A . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. Style . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. . : : . : . .. D . : : . : . ..

  29. Reposition Brand A BRAND A BRAND B BRAND C BRAND D STYLE 30% 1 2 5 6 POWER 20% 6 3 4 5 SPEED 15% 3 4 2 5 COMFORT 35% 5 6 4 2 OVERALL SCORE 3.75 3.9 4.0 4.25

  30. What is the Probability of Purchase?

  31. Probabilities of Purchase • Highest value takes all the market? • A value reflects a high probability of Purchase is more realistic • A probability of purchase on an individual basis implies a market share percentage over the total market

  32. RESULTS FROM RESPONDENT 2135 BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25

  33. RESULTS FROM RESPONDENT 2135 BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Probability of A

  34. Repeat for each brand BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Probability of Purchase 23.6% 24.5% 25.2% 26.7% Probability of Purchase implies Market Share

  35. Setting Price to the PerceivedQualityof the Offering

  36. Target Market Averages On Value BRAND A BRAND B BRAND C BRAND D STYLE 30% 0.3 0.6 1.5 1.8 POWER 20% 1.2 0.6 0.8 1.0 SPEED 15% .45 0.6 0.3 0.75 COMFORT 35% 1.75 2.1 1.4 0.7 OVERALL SCORE 3.75 3.9 4.0 4.25

  37. Target Market Averages On Value BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Overall Score is a measure of perceived value.

  38. Target Market Averages On Perceived Value BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Average Perceived Value is

  39. Setting Price for Brand D BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Average Perceived Value is 3.975 Brand D is 0.275 higher than Average

  40. Target Market Averages On Value BRAND A BRAND B BRAND C BRAND D OVERALL SCORE 3.75 3.9 4.0 4.25 Average Perceived Value is 3.975 Brand D is higher than average.

  41. Implication • If Brand D is 6.9% higher than average then you should be able to charge up to a 6.9% higher price. • If the average price is $200 then the maximum price for Brand D should be Max price for D = 200 + 200(6.9%) Max price for D = 200 + 13.83 = $213.83

  42. Problem with Perceived value Pricing As A Form of Demand Based Pricing is To Measure Perceived Price or Cost to Purchase

  43. Other Demand Based Pricing

  44. Value Added Pricing(Industrial) • Consider the value of the benefits to the customer • Price the product relative to what the product does for the customer

  45. Psychological Pricing • This is a closing out sale... This is a once in a life time sale.Limit of 4 per customer! • Loss-leader Pricing • Bait & Switch Pricing • Nature of Numbers (rounded or sharp)

  46. Nature of Odd-Even Pricing 9.00 9.90 9.99

  47. Cash Rebate • Coupons • 2%10 net 30 • Low or no finance charges • % off list (functional discount) • volume discount • Cumulative

  48. Discrimination Pricing • Customer Based (young, old) • Product/Image Based • Geographical or Location Based • Seasonal

  49. If you cut your priceCustomers may not buy more because of • Anticipate More Price Cuts • Believe your Products are being made cheaper • Your competitor reacts

  50. Difficulties With Demand Based Pricing • “Unfair to gouge people when they need something.” • “Price should not be the way goods and services are allocated in society.” • “Too hard to calculate.” • “Too hard to explain.” • “Causes too many fluctuations and makes the industry unstable.”

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