Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
SlideShare a Scribd company logo

Pricing lecture 2018

•Download as PPTX, PDF•
•
Nevo Hadas
Nevo Hadas

Pricing lecture for UCT GSB innovation lab - how pricing strategy has changed in the digital economy.

1 of 56
Price is not a number ! The secrets of pricing and
PRICE IS NOT LOGICAL
DON’T THINK PRICE – THINK PRICING SYSTEM
DEATH TO THE PRICE CURVE
PRICING ASSUMPTIONS • Our customers always prefer low prices ASSUMPTIO N REALITY • Only if you are incredibly accurate with your sales projections and cost projections • Customers will always say they like lower prices. However, in many markets price serves as a guide to quality, and pricing too low can send out a negative signal • Lack of customer price knowledge makes how you present the price even more important. This is where strategies such as good-better best and price ending cues are key • Simpler for who? Simplifying pricing structures means giving away money. Due to the taxi-meter effect, customers may not always appreciate it when firms do price simply • Price segmentation is actually going to be most effective for already-profitable firms, because effective segmentation requires market power implied by profitability • Simpler pricing structures are better • If we are profitable, we do not need to price-discriminate • Our customers do not know prices, so our pricing strategy is unimportant • If we use cost-plus pricing, we will make a profit
PRICING ASSUMPTIONS • Razor Blade pricing works because our customers are stupid ASSUMPTIO N REALITY • Razor blade pricing works because it is actually subtle price segmentation • Price sensitivity increases the more you use something • Even when a product has network effects, price segmentation is key. The crucial questions for network goods are: Whom do I set a low price to and whom do I set a high price to? • It can be more profitable to have unused inventory or capacity • Statements like this lead to jail time. It is the responsibility of the firm, and the firm alone, to avoid a price war • Firms have to actively manage perceptions of their pricing by competitors, regulators and other stakeholders • Our competitors understand our pricing strategy • Industries need to work together to ensure that they avoid harmful price wars • Firms need to adjust prices until I fill capacity • High-value, high-usage customers pay more. Low- value, low-usage customers pay less • Our product has network effects, so we need to set a low price
PRICING STRATEGIES Thanks MIT
STRATEGIC PRICING • Businesses often price a product offering based on  Cost plus pricing – determine a unit cost, then add a percentage mark-up  Competitive pricing – trying to beat or undercut competitors’ value offering • However, optimal price depends on product’s perceived value to the customer • Price affects perceived value  Under-priced products may be perceived as low-value/quality and actually attract fewer customers than a higher price would • ‘Value pricing’ is usually more appropriate for new/innovative products  though cost must be reviewed to check that your business will be financially viable! • Strategy also impact your pricing (i.e. a land grab could make you under-price or give away for free) • Free – is a price, consumers will have some form of cost attached
SETTING YOUR PRICE
Pricing lecture 2018
Pricing process Value Setting Core Brand Quality Affordability segmentation Identifiable segment affordability differentiation Demand sensitivity Time to event (or after) Logistics/ Hassle Needs Charging intervals Value points Payment intervals When do you ask for payments Inducement Behavioral Psychology Discounts Lock-in INTRINSIC INTRINSIC INTRINSICEXTRINSIC EXTRINSIC INTRINSIC
Many consumers don’t know the pricing of items, and seek ‘price cues’ to inform them as to whether something is a good deal or not. This lack of price knowledge means that they constantly look for clues as to whether a price they are seeing is a good deal relative to an unknown reference PRICING UNDER CONSUMER UNCERTAINTY
PRICING UNDER CONSUMER UNCERTAINTY THE COMPROMISE EFFECT Customers often choose the mid-priced option to protect themselves from making a bad choice. The implication here is that one can increase profits by adding a low-price or high-price option in addition to an existing product. • Works successfully in both B2C and B2B markets. • Products need to be from the same brand. •Everyone at the firm needs to know what the intention of introducing ‘decoys’ is. – Architectural software firm lost money after sales force manager misunderstood its decoy premium product and started discounting it to match the mid-price product.
PRICING UNDER CONSUMER UNCERTAINTY DISCOUNTING One way that firms can signal that their price will be cheaper than the unknown reference price is to advertise a discount, so that the reference price is anchored upwards. However, to be effective, a discount needs to have a credible reason, and not be overused. • People tend to think of prices in terms of proportion or percentage changes rather than absolute changes. • When discounting, discount cheapest part of the product bundle: – More effective to discount off dessert than total meal. – More effective to discount car financing than entire car price. • MIT research suggests that effectiveness of sales signs decreases at around 30 percent saturation.
ECONOMIC VALUE TO THE CUSTOMER EVC: • A customer will buy a product only if its value to them outweighs the value of the closest alternative (i.e. another way of solving the problem) • Value communication is important as EVC is perceived differentiation value • The price should be the same or below its competitor’s price plus the value advantage its product has to the customer over the rival product • The EVC describes only the maximum price a firm might theoretically charge It is best to use EVC as a pricing formula when: • Competitor’s prices are well-known and concrete • A product’s differentiation value is easy to calibrate • A product’s differentiation value is easy and believable to communicate
EVC Example • NETFLIX – Drive to DVD store – Rent DVD – Late fees – Return DVD • SPOTIFY – Drive to music store – Buy CD OR – Borrow from a friend OR - Find online and download
THIS IS NOT THE PRICE YOU ARE LOOKING FOR
PRICING UNDER CONSUMER UNCERTAINTY ASYMMETRIC INFORMATION ABOUT PRODUCT QUALITY. High prices may imply high quality if quality is uncertain. High prices as a signal of quality work well with: • Customers of middling sophistication who are uncertain about quality – Some survey evidence of limited ability to think iteratively through the credibility of price as a signal of quality • Scenarios when people who are not knowledgeable anticipate that there will be repeat or more knowledgeable purchasers in the market too. – I might buy more expensive cigars as I assume they are priced right for cigar fans • Capacity constraints – Show promoters in Vegas sell more seats at higher prices
PRICING UNDER CONSUMER UNCERTAINTY SIGNALING BY THE CUSTOMER. One potential source of differentiation value is for Veblen or ‘snob’ goods, where part of the product’s appeal is its high price. • High prices allow customers to signal their worth to other individuals – When a fountain pen manufacturer raised its prices, it sold more • It also allows customers to signal their worth to themselves and others • It also allows gift-buyers to signal the value of their present. – Scottish whiskies had difficulty in Japan when they tried to enter with lower prices. – L’Oreal has had huge success with the ‘Because you’re worth it’ campaign
MATHS 
PRICING ELASTICITY The price elasticity of a product measures the responsiveness of sales to a change in price. If elasticity=1, revenues will be the same from a price change If elasticity is >1, revenues will be higher with a price decrease If elasticity<1, revenues will be higher with a price increase
PRICING ELASTICITY Why is a price elasticity useful? Relative margins: An electronics retailer priced batteries the same all over....[Price Elasticity Analysis] showed the battery that had the highest ”price sensitivity” in Dallas had the lowest price sensitivity in Boston. In other words, while Texans would buy this particular battery only within a narrow price range, Bostonians were far less picky about it. The store altered its prices accordingly, sold more batteries and made more money at it. Rule of thumb pricing tool, especially in retail sector with a large number of SKUs. This caries a weighty health warning since you are effectively assuming away your competitors, that you are already optimizing and that you have increasing marginal costs.
PRICING ELASTICITY Ways of improving historical pricing analysis. • Calculate different price elasticities for each type of customer, each region, each product. Use more data than just aggregate sales and prices • DHL employed software that included the reactions of customers who called and got a quote but didn’t ship - that is, a failed sale. By including data from this group of customers, they improved their ‘quote to book ratio’ from 17 percent to 25 percent. • Use panel data econometrics where you include controls for places and times in your regression analysis. The problem is that this can get very expensive both in terms of personnel and costs of acquiring data.
SEGMENTATIO N &
PRICING TO SEGMENT CUSTOMERS The most crucial insight is that we shouldn’t think about where we should price along our demand curve. Instead we should think, how many different prices to different customers can I charge along my demand curve? How can we charge a lower price to low- valuation types and get them to ‘enter’ the market, but still persuade the high- valuation types to pay the high price.
Strategic assessment of whether a firm should move from a single price strategy: • Does my product offering have differentiation value? • Can I identify 2+ customer value profiles who theoretically have different valuations for my product? • Is there empirical evidence that these different customers actually have the EVC differences you expect them to have? • Very different price elasticities indicate that they do have different EVC. • Is there empirical evidence that customers in this value profile have similar enough EVC? • You can find out whether you have segmented enough, by trying to segment again. If the new price-elasticities that you calculate are noticeably different from each other then you have not segmented enough. PRICING TO SEGMENT CUSTOMERS
Necessary criteria for success: low cost vs high cost • Does my product offering have differentiation value? • Can identify an unambiguous component of differentiation value (e.g. convenience). • ‘Distortion’: This component of differentiation value must be correlated strongly enough with overall EVC that high-valuation types will pay a premium rather than not have it. Or in other words, you are going to force your low-valuation customers to signal that they have low-valuations because you are going to distort your product quality downwards. • Comfort, Speed, Reliability, Ease of use are good places to start. • ‘Compensation’: This component of differentiation value must be not so essential that low-valuation types will never buy the product without it. Price to compensate them. This is why we see discounts for economy class discomfort. PRICING TO SEGMENT CUSTOMERS
Necessary criteria for success: • Does my product offering have differentiation value? • Can identify an unambiguous component of differentiation value correlated with overall EVC (e.g. convenience). • ‘Distortion’: This component of differentiation value must be correlated strongly enough with overall EVC that high-valuation types will pay a premium rather than not have it. Or in other words, you are going to force your low-valuation types to signal that they have low-valuations because you are going to distort your product quality downwards. • Comfort, Speed, Reliability, Ease of use are good places to start. • ‘Compensation’: This component of differentiation value must be not so essential that low-valuation types will never buy the product without it. Price to compensate them. This is why we see discounts for economy class discomfort. PRICING TO SEGMENT CUSTOMERS
PRODUCT ATTRIBUTE BASED PRICING • Must be able to structure price to meet key attribute • Creating different products/price based on the attributes – Time of day – Delivery – Colour – Remnant/premium – Urgency
TIME AND PRICE TIMING STRATEGIES Getting the timing of pricing right can actually aid how much consumers enjoy your good. Basically, consumers prefer to avoid a payment that is timed when either they are enjoying the good, or when they expect in particular to not enjoy the good. • Decouple the pain of paying from consumption for experience goods: – For example, people are willing to pre-pay and pay a premium for things they enjoy (such as vacations) • Decouple the pain of paying from the pain of learning how to use a technology product: – Customers are more likely to switch if they do not have to pay full price for a technology service in the same month they are learning how to use it. • Decouple pain of paying from possibility of bad experience of products: – Cellphone companies gain more customers if they preannounce an automatic rebate when there is service interruptions.
Framing The context in which a price is communicated to a customer affects how much the customer may be willing to pay for something. PRICING & BEHAVIOURAL ECONOMICS In the hearing aid market, audiologists could frame their offerings by demonstrating key features relative to potential alternatives that cost considerably more. For example, once the likely long-term consequences of doing nothing about hearing loss is shared with the patient, it helps frame the benefits of a pair of professionally-fitted hearing aids. Another example of framing is the use of bundling (or unbundling) your offerings. When many of the key technology and service features are itemized and a dollar value is assigned to each, it frames your offering much differently than if you were to simply list one price in a bundled format. Research has shown that unbundling results in many patients willing to pay more for the same offering.
Anchoring The price you expect to pay for a product or service is an anchor. Price anchors are mainly determined by your experience buying a particular product, and they can change based on the season, time of day or even economic conditions. PRICING & BEHAVIOURAL ECONOMICS Based on previous buying experience, customers know they are receiving a “good deal” when a special low sale price is spotted in a newspaper ad or coupon. The challenge associated with respect to anchoring in the hearing aid market is that the average consumer is not very familiar with the time and expertise usually required to successfully fit hearing aids. When a dispensing practice runs advertising using low price points to drive traffic, an unintended consequence is anchoring a low price point in the mind of the prospective buyer. Once a price has been anchored in the mind of the customer it is difficult to change it.
Default Bias Consumers generally take a path of least resistance when making purchases. When an obstacle - even one as simple as checking a box to become eligible for a service or upgrade - is placed in front of a customer, they oftentimes do not voluntarily opt to buy it. PRICING & BEHAVIOURAL ECONOMICS Employers make 401k retirement plans something their employees can opt into. When this is the default option upwards of 50% of employees do nothing and, therefore, opt out of the voluntary retirement plan. However, when the employer makes automatic enrollment the default option, very few employees voluntarily opt out of the program.
DEATH TO THE DEMAND CURVE
Airplane Ticket Example
DIGITAL TRANSFORMS PRICING
GOOGLE
UBER
SLACK
MARKETPLACES E.G. AIRBNB/PLAY STORE
FREEMIUM
PRICING FOR CASH- FLOW
PRICING POWER • Market has limited capacity for purchase • Increasing demand by small customer set • Strong differentiation between products • High cost of switching
TIMING & PRICE • Pre-payments • Early payment discounts • Lower price with same payment terms not ideal to change cashflow metrics unless – Elasticity is high – Margin can support lower price at greater volumes
Yield vs Revenue vs Cash • Yield measures a return on a unit (margin) – Usually used for property and non-perishable assets • Depending on strategy, you can price to maximise revenue (cashflow hopefully) but not yield (return) • Low price does not equal better cashflow
TESTING PRICE
TESTING PRICE • Interview customers and ask – Interview bias • Online questionnaires (structure them well) – Instant Insights – Survey monkey • Fake products and ads – Google/FB campaign to target market – Same ad, different price points – Look for highest CTR at similar impression share
LIFE TIME
WHAT IS LTV • The life time value of a customer – Gross margin (or revenue) X expected length of time as a customer – Other factors • segmentation in customer groups (some are longer than others) • Value of customer segments – They introduce new customers – They are more profitable • How to use LTV – Business models – Benchmark – Segmentation analysis
CHANNE LS TO MARKET
CHANNELS • Is your product bought or sold – Bought – you put it in front of consumers and they take it off the shelf/digital storefront – Sold – somebody has to convince them and/or they need service to use it • Channels impact pricing due to – Mark-up required by channel – Cost of sales via the channel – Cost of logistics/training/service via the channel
BOUGHT • Bought products rely heavily on reach/distribution to be seen by as many potential customers as possible – Physical stores • Distributors • Agents • Direct to retailers – Digital stores • Distributors • High fragmentation – Direct to consumer • Own stores • Own digital footprint
SOLD • Who sells it • Who delivers the service – Is it the same place that sells it • Direct (own sales & service) • Mix direct/indirect
BROAD OR NARROW DISTRIBUTION • Limited availability (higher price) – Easier to train up or have stronger relationship – Cost of going broad is often under-estimated from logistics and channel management perspective
CHANNEL MANAGEMENT • Indirect channels need to be maintained – Distributor relationships – Understanding competitor behavior – In-store/on-line visibility & promotion – Training & after sales support
THAT’S ALL nevo@andinnovation.com @nevoda Linkedin.com/nevohadas

More Related Content

Pricing lecture 2018

  • 1. Price is not a number ! The secrets of pricing and
  • 3. DON’T THINK PRICE – THINK PRICING SYSTEM
  • 5. PRICING ASSUMPTIONS • Our customers always prefer low prices ASSUMPTIO N REALITY • Only if you are incredibly accurate with your sales projections and cost projections • Customers will always say they like lower prices. However, in many markets price serves as a guide to quality, and pricing too low can send out a negative signal • Lack of customer price knowledge makes how you present the price even more important. This is where strategies such as good-better best and price ending cues are key • Simpler for who? Simplifying pricing structures means giving away money. Due to the taxi-meter effect, customers may not always appreciate it when firms do price simply • Price segmentation is actually going to be most effective for already-profitable firms, because effective segmentation requires market power implied by profitability • Simpler pricing structures are better • If we are profitable, we do not need to price-discriminate • Our customers do not know prices, so our pricing strategy is unimportant • If we use cost-plus pricing, we will make a profit
  • 6. PRICING ASSUMPTIONS • Razor Blade pricing works because our customers are stupid ASSUMPTIO N REALITY • Razor blade pricing works because it is actually subtle price segmentation • Price sensitivity increases the more you use something • Even when a product has network effects, price segmentation is key. The crucial questions for network goods are: Whom do I set a low price to and whom do I set a high price to? • It can be more profitable to have unused inventory or capacity • Statements like this lead to jail time. It is the responsibility of the firm, and the firm alone, to avoid a price war • Firms have to actively manage perceptions of their pricing by competitors, regulators and other stakeholders • Our competitors understand our pricing strategy • Industries need to work together to ensure that they avoid harmful price wars • Firms need to adjust prices until I fill capacity • High-value, high-usage customers pay more. Low- value, low-usage customers pay less • Our product has network effects, so we need to set a low price
  • 8. STRATEGIC PRICING • Businesses often price a product offering based on  Cost plus pricing – determine a unit cost, then add a percentage mark-up  Competitive pricing – trying to beat or undercut competitors’ value offering • However, optimal price depends on product’s perceived value to the customer • Price affects perceived value  Under-priced products may be perceived as low-value/quality and actually attract fewer customers than a higher price would • ‘Value pricing’ is usually more appropriate for new/innovative products  though cost must be reviewed to check that your business will be financially viable! • Strategy also impact your pricing (i.e. a land grab could make you under-price or give away for free) • Free – is a price, consumers will have some form of cost attached
  • 11. Pricing process Value Setting Core Brand Quality Affordability segmentation Identifiable segment affordability differentiation Demand sensitivity Time to event (or after) Logistics/ Hassle Needs Charging intervals Value points Payment intervals When do you ask for payments Inducement Behavioral Psychology Discounts Lock-in INTRINSIC INTRINSIC INTRINSICEXTRINSIC EXTRINSIC INTRINSIC
  • 12. Many consumers don’t know the pricing of items, and seek ‘price cues’ to inform them as to whether something is a good deal or not. This lack of price knowledge means that they constantly look for clues as to whether a price they are seeing is a good deal relative to an unknown reference PRICING UNDER CONSUMER UNCERTAINTY
  • 13. PRICING UNDER CONSUMER UNCERTAINTY THE COMPROMISE EFFECT Customers often choose the mid-priced option to protect themselves from making a bad choice. The implication here is that one can increase profits by adding a low-price or high-price option in addition to an existing product. • Works successfully in both B2C and B2B markets. • Products need to be from the same brand. •Everyone at the firm needs to know what the intention of introducing ‘decoys’ is. – Architectural software firm lost money after sales force manager misunderstood its decoy premium product and started discounting it to match the mid-price product.
  • 14. PRICING UNDER CONSUMER UNCERTAINTY DISCOUNTING One way that firms can signal that their price will be cheaper than the unknown reference price is to advertise a discount, so that the reference price is anchored upwards. However, to be effective, a discount needs to have a credible reason, and not be overused. • People tend to think of prices in terms of proportion or percentage changes rather than absolute changes. • When discounting, discount cheapest part of the product bundle: – More effective to discount off dessert than total meal. – More effective to discount car financing than entire car price. • MIT research suggests that effectiveness of sales signs decreases at around 30 percent saturation.
  • 15. ECONOMIC VALUE TO THE CUSTOMER EVC: • A customer will buy a product only if its value to them outweighs the value of the closest alternative (i.e. another way of solving the problem) • Value communication is important as EVC is perceived differentiation value • The price should be the same or below its competitor’s price plus the value advantage its product has to the customer over the rival product • The EVC describes only the maximum price a firm might theoretically charge It is best to use EVC as a pricing formula when: • Competitor’s prices are well-known and concrete • A product’s differentiation value is easy to calibrate • A product’s differentiation value is easy and believable to communicate
  • 16. EVC Example • NETFLIX – Drive to DVD store – Rent DVD – Late fees – Return DVD • SPOTIFY – Drive to music store – Buy CD OR – Borrow from a friend OR - Find online and download
  • 17. THIS IS NOT THE PRICE YOU ARE LOOKING FOR
  • 18. PRICING UNDER CONSUMER UNCERTAINTY ASYMMETRIC INFORMATION ABOUT PRODUCT QUALITY. High prices may imply high quality if quality is uncertain. High prices as a signal of quality work well with: • Customers of middling sophistication who are uncertain about quality – Some survey evidence of limited ability to think iteratively through the credibility of price as a signal of quality • Scenarios when people who are not knowledgeable anticipate that there will be repeat or more knowledgeable purchasers in the market too. – I might buy more expensive cigars as I assume they are priced right for cigar fans • Capacity constraints – Show promoters in Vegas sell more seats at higher prices
  • 19. PRICING UNDER CONSUMER UNCERTAINTY SIGNALING BY THE CUSTOMER. One potential source of differentiation value is for Veblen or ‘snob’ goods, where part of the product’s appeal is its high price. • High prices allow customers to signal their worth to other individuals – When a fountain pen manufacturer raised its prices, it sold more • It also allows customers to signal their worth to themselves and others • It also allows gift-buyers to signal the value of their present. – Scottish whiskies had difficulty in Japan when they tried to enter with lower prices. – L’Oreal has had huge success with the ‘Because you’re worth it’ campaign
  • 21. PRICING ELASTICITY The price elasticity of a product measures the responsiveness of sales to a change in price. If elasticity=1, revenues will be the same from a price change If elasticity is >1, revenues will be higher with a price decrease If elasticity<1, revenues will be higher with a price increase
  • 22. PRICING ELASTICITY Why is a price elasticity useful? Relative margins: An electronics retailer priced batteries the same all over....[Price Elasticity Analysis] showed the battery that had the highest ”price sensitivity” in Dallas had the lowest price sensitivity in Boston. In other words, while Texans would buy this particular battery only within a narrow price range, Bostonians were far less picky about it. The store altered its prices accordingly, sold more batteries and made more money at it. Rule of thumb pricing tool, especially in retail sector with a large number of SKUs. This caries a weighty health warning since you are effectively assuming away your competitors, that you are already optimizing and that you have increasing marginal costs.
  • 23. PRICING ELASTICITY Ways of improving historical pricing analysis. • Calculate different price elasticities for each type of customer, each region, each product. Use more data than just aggregate sales and prices • DHL employed software that included the reactions of customers who called and got a quote but didn’t ship - that is, a failed sale. By including data from this group of customers, they improved their ‘quote to book ratio’ from 17 percent to 25 percent. • Use panel data econometrics where you include controls for places and times in your regression analysis. The problem is that this can get very expensive both in terms of personnel and costs of acquiring data.
  • 25. PRICING TO SEGMENT CUSTOMERS The most crucial insight is that we shouldn’t think about where we should price along our demand curve. Instead we should think, how many different prices to different customers can I charge along my demand curve? How can we charge a lower price to low- valuation types and get them to ‘enter’ the market, but still persuade the high- valuation types to pay the high price.
  • 26. Strategic assessment of whether a firm should move from a single price strategy: • Does my product offering have differentiation value? • Can I identify 2+ customer value profiles who theoretically have different valuations for my product? • Is there empirical evidence that these different customers actually have the EVC differences you expect them to have? • Very different price elasticities indicate that they do have different EVC. • Is there empirical evidence that customers in this value profile have similar enough EVC? • You can find out whether you have segmented enough, by trying to segment again. If the new price-elasticities that you calculate are noticeably different from each other then you have not segmented enough. PRICING TO SEGMENT CUSTOMERS
  • 27. Necessary criteria for success: low cost vs high cost • Does my product offering have differentiation value? • Can identify an unambiguous component of differentiation value (e.g. convenience). • ‘Distortion’: This component of differentiation value must be correlated strongly enough with overall EVC that high-valuation types will pay a premium rather than not have it. Or in other words, you are going to force your low-valuation customers to signal that they have low-valuations because you are going to distort your product quality downwards. • Comfort, Speed, Reliability, Ease of use are good places to start. • ‘Compensation’: This component of differentiation value must be not so essential that low-valuation types will never buy the product without it. Price to compensate them. This is why we see discounts for economy class discomfort. PRICING TO SEGMENT CUSTOMERS
  • 28. Necessary criteria for success: • Does my product offering have differentiation value? • Can identify an unambiguous component of differentiation value correlated with overall EVC (e.g. convenience). • ‘Distortion’: This component of differentiation value must be correlated strongly enough with overall EVC that high-valuation types will pay a premium rather than not have it. Or in other words, you are going to force your low-valuation types to signal that they have low-valuations because you are going to distort your product quality downwards. • Comfort, Speed, Reliability, Ease of use are good places to start. • ‘Compensation’: This component of differentiation value must be not so essential that low-valuation types will never buy the product without it. Price to compensate them. This is why we see discounts for economy class discomfort. PRICING TO SEGMENT CUSTOMERS
  • 29. PRODUCT ATTRIBUTE BASED PRICING • Must be able to structure price to meet key attribute • Creating different products/price based on the attributes – Time of day – Delivery – Colour – Remnant/premium – Urgency
  • 30. TIME AND PRICE TIMING STRATEGIES Getting the timing of pricing right can actually aid how much consumers enjoy your good. Basically, consumers prefer to avoid a payment that is timed when either they are enjoying the good, or when they expect in particular to not enjoy the good. • Decouple the pain of paying from consumption for experience goods: – For example, people are willing to pre-pay and pay a premium for things they enjoy (such as vacations) • Decouple the pain of paying from the pain of learning how to use a technology product: – Customers are more likely to switch if they do not have to pay full price for a technology service in the same month they are learning how to use it. • Decouple pain of paying from possibility of bad experience of products: – Cellphone companies gain more customers if they preannounce an automatic rebate when there is service interruptions.
  • 31. Framing The context in which a price is communicated to a customer affects how much the customer may be willing to pay for something. PRICING & BEHAVIOURAL ECONOMICS In the hearing aid market, audiologists could frame their offerings by demonstrating key features relative to potential alternatives that cost considerably more. For example, once the likely long-term consequences of doing nothing about hearing loss is shared with the patient, it helps frame the benefits of a pair of professionally-fitted hearing aids. Another example of framing is the use of bundling (or unbundling) your offerings. When many of the key technology and service features are itemized and a dollar value is assigned to each, it frames your offering much differently than if you were to simply list one price in a bundled format. Research has shown that unbundling results in many patients willing to pay more for the same offering.
  • 32. Anchoring The price you expect to pay for a product or service is an anchor. Price anchors are mainly determined by your experience buying a particular product, and they can change based on the season, time of day or even economic conditions. PRICING & BEHAVIOURAL ECONOMICS Based on previous buying experience, customers know they are receiving a “good deal” when a special low sale price is spotted in a newspaper ad or coupon. The challenge associated with respect to anchoring in the hearing aid market is that the average consumer is not very familiar with the time and expertise usually required to successfully fit hearing aids. When a dispensing practice runs advertising using low price points to drive traffic, an unintended consequence is anchoring a low price point in the mind of the prospective buyer. Once a price has been anchored in the mind of the customer it is difficult to change it.
  • 33. Default Bias Consumers generally take a path of least resistance when making purchases. When an obstacle - even one as simple as checking a box to become eligible for a service or upgrade - is placed in front of a customer, they oftentimes do not voluntarily opt to buy it. PRICING & BEHAVIOURAL ECONOMICS Employers make 401k retirement plans something their employees can opt into. When this is the default option upwards of 50% of employees do nothing and, therefore, opt out of the voluntary retirement plan. However, when the employer makes automatic enrollment the default option, very few employees voluntarily opt out of the program.
  • 38. UBER
  • 39. SLACK
  • 43. PRICING POWER • Market has limited capacity for purchase • Increasing demand by small customer set • Strong differentiation between products • High cost of switching
  • 44. TIMING & PRICE • Pre-payments • Early payment discounts • Lower price with same payment terms not ideal to change cashflow metrics unless – Elasticity is high – Margin can support lower price at greater volumes
  • 45. Yield vs Revenue vs Cash • Yield measures a return on a unit (margin) – Usually used for property and non-perishable assets • Depending on strategy, you can price to maximise revenue (cashflow hopefully) but not yield (return) • Low price does not equal better cashflow
  • 47. TESTING PRICE • Interview customers and ask – Interview bias • Online questionnaires (structure them well) – Instant Insights – Survey monkey • Fake products and ads – Google/FB campaign to target market – Same ad, different price points – Look for highest CTR at similar impression share
  • 49. WHAT IS LTV • The life time value of a customer – Gross margin (or revenue) X expected length of time as a customer – Other factors • segmentation in customer groups (some are longer than others) • Value of customer segments – They introduce new customers – They are more profitable • How to use LTV – Business models – Benchmark – Segmentation analysis
  • 51. CHANNELS • Is your product bought or sold – Bought – you put it in front of consumers and they take it off the shelf/digital storefront – Sold – somebody has to convince them and/or they need service to use it • Channels impact pricing due to – Mark-up required by channel – Cost of sales via the channel – Cost of logistics/training/service via the channel
  • 52. BOUGHT • Bought products rely heavily on reach/distribution to be seen by as many potential customers as possible – Physical stores • Distributors • Agents • Direct to retailers – Digital stores • Distributors • High fragmentation – Direct to consumer • Own stores • Own digital footprint
  • 53. SOLD • Who sells it • Who delivers the service – Is it the same place that sells it • Direct (own sales & service) • Mix direct/indirect
  • 54. BROAD OR NARROW DISTRIBUTION • Limited availability (higher price) – Easier to train up or have stronger relationship – Cost of going broad is often under-estimated from logistics and channel management perspective
  • 55. CHANNEL MANAGEMENT • Indirect channels need to be maintained – Distributor relationships – Understanding competitor behavior – In-store/on-line visibility & promotion – Training & after sales support