Marketing 333K
psychological pricing
- Signpost Pricing - Walmart sign to show how large it is - Reference Prices- Our Price right next to publisher price - Loss Leader - tickets at alamo draft house are underpriced so that they buy the really high priced food - Left-Digit Bias - Gas stations putting 1.99 9/10 so it looks like the buyer is getting $1 gas instead of $2.00 - Misleading Offers - Paper towels offering 33% more instead of 33% off... the 33% off is a better deal per paper towel - Price matching Guarantees - Walmart used to do this with everything in order to gain cheaper customers, this is tougher in the age of technology which makes it really easy to pull up prices online.
Best pricing strategies
- heavily comprehend customers' perceived value - are customized to optimize value capture - are woven into an effective business model
Cities with higher air prices
- more business travelers - served by smaller planes - less competition - strong local economy
Cities with lower air prices
- more leisure travelers - served by large planes - more competition - weak local economy
Customer Relationship Management (CRM)
-refers to practices, strategies and technologies that companies use to analyze and manage customer interactions and data throughout the customer lifecycle with the goal of improving business relationships with customers and driving growth.
Three drivers of CLV
1. Acquisition Cost 2. Development 3. Retention (Retention is the best way to increase revenue)
subscription model
A payment method for software that has users pay a fixed amount of money per month in order to use the software. Example: Amazon Prime shipping service Netflix Playstation shifting from a hardware focus on online subscriptions for multiplayer features
Demand Shaping or "Decoy Pricing"
A pricing strategy where a seller offers at least three similar products; two have comparable but more expensive prices and one of these two is less attractive to buyers, thus causing more buyers to buy the higher-priced more attractive item Example: Wine List - Cameenere - $34 - Tempranillo - $ 49 - Malbec - $54 - Pinot Noir - $62 - Cabernet Sauvignon - $212 The purpose of this wine listing is to get people to buy the $62 bottle of wine because the $212 looks super overpriced. In this case, the $212 isn't really supposed to be a hot item, but if the customer wants to buy a severely overpriced bottle of wine they will sell it to them.
Customer Development
Creating unique elements within the system environment in order to cater to the customer. Goal: - Increase Purchase Frequency Example: Colgate - made the toothpaste hole bigger to use more toothpaste per brush McCormicks - started putting less pepper in the same size container in order to get people to buy more often - Increase Purchase Amount Alamo Draft House - providing 3D movies that cost more than a 2D movie X-Box - selling games, cords and console all together for a larger purchase amount - Focusing on this changes the Avg. Profit Per Delivery
Evernote's "Smile" Curve
Freemium model - top note taking application in the world Revenue curve - users are more likely to upgrade to a paid version the longer they use it.
customer satisfaction
From notes: "Perceived company performance relative to customer expectations" -customers' evaluation of a good or service in terms of whether it has met their needs and expectations
Importance of Setting a pricing objective
Example on canvas: Assume: - Cost = $20 - Market = 1,000,000 Changing the price directly impacts the objective we are trying to meet. Price directly effects quantity and therfore effects - Revenue - lower price generally means higher R - Margin - price and M meets somewhere in the middle - Margin % - higher price generally = higher M% - Mark Share - lower price generally = higher MS
Evolution of Pricing Approaches
Haggling (6,000 years ago), Fixed Prices (1800s), Dynamic & Customized Pricing (2018 today)
business model
Harvard Business Review: Answers the fundamental questions every manager must ask: - How do we make money in this business? - What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
Two Sides of Customer Value
High (Vulnerable -> (Star Customer Customer) Customers) Profitability (Lost ^ Low Cause) (Free Riders) Low High Customer Experience
Predicting Churn
How likely is it you would recommend us to a friend? - 1 through 10 scale - 9 and 10 are extremely likely - 0-6 are not likely at all Extremely likely - not at all likely = Net promoter Score
perceived performance
Delighted Customer - above customer expectation Satisfied - right at customer expectations Dissatisfied Customer - below customer expectation
Product Offering
Manage product line to provide increasing functionality at an increasing price Example: - Hair Salon Women's Haircut, Hair Stylist - $35 with 5 options ending with the most expensive at Premium Director - $80 and up - Airlines making their basic economy tickets terrible so that people will by economy
Fastest and most visible way to create value for customers?
Low pricing, which is also the most expensive and the least sticky. Most companies do a poor job of pricing, focusing too much on costs
churn rate
Measurement of the number of customers who stop using or purchasing products or services from a company. Used as an indicator of the growth or decline of a firm's customer base.
price gouging
Pricing products unreasonably high when there is a high demand resulting from a monopoly or a natural disaster. - Uber does this with demand pricing - Price hikes also create a financial incentive for suppliers from outside the area to move their product into high- demand zones - ... politicians who suppress prices make it more difficult for storm victims to get much-needed suppliers
Setting the Price: Price Sensitivity is high if
Product: 1. Low differentiation of alternatives 2. Easy Comparability 3. Product will perform as expected 4. Not mission critical (cancer vaccine would be MC) Price: 5. Easily Comparable 6. High in a relative sense 7. Reference price exists 8. Not needed as a quality cue Buyer 9. Sophisticated, deliberative 10. Bearing Costs 11. Able to switch easily (apple does a good job of this) 12. Not motivated by prestige
Setting the Price: Other Factors
Reasons to set the price higher: - Low Price Sensitivity (inelastic demand) - Competitive Entry Not Likely - Limited Production Capacity - Support "prestige" Brand Image Reasons to set the price lower - High Price Sensitivity (elastic demand) - Competitive Entry Possible - High Production Capacity; Scale Economies Possible - Support "affordable" brand image
Availability
Selectively presenting an offer to particular customers (but not to others) - giving a 15% off coupon to someone more price sensitive
Customized Pricing
Selectively presenting and offer to particular customers (but not to others) Availability - selectively presenting and offer to particular customers Buyer Characteristics - set price based on buyer characteristics such as age, gender, location, affiliation Transaction Characteristics - set price base on quantity purchased, time of purchase, or method of payment Product Offering - manage product line to provide increasing functionality at an increasing price
Buyer Characteristics
Set price based on buyer characteristics such as age, gender, location, affiliation Example: -Canadians save 20% because they have a lot fewer Canadians that go to Disney World. -Children eat for free on Sundays
Transaction Characteristics
Set price based on quantity purchased, time of purchase, or method of payment Example: Save 15% when you pre-pay your stay
Cost-Oriented Pricing
Setting prices based on cost. Usually prices are set as a multiple of cost, such as 1.3 times the cost. Price = X x(1 + markup %) = $10 x (1 + 30%) = $13.00 product -> cost -> price -> value -> customers
unbundled
Involves a retailer's charging separate prices for each item sold. Example: Spirit Airlines - the cheapest plane ticket you can buy but the service is terrible and you pay for checked bags, boarding passes, carr-on in overhead bin, water or soda, nuts - two-fifths of its revenue comes from fees and nonticket sales - Frill control - "we believe in paying only for what you use, not what you don't. Control your options and never pay for someone else's "free" bags AT&T - has more than doubled administrative fee it tacks on to the bottom of wireless customers' bills. - Could add $970 Million to AT&Ts annual revenue
skim pricing
charging a high price for a new product during the introductory stage and lowering the price later From Notes: "Setting a high price for a product to "skim" maximum revenues layer-by-layer from the segments willing to pay the high price; the company makes fewer but more profitable sales."
penetration pricing
a pricing policy whereby a firm charges a relatively low price for a product initially as a way to reach the mass market From Notes: "Setting a low price for a product in order to attract a large number of buyers and a large market share"
price lining
establishes distinct price categories at which similar items of retail merchandise are offered for sale Example: Washburn Guitars - Collectors Series ($3000+) - Professional ($1000 - $3000) - Intermediate ($1,000 and below) - Entry ($349 and below)
Bundling
grouping two or more products together and pricing them as a unit. If you can sell the same bundle to everyone, it makes life easier, which usually means lower marketing and selling costs. Example: Hotel Packages - save a bundle when you bundle air+hotel Insurance - bundle and save on home and auto insurance Microsoft
Veblen Good
as the price of a good rises, people with high incomes begin to buy more of the product.
ad-supported
derives revenue by selling advertising space, much like the concept of an affiliate program. Example: Angry Birds - Ad-Supported family app (free for a customer in exchange for watching ads) facebook is ad-supported at the moment but could potentially go to a subscription to maintain stock growth?
prestige pricing
setting a high price so that quality or status-conscious consumers will be attracted to the product and buy it - the demand curve looks like a sideways parabola with the rounded end facing the axis Example: Stella Artois - "reassuringly expensive" Palessi - payless made an expensive-looking store and charged 800% markups on some of their shoes and were creating demand for cheap made shoes
value-based pricing
setting the price at a level that seems to the customer to be a good price compared to the prices of other options customer -> value -> price -> cost -> product
Freemium
subscriptions that provide some content for free but require a monthly subscription to take advantage of all the site has to offer Pros - potential to unlock viral growth , opportunity to upsell and monetize (clash of clans) Cons - Low free user to customer conversion rates , high churn rate Example: Spotify: - The initial app is free with listening to adds and the premium model is a subscription-based model without adds - Spotify was also described as a mix between an ad-supported/Subscription model which is basically a freemium
Product-to-service
that allows customers to purchase the desired result rather than the equipment that delivers that result - Example: HP offering businesses Personal Computers as a service - Corporate customers will be able to pay a fixed monthly fee per employee for computing equipment Rent the Runway - women pay to rent an evening gown or other special apparel for four to eight days - appeals more to millennials and Gen Z shoppers that value experiences more than owning things Uber - sells transportation as a service
Price
that which is given up in an exchange to acquire a product. -Price -Fare -Premium -Fee -Tuition -Interest -Salary -Dues
dynamic pricing
the practice of changing prices for products and services in real time in response to supply and demand conditions - Amazon vs. Sears example in selling the microwaves - Amazon uses dynamic pricing (9 pricing changes) Sears uses a stagnate price
customer lifetime value
the value of the entire stream of purchases a customer makes over a lifetime of patronage Alamo Drafthouse - $396 Bank of America - $931 Starbucks - $14, 099
Whale Chart
used to determine which of their customers are the most profitable, creating a hierarchy of importance Y Axis- Cumulative Profits X Axis- Cumulative Percentage of Customers looks like a wide parabola
Customer Retention
the objective of providing value is to retain highly satisfied customers - increases your customers' lifetime value and boosts your revenue - Blue Apron failed because of customer retention - Apple excels at this because people use more than one product in their ecosystem and the switching costs become high - look at notes - Focusing on this increases the expected lifetime of a customer - This has the most effect on the customer lifetime value
Dynamic and Customized Pricing Example
Admission and Policies - General Admission tickets are different prices depending on the day and time would be transactional characteristics - Offering 3D would be a product offering -
Legal Considerations of Pricing
1. Pricing Within Channel Levels: Very Illegal -Horizontal price-fixing -Predatory Pricing 2. Pricing Across Channel Levels: -Vertical price-fixing "resale price maintenance" 3. Deceptive Trade Practices: -Price gouging -Bait and switch -Bargains conditional on other purchases -Comparisons with suggested prices or former prices
Types of Business Models
- Ad-Supported - Subscription - Product-to-Service - Bundling - Freemium - Two-Part - Unbundled
Two-Part
Classic razor model, selling the initial product at a cheap price (maybe even at a loss) but the customer has to buy a reoccurring product like the actual razor Example Type 1: Lower Profit on Initial Sale -> Higher profit on subsequent sales Keurig - doesn't make much off of the coffee maker, but makes a killing on the individual cup's margin Example Type 2: Higher Profit on Initial Sale -> Lower Profit on Subsequent Sales Costco - "most customers don't take membership fees into account when considering the price of a Costco Item" Apple is an ecosystem company making them really "sticky" and make switching cost very high
Customer Acquisition Costs
The amount of money a firm spends to convince a customer to buy (or in the case of free products, try or use) a product or service. - focusing on this ups the frequency of purchases
Customer Value
This chart flows upwards. Firm Value Customer Lifetime Value Customer Acq. Customer Ret. Customer Dev. The 4 Ps