Marketing Quiz Notes Pricing

Americas Best BBQ Joint Summary: -surge pricing can affect how consumers perceive your
firm in the long run, making more reluctant to purchase from firm must have explanation as
to why you use surge pricing
Price Elasticity: crucial element for determining price
Rethink Your Pricing Strategy: move from cost-plus pricing to customer value based pricing
-Price realization: ability of firm to actually get prices that it is setting more relevant to B2B
contexts (but not exclusively) aka selling as close to target price as possible

Cost Plus vs. Value Based Pricing

a) Cost Plus = Product Focus
Product costs PRICE value customers
-Decide on quantity based off of costs and price
-Justify costs through value
Issue: dont consider how customers value it price is determined by costs, but price is
determined by quantity, so you cant actually figure out the price or quantity

b) Value Based = Customer Focus

Customers value PRICE costs product
-Customers needs dictate value
-Decide on quantity based off of costs & price
-Justify costs through value
-How marketing is usually done
-Look at whether you can profitably serve market by looking @ costs after

Mustang Example: Ford creating Mustang cars 1964, offering bare bones sports car for under
$2,500 has outsold any other car Ford has since built
*Looked at value based pricing & customers needs

Understanding WTP
-Key to pricing effectively is to understand where consumers valuation comes from
1) Change a regular distribution graph to a cumulative distribution (@ each point, adds up all
the people to the left side) at the highest price, everyone is captured *AKA THE EXACT
OPPOSITE OF WHAT WE WANT
-Each price states total # of consumers who max WTP is LESS than the price
2) Invert the curve (so now its more like a demand curve) but price is on the x axis and
quantity is on the y axis
3) Turn into demand curve by switching axis (can also change to make line graph instead)

*the demand curve and underlying distribution of consumers values tells the same thing
formatted differently

Price Sensitivity
Def: how much demand will change based on a change in price
-Relates to slope of demand curve
-Comes from the fact that when you change price, you change the # of people willing to
purchase has nothing to do with an individuals price sensitivity

-Price sensitivity stems from variance in WTP

-Niche product will have more narrow & taller graph
-A well targeted product will be more narrow & shift the curve to the right (more people willing
to than not)
Determinants of WTP
-Should reflect combination of utility of item, prices of alternatives & opp costs
-Hard bc consumers cant even tell
-Uncertainty proven with WTP changing depending on irrelevant factors

Wine Study: if asked those born from the 1st-18th would pay for a bottle of wine worth the
number of their birthday, chose a cheaper amount they would pay vs. those born from the 19 th-
30th

Basic of WTP: Reference prices

-WTP strongly influenced by price of alternatives (Reference prices) e.g. actual utility of water
much higher than willingness to pay due to cheapness of substitutes
-Represents attempt to assess value of good relative to cost of comparable goods aka
EXCHANGE VALUE

Assessing Exchange Value

-Total exchange value WONT exceed utility value (consumers shouldnt be willing to pay more
than monetary value of total utility from product)
Total exchange value = reference price (+ positive differentiation value) or ( - negative
differentiation value)
use total exchange value as the basis of price

Reference value = cost of best alternative

Differentiation value can be SUBJECTIVE pleasure, OBJECTIVE time/money

Assessing Exchange Value Sandwich Example

Total Utility Value = Utility value (1 option wouldnt normally pay) + Exchange Value (2
options) + Reference Price (sandwich normally)
-Reason why conveniently located stores charge higher prices
-Demonstrates how WTP can be effected by perceived efficacy (perceived ease of obtainability)

TWO ISSUES TO CONSIDER WHEN ASSESSING EXCHANGE VALUE

1) Highly sensitive to reference prices: must identify what consumers are likely to view as
the reference alternative (can sometimes influence)
e.g. of reference price power: if reference prices are unavailable or unfavourable, can turn to
reference prices from other categories e.g. cost of Iraq war equal to 9 Twinkies per American
per day for a year
OTHER EXAMPLES: Eisenhower 1953 speech: cost of war bomber is a school in 30 cities etc.
De Beers ad: 2 large diamond earrings, putting off kitchen renos for a year
Ikea cabinet and extra shoes
-
2) Value of differentiating features: no reference price for differentiating feature
marketers must emphasize full value of differentiating feature

Broad Pricing Strategies

1) Skim Pricing: price at high end, above exchange value (try to capture most of WTP)
trade off volume for higher CM use when
demand is relatively inelastic
CM is low
 2) Penetration Pricing: price at low end, below exchange value a large CM opens up this
option make up with volume (tradeoff CM for volume) e.g. MEC, Acura, Lexus price
is low relative to exchange value (but not Low LOW) use when
demand is relatively elastic
CM is high
3) Neutral Pricing: middle pricing