BEHAVIOURAL PRICING

Managers when asked about 6 potential inputs on product pricing decisions:

84% were well-informed on the variable cost of

providing their product. 81% were well-informed on the fixed cost of providing their product. 75% were well informed on the competitors product price 61% were well-informed on the value of their product to the customer. 34% were well informed on how consumers would respond to price changes. 21% were well informed on consumers willingness to pay at different price levels.

Value Pricing and the Economic Perspective

Objective value Perceived value Product Price Marketing Effort and Price of Substitutes
Perceived valuePrice Price-COGS

Consumer Incentive to buy

Cost of Goods Sold

Rs. 0/-

Companys incentive to sell

 The Economic Perspective- Consumers buy

when perceived value exceeds price. Perceived value-Actual Price >0

 You lying on a beach on a hot day All you have to

drink is ice water. For the past hour you have been thinking about how much would you enjoy a nice cold bottle of your favourite beer. A friend gets up to make a phone call and offers to bring back a bottle of your favourite beer from the only nearby place where beer is sold-a small run down grocery store. He says that the beer ,might be expensive and asks how much are you willing to spend. He says he will not buy the beer if it costs more than the price you state. What price do you tell your friend?

 You lying on a beach on a hot day All you have to

drink is ice water. For the past hour you have been thinking about how much would you enjoy a nice cold bottle of your favourite beer. A friend gets up to make a phone call and offers to bring back a bottle of your favourite beer from the only nearby place where beer is a fancy resort hotel. He says that the beer ,might be expensive and asks how much are you willing to spend. He says he will not buy the beer if it costs more than the price you state. What price do you tell your friend?

 Study revealed people where willing to pay more for the

fancy hotel compared to the grocery store. The interesting question is why? In both the scenarios the ultimate consumption is identical. No atmosphere from the fancy store or the run down grocery store is being consumed by the beer drinker to justify different prices. There is no strategic reason to report a price lower than ones perceived value (no discount from either of the stores on bargaining) In addition to economic utility the consumer is driven by Psychological utility of the products which in turn is

Relative Vs Absolute Value of Money

You are set off to buy a walkman at what you

believe is the cheapest store in your area. Upon arriving you find that the walkman costs you Rs. 2500/- a price consistent with your prior expectations. As you are about to make the purchase a reliable friend tells you that the same walkman is available at Rs. 500/- less in a store approximately 50 minutes away. Do you go to the other store to buy the walkman?

 You are set off to buy a camcorder at what you

believe is the cheapest store in your area. Upon arriving you find that the walkman costs you Rs. 4500/- a price consistent with your prior expectations. As you are about to make the purchase a reliable friend tells you that the same walkman is available at Rs. 500/- less in a store approximately 50 minutes away. Do you go to the other store to buy the walkman?

 The Absolute saving is the same. However the

psychological value of the savings is far greater in the first scenario than the second. The psychological utility of fixed amount of money is relative. Willingness to pay is impacted by relative incentives. He will consider both economic utility i.e. perceived value price as well as his relative incentive to enter the transaction(perceived value-actual price)/actual price)

Impact of a Salient Reference Price

Your favorite sports team has made to the

baseball world cup .The first round playoff series is the best series of the seven series with games 1,2,5,7 being played on your teams home field. The general admission tickets have been priced at Rs100 during the regular season. However the team decides to raise the tickets of the home field games to Rs 150. Is the price increase fair or unfair?

Arguments in support of this stance

The nature of the product has changed- playoff

games are more exciting than regular season games. Demand almost certainly will be higher for the playoff games and the team is merely responding to this increase in demand. It is common for the ticket prices to increase for playoff games.

 Your favorite sports team has made to the world

cup. The first round playoff series is the best series of the seven series with games 1,2,5,7 being played on your teams home field. The general admission tickets have been priced at Rs100 during the regular season and also for games 1,2. However the team decides to raise the tickets of the home field games no. 5,7to Rs 150. Is the price increase fair or unfair?

 If games 5,7 are worth 150/- in the scenario 5#

they should be worth the same in scenario 6# so economic utility remains the same. However Psychological utility differs due to the component of fairness In scenario 5# the regular season tickets were not the salient reference price for the playoff tickets. Willingness to pay is impacted by relative incentives. He will consider both economic utility i.e. perceived value price as well as the consistency between the actual and salient reference price i.e (actual price-reference price).

Impact of cost of goods sold

A grocery store has no peanut butter in stock, but

is about to receive a new shipment. Prior to delivery the owner finds out that the wholesale price of the peanut butter has increased to 20% and will affect this new shipment. The owner decides to raise the price of the peanut butter by 20% is the price increase fair or unfair?

 The grocery store has one week supply of peanut

butter in stock and is due to receive a new shipment in near future. Prior to delivery the owner finds out that the wholesale price of the peanut butter has increased to 20% and will affect this new shipment. The owner decides to raise the price of the exiting stock price of the peanut butter by 20% is the price increase fair or unfair?

 The product under scrutiny is the same and the

price is increasing 20% in both the cases so there is no change in perceived value- price i.e the economic utility. Consumers are also concerned about the firms' magnitude to sell. In determining his willingness to pay a consumer will consider his own economic utility from the transaction and that of the firm i.e (actual priceCOGS)

Nature of the product being sold

In Indian Idol 5 Tamang made it to the final.

During the season general admission to the season the tickets were priced at Rs. 200. However Tamangs visit to his home ground his performance was specially priced at Rs. 250 .
A hardware store had been selling snow shovels

in kalimpong at Rs 200/-. A night after a large snowstorm he increased the price to Rs. 250/-. Is the price increase fair or unfair?

 In determining his willingness to pay a consumer

will consider his own economic utility from the transaction and will vary across product categories(e.g discretionary vs necessity, luxury vs utilitarian )

Actively manage price expectations:

Establish credible reference price

Manage product price trends.

Encourage favourable comparison Avoid unfavourable comparison through product

differentiation.

Actively manage perceptions of COGS

Focus attention on fully loaded cost of goods

sold. Bundle products to obscure cost of goods sold. Focus attention on consumer value.