review pricing a marketing research value of information evpi = |emvwpi – emvwoi|
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Review
Pricing a marketing research Value of Information
EVPI = |EMVwPI – EMVwoI|EVPI = |EMVwPI – EMVwoI|
2
0
-5
Success
0.5
Failure
0.5
25
0
Approve
Disapprove
Approve
Disapprove
EMV(the best alternative with free perfect info) = 12.5
With perfect information
Approve
Disapprove
Success
0.5
Failure
0.5
25
0
-5
EMV(the best alternative without new info) = 10
Without information
Suppose with 50% of chance, the product will be a great success, bringing $40 million in revenue; and 50% of chance it will be a failure, bringing $10 million.
EVPI = EMVwPI - EMVwoI = 12.5-10 = 2.5millionThe most you are willingness to pay for any information
Example from Previous Class
The estimated R&D cost is estimated to be $20 million and the marketing cost is $5 million.
Suppose with 1/3 of chance, the product will be a great success, bringing $90 million in revenue; with chance of 1/3 it will be a failure, bringing $15 million revenue, and with 1/3 it will be a disaster and will generate zero revenue.
What is the value of the marketing research here? The answer is $11.67 million
1. Identify the status quo course of action when no marketing research (info) is available.
Expected Cost
Expected Revenue
Status quo course of action
2. Identify the scenario(s) in which marketing research will change the course of action.
Scenario # 2
When the revenue is $15 million
Scenario # 3
When the revenue is $0 million
3. Determine the gain conditional on the relevant scenario(s).
Scenario # 2
The conditional gain is
Scenario # 3
The conditional gain is
4. Multiply the conditional gain and the probability for the occurrence of the scenario. Notice that in this case, there are 2
scenarios (#2 and #3) in which the research has the potential to change status quo course of action and be valuable.
Thus, we need to calculate the expected value of the marketing research, accounting for both scenarios.
Expected Revenue
EVA - based on product differentiation
Reference Valueor
Reference Price
PositiveDifferentiation
Value
NegativeDifferentiation
Value
Total Economic Value
+$
- $Final $
8
Importance of Differentiation Value
Selling hot dogs at the street corner of NYC
Your cost
Competitor cost
Case A Case B
Your cost
Competitor cost
WTP
WTP
9
Importance of Having Differentiation Value
Netflix Cleanfilms.com
Inventory
Approx. 100,000 Approx. 1,000
# of distribution center
40+ 1
Price charged For 2 at a time
$17.99 $19.99
Secret of survival?
10
A not-so-fairy-tale ending
• In 2006, Judge Richard P. Matsch of the United States District Court for the District of Colorado ruled that it was a copyright violation to distribute re-edited movies without the consent from the movie studios.
• Cleanfilms.com notified its subscribers the loss of the battle while ensuring them that they commit to rent only the “clean” films. • Cleanfilms.com went out of business soon after.
• The Directors Guild of America and the Motion Picture Association of America sued most of these industry players for copyright infringement and claims regarding derivative works.
11
Value Communication
12
Value Communication
Competitor Our Magazine
Advantage
Circulation 1,400,000 1,550,000 11%
Readers per copy 1.8 2.1
Readership 2,520,000 3,255,000 29%
% See ad 9.20% 14.50%
% Motivated/ad seen
1.6% 2.2%
% Sold/motivated 20% 20%
# Readers sold 742 2077 180%
Sales per customer
$180 $200
Gross margin 30% 30%
Value of ad $40,062 $124,601 221%
Cost of ad $29,000 $67,400
Return on ad $11,062 $57,201
13
Value Measurement (Chapter 13)
3The Strategy and Tactics of Pricing
Techniques for Measuring Price SensitivityTechniques for Measuring Price Sensitivity
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis
• Direct Questioning
• Buy-response Survey
• Depth InterviewPreferences and Intentions
• In-store Experiments
• Laboratory purchase experiments
• Historical Sales Data
• Panel Data
• Store Scanner DataActual Purchases
Experimentally ControlledUncontrolledVariable Measured
4The Strategy and Tactics of Pricing
Cell 1:Uncontrolled Studies of Actual Purchases
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis
• Direct Questioning
• Buy-response Survey
• Depth Interview
Preferences and Intentions
• In-store Experiments
• Laboratory purchase experiments
• Historical Sales Data
• Panel Data
• Store Scanner Data
Actual Purchases
Experimentally Controlled
UncontrolledVariable Measured
Measuring Price Sensitivity: Uncontrolled Conditions
“+” Easy availability of data
“-” Reliability (confounding factors such as such as number of brands, number of competitors, competitors actions, frequency of advertising, and changes in the economic condition)
Appropriate for existing products Inappropriate for pricing new products or when a new pricing strategy is being introduced that has not been implemented by the company in the past.
Using Past Data
Measuring Price Sensitivity: Uncontrolled ConditionsAnalysis of Historical Data
Historical data is used to develop models that explain sales of goods and services.
Models are usually regression models (econometrics).
Models are limited by the range of data provided and the quality of the data.
The assumption is that the past is a good indicator of the future.
Example: Measuring New Home Sales
Measuring Price Sensitivity: Uncontrolled Conditions
Aggregate Sales Data
Data is typically collected on weekly or monthly cycles and aggregated across retail outlets. Data can generally be broken out by retail channel.
“+” Cheap Abundant
“-” Interpretation issue Lack of statistical power
Appropriate for Inappropriate for
Measuring Price Sensitivity: Uncontrolled Conditions
Panel Data Consumers keep track of purchases (size, amount, price, where purchased, when purchased, etc.). Consumer diaries are then aggregated to provide market information and brand by brand information. “+”
Short time horizon. Individual-level prices Demographics info. Competitor Information
“-” Biased sample of population Buyer identity
Measuring Price Sensitivity: Uncontrolled Conditions
Scanner Data
Data is collected on a store-by-store basis (prices and volume of sales data are collected). Can be linked with demographic information.
“+” More representative sample
“-” Lack of competitor information
Appropriate for Inappropriate for
6The Strategy and Tactics of Pricing
Cell 3:Uncontrolled Studies of Preferences and Intentions
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis
• Direct Questioning
• Buy-response Survey
• Depth Interview
Preferences and Intentions
• In-store Experiments
• Laboratory purchase experiments
• Historical Sales Data
• Panel Data
• Store Scanner Data
Actual Purchases
Experimentally Controlled
UncontrolledVariable Measured
• “-” Direct questioning regarding willingness-to-play potentially highly misleading.
• “+”• Data cheap and quick to collect • Can be used to measure WTP of durable/expensive products• Useful for obtaining detailed information for making economic value calculations.
• Buy-response surveys present the respondent with a price and ask if he or she would buy at that price. Since this question is structured more like a purchase, with no opportunity to bargain, the responses are more reasonable.
Measuring Price Sensitivity: Uncontrolled Conditions
5The Strategy and Tactics of Pricing
Cell 2:Experimentally Controlled Studies of Actual Purchases
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis
• Direct Questioning
• Buy-response Survey
• Depth Interview
Preferences and Intentions
• In-store Experiments
• Laboratory purchase experiments
• Historical Sales Data
• Panel Data
• Store Scanner Data
Actual Purchases
Experimentally Controlled
UncontrolledVariable Measured
Measuring Price Sensitivity: Controlled Conditions
In-Store Purchase Experiments
Most common method is to use two or more retail outlets that have similar characteristics (experiment and control).
“+” Ability to disentangle price and other promotion
“-” Can be extremely expensive. Competitors’ actions can contaminate results (special sales promotions, advertising)
Appropriate for products sold through
Inappropriate for products of
Measuring Price Sensitivity: Controlled Conditions
Laboratory Purchase Experiments
These experiments attempt to simulate the real store purchase experience. Mall intercepts an example of laboratory experiments.
Very adaptable.
“+” Inexpensive. High validity Control for demographics
“-” Artificial (Heightened consumer awareness)
Appropriate for products that are
Inappropriate for products that are
7The Strategy and Tactics of Pricing
Cell 4:Experimentally Controlled Studies of Preferences and Intentions
• Simulate Purchase Experiments
• Trade-off (Conjoint) Analysis
• Direct Questioning
• Buy-response Survey
• Depth Interview
Preferences and Intentions
• In-store Experiments
• Laboratory purchase experiments
• Historical Sales Data
• Panel Data
• Store Scanner Data
Actual Purchases
Experimentally Controlled
UncontrolledVariable Measured
Difference between laboratory experiment and simulated experiment “+” Conjoint analysis can be conducted very quickly and at a low cost.
“-” Validity
Appropriate for determining what familiar attributes to include (and at what levels to include them at) during the product/service design process.
Inappropriate for attributes that are
Measuring Price Sensitivity: Controlled Conditions
Conjoint Analysis
Most methods used to calculate consumer preference are compositional. For example, consumer ratings of attribute importance represent a compositional approach.
Conjoint analysis is a decompositional approach to measuring consumer preferences. Consumers rate a product while evaluating several product attributes simultaneously.
Conjoint Analysis
Consumer preference data is collected for several product configurations.
Product configurations are presented such that various trade-offs can be assessed on a monetary basis.
Data can be reported on an individual or aggregate basis, which is useful for segmenting a market based on price or other product attribute.
Sensitivity analysis can be conducted with the data to assess the impact that changes in attributes have on price sensitivity.
8The Strategy and Tactics of Pricing
Discussion Questions
For each scenario below, which method should be used to measure price sensitivity?
– You want to determine price sensitivity for an existing brand oforange juice.
– You are a long distance telephone company trying to determine what causes price sensitivity and how price sensitive consumers are in their selection of a long distance telephone service.
– You are a hotel chain trying to determine what features to include in a room (color TV, free toiletries, etc.).
– You are a laundry detergent maker introducing a flanking brand and want to see how many sales you will take away from your flagship brand as well as from competitors' brands. It is important, however, that competitors not find out about the test. Otherwise, they will be forewarned of the new brand's introduction.
Next Lecture
Cost and cost-plus pricing, BEP
Read Chapter 1
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