revenue management and pricing

7/29/2019 Revenue Management and Pricing

1/113

Pricing and Revenue Management

(c) Stowe Shoemaker, Ph.D


2/113

Les Miserables

The duty of the innkeeper is to sell to the firstcomer, food, rest, light, fire, dirty linen, servants,fleas, and smiles; to charge for the open

window, the closed window, the chimneycorner, the sofa, the chair, the stool, the bench,the feather bed, the mattress, and the straw bed;

to know how much the mirror is worn and totax that; and by five hundred thousand devils, tomake the traveler pay for everything, even thefleas that is dog eats.



3/113

Objective of this section

Understand steps to better pricing

Understand Competitive Value Analysis

Review basics of revenue management

Understand price customization

Understand Value



4/113

The Challenge of Pricing

Taxi



5/113

There is no easy way to find out what the actual

true price of any car is. Oh sure, there is asticker price, but only a very nave fungal

creature just arrived from a distant galaxy

would dream of paying this. In fact, federallaw now requires that the following statement

appear directly under the sticker price:

WARNING TO STUPID PEOPLEDO NOT PAY THIS AMOUNT

-- Dave Barry



6/113

60.3% claimed they definitely would ask about theroom rate the next time they made a reservation

35.7% claimed they would definitely check rates atother properties the next time they planned to visitthis hotel

Assume that you go to make a reservation at

the luxury hotel you are loyal to and you find

out that they are charging you $50 per night

more than they usually do because they have only

a few rooms left. Please answer each of the

questions based on this knowledge.



7/113

Steps to Better Pricing

1. Assess what value your customers place on a product orservice

- How to create value

- What is the economic value of this product or service tocustomers

- Case study on Coca-Cola

2. Look for variation in the way customers value the product

- Do customers vary in their intensity of use

- Do customers use the product differently

- Does product performance matter more to somecustomers, even if the application is the same



8/113


2. Look for variation in the way customers value the product -continued

- How do differences in both perceived value and nonvalue factors influence price sensitivity and dividecustomers into market segments

- How can members of different segments be identifiedprior to purchase

- How can fences between segments be established

- How can the firm avoid violating legal constraints



9/113


3. Assess customers price sensitivity

- How could an effective marketing andpositioning strategy influence thecustomers willingness to pay

- Market research techniques using Excel

- Behavioral aspects of pricing

4. Identify an optimal pricing structure- Bundle pricing



10/113


5. Consider competitors reactions

- Who are key current and potentialcompetitors

- If competitors are currently in thismarket, what actual transactional pricesdo they charge

- Given competitors past behavior,personalities, and organization structures,what is their goal in pricing



11/113


5. Consider competitors reactions - continued

- What are competitors strengths andweaknesses relative to the firm

- How might a firm use information toinfluence competitors behavior in waysthat would make its goals more

achievable or profitable



12/113


6. Monitor prices realized at the transaction level

- pricing across different channels

7. Assess customers emotional response8. Analyze whether the returns are worth the cost

to serve



13/113


9. Understand costs

What is the incremental variable cost ofsales

At what levels of output will additionalexpenditures on semi-fixed costs berequired, and how much will they be

What are the avoidable (not yet sunk) fixedcosts involved to offer this product at theproposed price



14/113


10. Understand Supply

Cost structure

Capacity utilization Product perishability

Extent of product differentiation

Number and diversity of competitors Impact of sales volume on cost



15/113


11. Understand Demand

Price sensitivity of selective demand

Efficiency of price shopping Degree of brand loyalty

Industry growth rate

Buyer concentration Complementary product



16/113


12. Understand Distribution Channels



17/113


Competitor Analysis and

Positioning: Key to Pricing


18/113


The competitive advantages and disadvantages which areshown in the matrix of competitive advantages can becondensed into one single index, the index of competitive

strength. All relative performances of the product on theindividual factors are weighted with their importance and

summed up.

Index of Competitive Strength


19/113


Example: Importance Question

Next, please think for a moment about the reason for visiting a specifichotel in Las Vegas for gambling. Please tell me how important eachreason is for you in your decision to visit one specific property overanother. Please use a 1 to 10 scale, where a 1 means the reason is notat all important and a 10 means the reason is very important in yourdecision to choose one establishment over another for gambling. Youmay use any number on this 1 to 10 scale.

[Ask questions in random order]

How important is_______________in your decision to choose oneplace to visit over another?

It is a place my friends like to go


20/113


Example: Attitude Question

Now I am going to read you a list of features that may or may notdescribe some of the hotels in the Las Vegas area. Well use a 1 to 10scale, where a 1 means it does not describe the hotel at all and a 10means describes the hotel perfectly. If you have not been to the hotelpersonally, please base your answers on what you have heard, or whatyou believe to be true.

[Ask questions in random order]

How well does this feature describe(brand to be rated)?

It is a place my friends like to go


21/113


Calculation of Competitive Index

1. Sum the importance ratings for all features andmultiply by the number of scale points. (The numbersare in column A in Table on next page)

2. For each attribute, multiple average importance xaverage performance. Answers in Column C

3. Sum all numbers in column C

4. Calculate the CSI as -- Total C/Total in A

5. Repeat steps for competitor's: see columns D and E


22/113


Calculation of Competitive Index

Importance

A

CompanyRating

B

CompanyScore

C

CompetitorRating

D

CompetitorScore

EFeature Scale: 1-10 Scale: 1-

10A*B Scale: 1-10 A*D

It is a placefriends like to go

7.3 7.6 55.48 6.4 46.72

Atmosphere is

very pleasant

8.8 7.7 67.76 7.6 66.88

One place seemsto have betterodds

7.4 6.8 50.32 6.0 44.40

Slot machinesfilled in a timelymanner

7.5 6.8 51 6.8 51.00

Type ofpromotionsoffered

7.4 7.7 56.98 6.8 50.32

TOTALINDEX

38.4 *10=384 281.5473.3

259.3267.5


23/113


Relative Performance

Example: Casino

LevelofImportance

high

low

Brand FeelSafe

GoodEntertainment

Value ofPromotions

Slot Club

Non

Smoking

FriendlyStaff

ServicePackage

Price

Matrix of Competitive Advantages


24/113


Steps to Developing a Positioning Strategy

1. Identify the competitors

From customers point of view

Different competitors in different segments


25/113


Best Way to Define True Competitors

Ask 50100 customers at check-in, If you didnot stay here tonight, where would you stay?

Those hotels who, if they took a pricing action,would force you to take a pricing action

Where do you currently walk guests?


26/113


Best Way to Define True Competitors

Based upon a definition of the corecustomer; different competitors fordifferent segments

Avoid emotional opinions


27/113


Steps to Developing a Positioning Strategy

2. Determine how the competitors are perceivedand evaluated

3. Determine the competitors positions

Critical to also have reference points fordata analysis


28/113


1. Identify competitive set Upper tier: member of competitive market

with a rate premium above our hotel

Direct tier: member of our competitivemarket, with a rate price point approximatelyequal to our hotel

Lower tier: member of our competitive

market, with a rate price point below ourhotel


29/113


Calculate for your three core customers in all threecompetitive tiers: a total of nine analysis

Three core customers

Business transient

Pleasure transient Group customer

Thee competitive tiers

Upper tier

Direct tier Lower tier


30/113


2. Conduct competitive pricing analysisShops for

Local hotel reservations office

Hotel 800 number

GDS system Internet

Shop for leisure peak, leisure non-peak, businesspeak, business non-peak, group peak, and group

non-peak


31/113


3. Use chart to plot each competitors overallvalue

Horizontal axis: plot each competitors

overall value assessment

Vertical axis: plot each competitors lowestavailable retail rate obtained via blind shop

Center axis: your hotel with rate equal tolowest available retail price point


32/113


Feel

Safe

There

Friendly

Employe

es

Place My

Friends

Like to Go

Always

Have Good

Entertaiment

Drink

Orders

Taken in

Timely

Manner

Cashier

Lines Are

Short

Restaurants

Offer Great

Value

Can get

change

quickly

Slot

Machines

Filled in

Timely

Manner

Like the

Promotion

s Offered

You Can Get

Complimentari

es

overall

average

Importance 8.20 8.20 6.27 4.80 6.12 6.37 7.49 6.33 5.67 4.80 6.15 6.40

Rio 7.26 6.60 6.49 6.47 5.93 5.91 5.70 5.54 5.35 5.05 4.96 5.93

Bally 6.55 5.28 3.96 4.59 5.11 5.05 4.05 4.70 4.60 3.75 4.20 4.71

Boulder 7.40 6.88 6.40 5.74 6.50 5.90 6.54 6.11 5.89 6.16 6.05 6.32

Caesar 7.19 5.85 6.15 5.81 5.37 5.43 4.32 4.82 5.07 3.62 3.97 5.24

Circues 4.70 4.60 4.07 4.24 4.59 4.63 4.55 4.15 4.21 3.80 3.81 4.30

Excalibur 6.61 5.64 5.01 4.89 5.03 5.42 5.01 5.19 5.04 4.06 4.47 5.12

Fiesta 6.19 6.00 4.75 4.64 5.48 5.43 5.61 5.60 5.34 4.66 5.25 5.36

Rate CSI

Rio $179.00 59.97

Bally $185.00 47.91

Boulder $160.00 63.92

Caesar $189.00 53.16

Circues $159.00 43.41

Excalibur $140.00 52.07

Fiesta $155.00 54.3


33/113


$179

$185

$189

$180

$159

$155

$140

59.97Rio

47.91Bally

63.92Boulder

53.16Caesar

43.41Circus Circus

52.07Excalibur

54.3

Fiesta


34/113

Creating Loyalty (44)Process

Value

(AddedandRecovery)

Communication

Fluid

ExitExit

Exit

Exit



35/113

Value-Based Pricing

Involves choosing a price after developingestimates of market demand based on howpotential customers perceive the value of the

product or service.

Can satisfy diverse product strategies, including,for example, market penetration or profit

maximization. Should be the preferred pricing methodology



36/113

Question: Where Would You Buy Gas?

Station A: Sells gasoline for $ 2.30 per gallon, and gives a

$ 0.10 discount if the buyer pays with cash.

Station B: Sells gasoline for $ 2.20 per gallon, and charges a$ 0.10 surcharge if the buyer pays witha credit card.



37/113

Examples

Which do you choose? A____ or B____

A. Receive $50

B. 55% chance of receiving $100; 45%chance of earning nothing



38/113

Examples

Which do you choose? C____ or D____

C. Loose $20

D. 20% chance of loosing $100; 80%chance of losing nothing



39/113

Answer to Previous Question Pertains

to Prospect Theory



40/113

Daniel Kahneman Toasting Noble Prize



41/113

Prospect Theory: Basic Idea

Value is associated not with actual levels ofconsumption, but with anticipated changesin wellbeing

Buyer assesses prospective decision outcomes(prospects) by mentally categorizing them aseither gains or losses relative to reference point



42/113

Explanation

Station A sets reference point at $2.30 and thenrewards buyers who pay cash; that is; a gain relativeto the reference point;

Station B first establishes a reference point at$2.20 and then penalizes buyers who use creditcards; a loss relative to the reference point

This is in contrast to economic theory that predictsthat gains and losses of equal size are valued thesame


Positive Value


43/113

Losses Gains

Negative Value

Reference Point

(state of well being)

Station A ($2.30 0.10)

Station B:

($2.20 +.10)

Value Function

1.6

1.0



44/113

Examples

Which do you choose? A____ or B____

A. Receive $50

B. 55% chance of receiving $100; 45%chance of earning nothing

Which do you choose? C____ or D____

C. Loose $20

D. 20% chance of loosing $100; 80

chance of loosing nothing



45/113

Answer

If you chose A in Question 1, then you shouldchoose C in Question 2

If you chose B in Question 1, then you shouldchoose D in Question 2

How many had a reversal?



46/113

Rationale for Answers

Prospect theory states that people are risk adverse (e.g.,conservative) when considering gains; in contrast, morenaturally inclined to risk a loss than to pay even the

expected value of avoiding it.


Positive Value


47/113

Losses Gains

Negative Value

Reference Point


Value Function


E i Th P


48/113

Economic Theory versus Prospect

Theory

Economic Theory

Gains and losses of equalsize treated the same (e.g.,100 gain = to 100 loss)

Prospect Theory

loss judged more painfulthan a gain of equal value(e.g., loss of 100 morepainful than a gain of100)


E i Th P


49/113


Theory

Economic Theory

People are consistent intheir decision making

Prospect Theory

If people perceive they arein the gain domain, they

will act conservatively If people are in the loss

domain, they will tend totake more risks


E i Th P


50/113


Theory

Economic

Expected utility ofuncertain outcome is

weighted by itsprobability

Prospect Expected utility of uncertain

outcome is multiplied by adecision weight (p) where

: 1. Impossible events are

discarded (0)=0

2. Low probabilities areover weighted whilemoderate and highprobabilities are underweighted (e.g., odds of beinginvolved in an airline crashversus car accident)



51/113

Prospect TheoryImplications

Increasingly larger gains are incrementally less pleasurable (10to 20 great; 110 to 120 not as great)

Increasingly larger losses are incrementally less painful (and

smaller losses are almost as painful as slightly larger losses)

The displeasure associated with losing a certain amount (e.g.,of money) is generally greater than the pleasure associated

with winning the same amount (e.g., of money)



52/113

Implications

Once consumers have agreed to spend a certainamount of money, getting to pay more is easierthan one would think

Goal for is to move the reference point beyondprice to something that can gain a competitive

advantagee.g., brand, type of ingredients,

service, etc.


Positive Value


53/113

LossesGains

Negative Value

Reference Point


Value Function



54/113

Prospect Theory Leads to Framing



55/113

Framing

Buyers frequently form frames of reference

when making buying decisions, and these

frames of reference in turn influence howbuyers respond to price and product

information.


G l f U d t di


56/113

Goal of Understanding

Frames of Reference

1. Change the relationship between what

customers perceive they pay and whatthey perceive they get in return.

And manage this relationship



57/113

Example -1Change the relationship between what customers perceive they pay and what they

perceive they get in return.

Option 1: Oliva Cameroon Cigar for $15

Option 2: Oliva Cameroon (Figurado, 6 inch x 60ring); made by Oliva Cigar Co.Nicaragua

The Authentic Cameroon Wrapper gives this boxed

pressed figurado a pronounced aroma of nuts, with hints of

cocoa and coffee.It is medium-bodied, but not exceedingly strong. $15



58/113

Example-2Change the relationship between what customers perceive they pay and what they


Option 1: Selection of teas from wooden box $1.95

Option 2: Fresh pot of Lapsang Souchong black-smoked tea:

From the Fujian province of China, this black tea is full

ancient history and flavor! Smoky smooth character is

achieved through the smoking process over pine and oak fires.$3.95



59/113

Example-3Change the relationship between what customers perceive they pay and what they


Option 1: Our standard room for $240

Option 2: Or, an upgrade to superior fromfor only $15 more.

How is a better way to write this?



60/113

Example-4Change the relationship between what customers perceive they pay and what

they perceive they get in return.

Research shows that a significant number ofconsumers DO place a value on the X brand; e.g.,

for a 10 premium 56% of business travelers and38% leisure travelers are very likely to choose Brand

A

Goal is to concentrate not on the price, but thecomponents of the brand that consumers desire

Give customer choice


Example-5


61/113

pChange the relationship between what customers perceive they pay

and what they perceive they get in return.

Focus on the features of the menu item thatare different from what consumer can buy at

home; e.g., Kobe beef


W T F P h D i i


62/113

Ways To Frame Purchase Decisions

1. Structure transactions to reflect gainsand avoid losses

Present price last after descriptions endow potential buyers



63/113

# 2 Change Way Frame Decisions



64/113

Example 1

Let customer know the cost of not bookingand paying now; that is, give the differencebetween current booking class and the next

level up



65/113

Examine How We Quote Rates

We always quote low to high, which setsreference point low and the other prices a loss

If we quote high price first, then other prices are

a gain



66/113

Example 2

Make it simple for customer to see optionsandtrade-offs


This slide shows how prices change


67/113

This slide shows how prices changedepending upon day of flight; keyhere is that customer sees the optionsand can make choices



68/113

Figure 3



69/113



70/113



71/113

Note: departure and returnare bundled

Customers knows price buthas to buy prepackaged

schedule



72/113

Customer chooses by schedbut does not know price


Customer can easily get bothprice and schedule and therefore it


73/113

is easy to make choice



74/113

Example 3

Frame decision outcomes in terms of gains orlosses

do not discuss benefits of buying the product, butdiscuss the consequences of not buying the product



75/113

Example 4

Frame by Bundling Gains and Losses un-bundle gains

bundle losses



76/113

Frame by Un-bundle Gains

Packages such as London for Free use offree bundles gain; list all the componentsseparately

Ability to purchase upgrades by segment (e.g.,seat on UK to USA different utility than seat onUSA to UK)

Check-in time; use of lounge



77/113

Frame by bundle losses

Should we quote rates that include all taxes andairport fees?

What losses that can be bundled?



78/113

Hotel Examples?



79/113

Example of Research Study Undertaking

Test Condition: Bundling Added:1. Utilize proper opening dialogue

2. Listen to callers requests

3. Ask repeat guest question and determine reason for stay4. Provide normal sales strategy

5. At time of purchase, ask the following:



80/113

Example of Research Study Undertaking

For an extra $15 we can offer an amenities package that includes:

no phone access charge,

10 free local phone calls,

free received faxes,

free sent faxes,

free internet access,

one 3-minute call to call home (may call anywhere in the world).


l f h


81/113

Examples of current research

Test Condition: Willingness to Pay forGuaranteed Bed Type:

At time of purchase, read the following:

As you are probably aware, hotels only guarantee a room, they neverguarantee what the bed type in the room will be. The reason for thispertains to the fact that the bed inventory is limited and fixed. Sinceguests arrive at different intervals, room assignments are made on a firstcome first serve basis. This means that the bed type you would like to

have may not be available. For an extra $20 we can guarantee that nomatter what time you arrive, the bed type you requested will beavailable.


l f h


82/113

Examples of current research

Test Condition: Willingness to Pay for

Guaranteed Bed Type: Other test conditions:

At what price would this guarantee service be so expensive that youwould not consider purchasing this service?

At what price would this guarantee service be expensive, but you stillwould consider purchasing this service?

What price would you expect this hotel to charge for the guarantee of a

bed type?



83/113

Framing and Reference Price

Formation


H l E l W ld Y Ch ?


84/113

Hotel Example: Would You Choose?

Staying at the Venetian Hotel in Las Vegas for avacation; Staying two nights; 3036 rooms

Which Would You Choose?

A: Luxury suite room at $159 and then for an additional $30you get guaranteed room on a high floor with a strip view

B: Luxury suite room with guaranteed room on a high floorfor $189, or room for $30 less anywhere in the hotel


H l E l


85/113

Hotel Example

Venetian Hotel in Las Vegas Manipulation

Quote $159 first (option A previous slide)

Quote $189 first (option B previous slide)

Two Teams

Team 1: conversion 21.9%; calls 1813Team 2: conversion 21.2%; calls 1654


H l E l


86/113

Hotel Example

Upgrades:

$159 quoted first: 13.59% upgraded (optionA)

$189 quoted first: 20.55% upgraded (optionB)

Translates $31,878 extra revenue for themonth to the bottom line



87/113

Restaurant Study


S d D i


88/113

Study Design

Eight different menus

Type of description

Modest/Detailed

Number of items

Three per category/Two per category

Prices High prices/Low prices

23


Spi h d F t Dip


89/113

Spinach and Feta Dip

Modest Description: Spinach and Feta Cheese with Tomatoes and

Pinenuts

Detailed Description: Organic Spinach Sauted in Garlic and

Combined with Authentic Athenian Feta

Cheese, Sun Ripened Yellow Tomatoes andToasted Pinenuts


MENU DESIGN


90/113

MenuOne: DetailedMenuDescriptions,HighPrice,3Choices

MenuTwo: DetailedMenuDescriptions,LowPrice,3Choices

MenuThree:DetailedMenuDescriptions,HighPrice,2Choices

MenuFour: DetailedMenuDescriptions,LowPrice,2ChoicesMenuFive: ModestMenuDescription,HighPrice,3Choices

MenuSix: ModestMenuDescription,LowPrice,3Choices

MenuSeven:ModestMenuDescription,HighPrice,2Choices

MenuEight: ModestMenuDescription,LowPrice,2Choices

MENU DESIGN



91/113

Hypothesis Two Items

Each

Menu

CategoryHo1 X value (high price with detailed description) = X value (high price with modest description)

Mean 4.74 4.26

p=.083

Ho2: X value (low price with detailed description) = X value (low price with modest description)

Mean 4.99 4.74

P=.369

Ho3: X value (high price with detailed description) = X value (low price with detailed description)

Mean 4.74 4.99

P=.315

Ho4: X value (high price with modest description) = X value (low price with modest description)

Mean 4.26 4.74

p=.113

Ho5: X value (high price with detailed description) X value (low price with modest description)

Mean 4.74 4.74

p=1.00


Wh t I fl B R f P i


92/113

What Influence Buyers Reference Prices

1. Current Price Influences

2. Past Price Influences

3. Purchase Context Influences

4. Prices of similar items

5. Price considering cost of making item yourself


1 C t P i I fl


93/113

1. Current Price Influences

Product-Line Pricing

Adding a premium product to the product line may

not necessarily result in overwhelming sales of the

premium product itself. It does, however, enhancebuyers perceptions of lower-priced products in the

product line and influences low-end buyers to trade up

to higher-priced items


P d t Li P i i E l Wi


94/113

Product Line Pricing Example: Wine

$38

$48



95/113

$38

$48

$58

Product Line Pricing Example: Wine


Anchoring


96/113

Anchoring

The idea is that when a person must make ajudgment, he or she starts with an initial,approximate judgment - an anchor. This

judgment gets the person in the ball-park.Then, in view of other considerations, theperson arrives at a final judgment by adjusting

away from that initial assessment


Our top room is a Park Avenue Suite decorated with an elegant


97/113

Our top room is a Park Avenue Suite decorated with an elegantEuropean accent. This suite is 900 Sq. Ft. The suite is designedwith the business traveler in mind. Suites feature a separate parlor

with a wet bar and refreshment center, an oversized working desk,2 multi-line speaker phones with call waiting, voicemail, data-port,fax machines, Lodgenet Entertainment System with movies andCD Library. These rooms overlook 56th street or the city view of57th street. The bedroom can be closed off from the living room.The king size bed includes five down pillows with satin-bandedEgyptian cotton Pillowcases. Suites sell for $995.00.

Position following second:Our 2nd room type is the Metropolitan Suite. This suite is 700 Sq.

Ft.

Position following third:Our 3rd room type is the Executive Suite. This suite is 600 Sq. Ft.


Current Price Influences continued


98/113

Current Price Influences - continued

Suggested Reference Prices

State a price charged previously

State a price charged by a competitor

State suggested retail price


Example of item being tested


99/113

Example of item being tested

If consumers are always told the normal rate, and thenprovided with a discount from that rate, they willremember the normal rate, not the discount rate. Inaddition, when the invoice is provided to the client at

check-out, the normal price will be printed. At the endthe discount will be subtracted. We should see a rise in"overall price value" compared to when customer onlysees the price paid.


Current Price Influences continued


100/113

Current Price Influences - continued

Consider the following airline prices seen on Internet for round-tripLondon to Paris 310Paris to Prague 288Nice to Prague 289London to Nice 310

Given above prices, answer following questions:1. What price would you expect to pay to fly from London to Prague

_____2. What is the most you would pay _____

3. What is a fair price _____


2 Past Price Influences


101/113

2. Past Price Influences

Past price paid has a particularly strong influence on thereference price because it is more likely to be recalled asa frame of reference than past prices that wereobserved in advertising


2 Past Price Influences continued


102/113

2. Past Price Influences - continued

Implications of Previous Slide

Numerous small price increases for frequentlypurchased items more likely to be accepted

than are infrequent large increasesNeed to always state actual price and discount

from that; otherwise, low promotional prices

can establish low reference prices for judgingthe value of later purchases


3 Purchase Context Influences


103/113


You are lying on the beach on a hot day. All you have to drink iswarm water. For the last hour you have been thinking abouthow much you would enjoy a nice cold bottle of your favoriteimported beer. A companion gets up to make a phone call and

offers to bring back a beer. The only near by place where beer issold is a small, run-down grocery store. He asks what themaximum price you are willing to pay. If the price is higher, he

will not buy it.

What price do you tell him? _____


3 Purchase Context Influences


104/113


You are lying on the beach on a hot day. All you have to drink iswarm water. For the last hour you have been thinking abouthow much you would enjoy a nice cold bottle of your favoriteimported beer. A companion gets up to make a phone call and

offers to bring back a beer. The only near by place where beer issold is a resort hotel. He asks what the maximum price you arewilling to pay. If the price is higher, he will not buy it.

What price do you tell him? _____



105/113

3. Purchase Context Influences continued

Use context as a frame of reference that makes theprice seem fair or reasonable

e.g., 8 hours tossing and turning trying to get

comfortable, versus good night sleepe.g., a day at the office

e.g., What is your time worth to drive versus

to fly to airport that is not convenient?



106/113

4. Prices of similar items (e.g., if

consumers think there is nodifference, then there is a problem)

5. Price considering cost ofmaking it yourself


6 Pri Diff r ti l


107/113

Scenario A:You are a purchasing agent for a large organization. You haveordered for your own use a new electric typewriter with special features,

which will cost 1,000. A friend discovers that the identical typewriter isavailable from another vendor for 600. Would you cancel the currentorder and switch to the other vendor? (Assume that canceling the current

order and initiating a new one will take one of the purchasing clerks whoworks for you about one-half day. Assume that there are no other costssuch as a loss of good will or delay in delivery.)

Would you cancel the current order and switch to the other vendor?

Yes _______ No _________

6. Price Differentials



108/113

Scenario B:You are a purchasing agent for a large organization. You haveordered a new word processor with special features, which will cost 20,000. Your purchasing department discovers that the identical wordprocessor is available from another vendor for 19,600. Would youcancel the current order and switch to the other vendor? (Assume thatcanceling the current order and initiating a new one will take one of thepurchasing clerks who works for you about one-half day. Assume thatthere are no other costs such as a loss of good will or delay in delivery.)

Would you cancel the current order and switch to the other vendor?

Yes _______ No _________



109/113

Scenario A the difference is 40%, whereas inScenario B the difference is 2%, even though the

absolute difference in both is 400

Implications the perception of a price change depends on the

percentage, not on the absolute difference

there is a threshold above and below a products price at

which price changes are ignored



110/113

When quoting rates, quote price differencesinstead of whole rate; e.g., $320 versus $290.For $30 less get.


7 Framing Price Differences


111/113

7. Framing Price Differences

Look at the two pairs of prices below and quicklyanswer the question: For which pair of prices is thelower price more of a bargain?

Higher Price Lower Price

First Pair $0.89 $0.75

Second Pair $0.93 $0.79

Your answer _____



112/113

Perceptions of Odd Price Endings Buyers use left most digits in a price and round up to

form a quick reference point to evaluate the actual priceagainst.

Previous example: second pair seems to have betterdiscount.

(first pair: 8-7 = 1; second pair 9-7 = 2; if figure same infirst column, then look at second column)

In reality, difference is a greater percentage of the price inthe first pair (18.6% vs. 17.7%)



113/113

Objective of this section

Understand steps to better pricing

Understand Competitive Value Analysis

Review basics of revenue management Understand price customization

Understand Value

revenue management and pricing

Documents