Pricing and Monetization
LECTURE 1: Introduction
What is Marketing from the Perspective of the Consumer?
A way to make products and services conveniently available
(cost of selling vs. cost of making
Realized that there was a lot of cost of selling that could be done more efficiently when becoming
larger: economies of scale)
Vs.
A method to change preferences and willingness to pay
Marketing is the New Finance
You can learn from it by studying consumers
Own customers data is proprietary; only you can see it → so it is a competitive advantage
The Marketing Framework
Creating value/delivering value
Price + product = value
Promotion + place = market reach
In general there are 3 generic pricing strategies:
- Cost-based (not easy to justify, maybe only if there is 1 customer a good approach)
- Value-based
- Competitive-based
The Pricing and Monetization Course Emphasizes:
1
, Course outline
Week 1: Understanding customers Week 4: Price discrimination and Pricing bundles
+ Consumer preferences + Degrees of price discrimination
+ Willingness to pay + Segmentation and bundling
+ Segmentation
Week 5: Pricing dynamics and Metered pricing
Week 2-3: Setting boundaries on pricing + Customer loyalty and life time value
+ Economic value to the customer + Life cycle pricing
+ Lowest sensible price + Pay for use /Subscription Pricing
+ Highest feasible price + Razors and blades problems
+ Demand functions
+ Competitive Pricing Strategy Week 6: Platform pricing and Price
+ experimentation
Week 2-3: Psychology of pricing/ Ethics/ Sustainability + Pricing access
+ Consumer Reference points + Two sided markets
+ Consumer Price expectations + A/B pricing experiments
+ Ethics
+ Sustainable costing Week 7: Integration and review
+ Pricing Policy
Grading
Need min. 5.5 for exam
Price as a tool to divide value between consumers and sellers
Ultimatum Game (1)
1) Two persons, encountering one another once
2) Person A proposes to person B how to divide an amount of money
3) Person B can say yes or no
» Yes: A and B divide the money as proposed
» No: The money disappears and is gone forever
(this is a full information game)
- Basic economic reasoning: Person B always has to choose between getting something or nothing,
basically from economic standpoint would say could offer anything to B and he would accept as in
the other option he gets nothing so anything would be gained value. However, in reality in you
would give person B 1 cent, he would most likely reject in practice. You make an offer that is too
low, they would not accept as they would perceive this offer as unfair.
- Think about A as company, 10 euro as value and B as consumer: if B(consumer) says ‘no’ there is
no value created. While the firm was able to add 10 euros of value to some resources, but now the
firm has to think how do I divide the value between us and the consumers, which they will have to
do via the price. So offering 1 cent of value to customers and keeping 9,99 of the value to the
company as profits, or in reverse giving the full 10 euros to consumers and not keeping any value
to the company itself.
- In real world sharing of values is forced due to competition: if you had 2 persons A and they would
compete for customer(B) they would make much better offers in order to get the consumer to them.
2
, Ultimatum Game (conclusions)
1) Has been studied in many contexts
2) Theory suggests person A proposes minimum to person B who accept
3) Puzzle: In practice person A proposes much more
Ultimatum Game: findings
1) Modal offer: 40-50%
2) Mean offer: 30-40%
3) Offers below 20% are rejected half of the time
4) Offers below 10% are very rare
5) Offers above 50% are very rare
6) Offers around 40-50% are rarely rejected
How stable are these findings?
1)
Repetition: has little effect
Stakes: some % effect, though person B will still reject larger offers with higher stakes
Anonymity: has little effect
2)
Gender: same offers, women reject less often
Race: little difference
Age: little children make smaller offers than adults
3)
Brains: those who figured out the equilibrium offered 5% less
Biology: high testosterone males reject more but make larger offers
Beauty: somewhat higher offers to beautiful people
Dictator Game
1) Two persons, encountering one another once
2) Person A proposes to person B how to divide an amount of money
3) Person B has to accept
In this version people study altruism: they study a situation in which
their bad behaviour cannot be punished
Pricing decisions:
Sharing the value a company creates between itself and its customers
Key take aways
1) Pricing is the function that shares value between sellers and consumers. Divides value. Need to
think about consumer surplus. Ethics. Fairness.
2) Foundation of the course is economic frameworks + elements of psychology. Focused on
marketing practice
3) Course is going to be hands-on. Grading based on homework, cases, and exam
3
LECTURE 1: Introduction
What is Marketing from the Perspective of the Consumer?
A way to make products and services conveniently available
(cost of selling vs. cost of making
Realized that there was a lot of cost of selling that could be done more efficiently when becoming
larger: economies of scale)
Vs.
A method to change preferences and willingness to pay
Marketing is the New Finance
You can learn from it by studying consumers
Own customers data is proprietary; only you can see it → so it is a competitive advantage
The Marketing Framework
Creating value/delivering value
Price + product = value
Promotion + place = market reach
In general there are 3 generic pricing strategies:
- Cost-based (not easy to justify, maybe only if there is 1 customer a good approach)
- Value-based
- Competitive-based
The Pricing and Monetization Course Emphasizes:
1
, Course outline
Week 1: Understanding customers Week 4: Price discrimination and Pricing bundles
+ Consumer preferences + Degrees of price discrimination
+ Willingness to pay + Segmentation and bundling
+ Segmentation
Week 5: Pricing dynamics and Metered pricing
Week 2-3: Setting boundaries on pricing + Customer loyalty and life time value
+ Economic value to the customer + Life cycle pricing
+ Lowest sensible price + Pay for use /Subscription Pricing
+ Highest feasible price + Razors and blades problems
+ Demand functions
+ Competitive Pricing Strategy Week 6: Platform pricing and Price
+ experimentation
Week 2-3: Psychology of pricing/ Ethics/ Sustainability + Pricing access
+ Consumer Reference points + Two sided markets
+ Consumer Price expectations + A/B pricing experiments
+ Ethics
+ Sustainable costing Week 7: Integration and review
+ Pricing Policy
Grading
Need min. 5.5 for exam
Price as a tool to divide value between consumers and sellers
Ultimatum Game (1)
1) Two persons, encountering one another once
2) Person A proposes to person B how to divide an amount of money
3) Person B can say yes or no
» Yes: A and B divide the money as proposed
» No: The money disappears and is gone forever
(this is a full information game)
- Basic economic reasoning: Person B always has to choose between getting something or nothing,
basically from economic standpoint would say could offer anything to B and he would accept as in
the other option he gets nothing so anything would be gained value. However, in reality in you
would give person B 1 cent, he would most likely reject in practice. You make an offer that is too
low, they would not accept as they would perceive this offer as unfair.
- Think about A as company, 10 euro as value and B as consumer: if B(consumer) says ‘no’ there is
no value created. While the firm was able to add 10 euros of value to some resources, but now the
firm has to think how do I divide the value between us and the consumers, which they will have to
do via the price. So offering 1 cent of value to customers and keeping 9,99 of the value to the
company as profits, or in reverse giving the full 10 euros to consumers and not keeping any value
to the company itself.
- In real world sharing of values is forced due to competition: if you had 2 persons A and they would
compete for customer(B) they would make much better offers in order to get the consumer to them.
2
, Ultimatum Game (conclusions)
1) Has been studied in many contexts
2) Theory suggests person A proposes minimum to person B who accept
3) Puzzle: In practice person A proposes much more
Ultimatum Game: findings
1) Modal offer: 40-50%
2) Mean offer: 30-40%
3) Offers below 20% are rejected half of the time
4) Offers below 10% are very rare
5) Offers above 50% are very rare
6) Offers around 40-50% are rarely rejected
How stable are these findings?
1)
Repetition: has little effect
Stakes: some % effect, though person B will still reject larger offers with higher stakes
Anonymity: has little effect
2)
Gender: same offers, women reject less often
Race: little difference
Age: little children make smaller offers than adults
3)
Brains: those who figured out the equilibrium offered 5% less
Biology: high testosterone males reject more but make larger offers
Beauty: somewhat higher offers to beautiful people
Dictator Game
1) Two persons, encountering one another once
2) Person A proposes to person B how to divide an amount of money
3) Person B has to accept
In this version people study altruism: they study a situation in which
their bad behaviour cannot be punished
Pricing decisions:
Sharing the value a company creates between itself and its customers
Key take aways
1) Pricing is the function that shares value between sellers and consumers. Divides value. Need to
think about consumer surplus. Ethics. Fairness.
2) Foundation of the course is economic frameworks + elements of psychology. Focused on
marketing practice
3) Course is going to be hands-on. Grading based on homework, cases, and exam
3
