PRICING AND REVENUE
ANALYTICS
NOTES, LECTURE SLIDES, TUTORIALS – SUMMARY
,THE TRUST GAME
WEBLECTURE
Everyone gets a partner in class, but will never know who this partner was.
Both receive €10,- from the researcher.
Options:
- Keep €10,-
- Send to unknown partner that receives €40,-
Decision 1 – will you send €10 to an unknown partner?
Decision 2 – if you receive €10 + €30 extra, will you send any money back to this
unknown partner?
Decision 3 – suppose the unknown partner keeps the €50. How much money would you
spend to punish partner to lose his winnings?
Suppose partner loses €2 for every €1 you spend… (€0-€25)
,WEEK 1
WEBLECTURE – PRICING MYTHS
Price setting often driven by “myths”
= widely held and unquestioned beliefs that lack scientific basis…
Important to learn what should not be done when taking pricing decisions – a lot of
people still rely on myths which can cause a lot of management mistakes.
Make sure to not make these mistakes.
You should always be aware that constantly changing and experimenting with pricing is
one of the most important ways to check the way customers respond to certain price
changes.
These pricing myths persist for decades
Have been shown repeatedly to inhibit or hurt firm profitability!
Solution
Make you aware of these misconceptions.
Study scientific principles to guide pricing decisions.
Research and experimentation with prices!
MYTH 1 – COSTS ARE THE BASIS FOR PRICING.
NOT AT ALL CORRECT.
Ex. Cost plus pricing, target pricing…
The majority is still relying on this approach – 80% of firms rely on costs to set prices.
Based on economic principle of fully efficient markets
Firms go bankrupt if they sell below cost.
Price product at marginal cost.
In the end with perfectly substitutable products, products will go to their marginal costs.
Advantages Disadvantages
Simple method Not very profitable
(variable) costs are known by firms Ignores brand positioning
Stable prices Ignores competitors’ prices
Perceived “fairness” Allocation of fixed cost not trivial
Easy to justify Expected demand is dependent on the
price.
The price should rather be based on the customer’s willingness to pay for a product.
MYTH 2 – SMALL PRICE CHANGES HAVE LITTLE IMPACT
2 observations:
- A 1% change in price will increase profits by 11% on average.
- A 10% price cut to customers often means taking a 50% or more cut in profits.
- Large sales boosts from using 99-pricing.
Every reduction in price is directly taken from your profit.
2 solutions:
, - Limit price negotiation authority of salesforce and marketers.
- Artificially inflate list price to make room for negotiation (reference prices)
MYTH 3 – CUSTOMERS ARE HIGHLY PRICE SENSITIVE
Consumers claim they value price (most) <> do not act this way…
Firm price setters overestimate consumer price knowledge and price sensitivity.
Study results:
- 50% of shoppers could not name the price of the item placed in their shopping
cart!
- Less than 1 in 2 shoppers was aware the product they purchased was on
promotion.
- Small price changes of <2% tend to go unnoticed.
- Cherry-pickers that ‘hunt’ for loss leaders <2% of shoppers.
- Price-driven consumer segments <30% of your shoppers <> 70% choose based
on OTHER benefits.
Business opportunities:
- Customer segmentation, deal signaling, industrial markets value benefits OTHER
than price (e.g. efficiency, easy maintenance, etc…)
MYTH 4 – PRODUCTS ARE DIFFICULT TO DIFFERENTIATE
There is NO product that CANNOT be differentiated.
No perfect competition…
Ex. Bottled water, gasoline…
MYTH 5 – HIGH MARKET SHARE = HIGH PROFIT
See “competitor obsession bias”:
Managers pursue competitor oriented goals <> profit oriented goals.
Strategy formulation – set relative <> absolute performance targets
But “market leadership in itself is not worth a cent.”
Ex. Smartphone market.
Strive for leadership in price premium <> ms
MYTH 6 – MANAGING PRICE MEANS CHANGING PRICES
Communicating value = more effective than changing price.
How to enhance product value without changing prices:
- Emphasize unique features/ingredients.
- Add product features.
- Emphasize beneficial payment and delivery terms
- Extend product warrantee
- Stress exclusivity
- Better frame your price
- Improve shopping environment
- …
ANALYTICS
NOTES, LECTURE SLIDES, TUTORIALS – SUMMARY
,THE TRUST GAME
WEBLECTURE
Everyone gets a partner in class, but will never know who this partner was.
Both receive €10,- from the researcher.
Options:
- Keep €10,-
- Send to unknown partner that receives €40,-
Decision 1 – will you send €10 to an unknown partner?
Decision 2 – if you receive €10 + €30 extra, will you send any money back to this
unknown partner?
Decision 3 – suppose the unknown partner keeps the €50. How much money would you
spend to punish partner to lose his winnings?
Suppose partner loses €2 for every €1 you spend… (€0-€25)
,WEEK 1
WEBLECTURE – PRICING MYTHS
Price setting often driven by “myths”
= widely held and unquestioned beliefs that lack scientific basis…
Important to learn what should not be done when taking pricing decisions – a lot of
people still rely on myths which can cause a lot of management mistakes.
Make sure to not make these mistakes.
You should always be aware that constantly changing and experimenting with pricing is
one of the most important ways to check the way customers respond to certain price
changes.
These pricing myths persist for decades
Have been shown repeatedly to inhibit or hurt firm profitability!
Solution
Make you aware of these misconceptions.
Study scientific principles to guide pricing decisions.
Research and experimentation with prices!
MYTH 1 – COSTS ARE THE BASIS FOR PRICING.
NOT AT ALL CORRECT.
Ex. Cost plus pricing, target pricing…
The majority is still relying on this approach – 80% of firms rely on costs to set prices.
Based on economic principle of fully efficient markets
Firms go bankrupt if they sell below cost.
Price product at marginal cost.
In the end with perfectly substitutable products, products will go to their marginal costs.
Advantages Disadvantages
Simple method Not very profitable
(variable) costs are known by firms Ignores brand positioning
Stable prices Ignores competitors’ prices
Perceived “fairness” Allocation of fixed cost not trivial
Easy to justify Expected demand is dependent on the
price.
The price should rather be based on the customer’s willingness to pay for a product.
MYTH 2 – SMALL PRICE CHANGES HAVE LITTLE IMPACT
2 observations:
- A 1% change in price will increase profits by 11% on average.
- A 10% price cut to customers often means taking a 50% or more cut in profits.
- Large sales boosts from using 99-pricing.
Every reduction in price is directly taken from your profit.
2 solutions:
, - Limit price negotiation authority of salesforce and marketers.
- Artificially inflate list price to make room for negotiation (reference prices)
MYTH 3 – CUSTOMERS ARE HIGHLY PRICE SENSITIVE
Consumers claim they value price (most) <> do not act this way…
Firm price setters overestimate consumer price knowledge and price sensitivity.
Study results:
- 50% of shoppers could not name the price of the item placed in their shopping
cart!
- Less than 1 in 2 shoppers was aware the product they purchased was on
promotion.
- Small price changes of <2% tend to go unnoticed.
- Cherry-pickers that ‘hunt’ for loss leaders <2% of shoppers.
- Price-driven consumer segments <30% of your shoppers <> 70% choose based
on OTHER benefits.
Business opportunities:
- Customer segmentation, deal signaling, industrial markets value benefits OTHER
than price (e.g. efficiency, easy maintenance, etc…)
MYTH 4 – PRODUCTS ARE DIFFICULT TO DIFFERENTIATE
There is NO product that CANNOT be differentiated.
No perfect competition…
Ex. Bottled water, gasoline…
MYTH 5 – HIGH MARKET SHARE = HIGH PROFIT
See “competitor obsession bias”:
Managers pursue competitor oriented goals <> profit oriented goals.
Strategy formulation – set relative <> absolute performance targets
But “market leadership in itself is not worth a cent.”
Ex. Smartphone market.
Strive for leadership in price premium <> ms
MYTH 6 – MANAGING PRICE MEANS CHANGING PRICES
Communicating value = more effective than changing price.
How to enhance product value without changing prices:
- Emphasize unique features/ingredients.
- Add product features.
- Emphasize beneficial payment and delivery terms
- Extend product warrantee
- Stress exclusivity
- Better frame your price
- Improve shopping environment
- …
