Pricing and Monetization Strategies (350933-M-6)
Spring 2021 Summary
Course taught by Bart Bronnenberg and Teun de Kort.
Includes materials of lectures.
Examples are given in italics.
,Lecture 1 - Introduction
Pricing and Sharing Value
Ultimatum 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 can say yes or no
→ Yes: A and B divide the money as proposed
→ No: The money disappears and is gone forever
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
Lecture Notes
What is the impact of price and product together on the formation of a marketing strategy?
- Quality - Price = Value proposition (ultimately the surplus consumers get from it)
What is the impact of promotion and place together on the formation of a marketing strategy?
- Market reach: to what extent does the market know your product
- All about distribution of goods and information
- Advertising announces the existence of a product, creates existence or salience
- Place: channel actually makes products available to consumers
How are these instruments different in another way? How is pricing different from product (in
what dimension)?
- Price can be changed quite easily
- Pricing is a fast instrument; you can change price and have an immediate response
- Managers tend to use price when they want to get something done now
- Product is on the other end of the spectrum; making new products is very slow
- Length of product cycles depends on the industry; consumer adoption can take time
,For instance smartphones have been around for quite a while; you would expect consumers to
pick up on this trend quickly, however, this took multiple years. Product is not only a slow
instrument for managers, also for consumers to respond to.
Essentially when you're thinking about price, most firms choose a value between two extremes:
lowest price = cost (could be below cost in order to increase market share)
1. Price floor: marginal cost is the lowest price you are rationally willing to pay if you're selling
for profits in the short run
2. Price ceiling: willingness to pay
Price is somewhere between marginal cost and consumer willingness to pay. Price actually divides
this surplus. The value firms generate is the WTP on the one hand minus the amount it costs the
firm to make an extra unit (marginal cost). Price is all about dividing value between consumers and
firms.
Value (generated by the firm) = WTP - marginal cost
Surplus = WTP - Price
Margin = Price - Cost
Ultimatum Game: Person A is the divider, person B is the responder. A proposes to B how to divide
the €10. B says yes or no. When yes, the money gets divided as A proposes. When no, the money
will disappear. Theory A proposes the minimum amount to person B; rationally person B accepts
as B still wins as he/she otherwise would receive nothing. In practice, A proposes more than €1 or
€0.01. A fears that he/she would also end up in getting nothing. Also from an ethical perspective;
short-run utility maximization is worth less than a long-term relationship.
People are still reacting when the share goes up (feelings of fairness keep playing a role).
Fear of rejection: dictator game. Dictator makes lower offers, but not much lower as in the
ultimatum game. Another way to study altruism.
In the ultimatum game, person A offers a higher amount because of the fear of rejection; according
to basic economic principles, B would always accept. Hence, A’s response is not rational.
(This is a full-information environment; information asymmetry would lead to different results.)
The higher the utility for a product (water, smartphones), the more competitors will enter the
market and the more the price will be driven down.
The ultimatum game elicits fear of rejection, and therefore A offers high amounts of money. In the
dictator game has no choice and has to accept the offer. A’s offers are somewhat lower but not
much. This points at altruism. It indicates that short-run utility maximization is worth less than a
long-term relationship.
, Lecture 2 - Customer Preferences
Issues in Measuring Consumer Preference
Consumer preferences measurement:
1. Intention to buy (intention)
→ Too hard a question
→ Overconfident about buying probability
2. Self-reported importance weights (search)
→ Lack of discrimination, everything is important
3. Trade-offs (consideration)
→ Benefits and costs
→ What is desired most?
4. Actual purchase data (action)
→ Counts
→ Sales force reports
This graph is great as it translates intentions (words) into actions.
(Toward conjoint analysis) Use cost-benefit trade-offs:
Conjoint: survey-based research technique designed to force customers to make tradeoffs,
thereby revealing their true preferences
→ Products and services are treated as combinations of features
→ Procedure produces a mathematical model of each customer’s “value system”
Conjoint analysis aims to do two things really well:
1. Willingness to pay: measure what individual consumers are willing to give up to obtain
certain product benefits
2. Distribution of willingness to pay: measure how consumers differ in their willingness to pay
Spring 2021 Summary
Course taught by Bart Bronnenberg and Teun de Kort.
Includes materials of lectures.
Examples are given in italics.
,Lecture 1 - Introduction
Pricing and Sharing Value
Ultimatum 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 can say yes or no
→ Yes: A and B divide the money as proposed
→ No: The money disappears and is gone forever
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
Lecture Notes
What is the impact of price and product together on the formation of a marketing strategy?
- Quality - Price = Value proposition (ultimately the surplus consumers get from it)
What is the impact of promotion and place together on the formation of a marketing strategy?
- Market reach: to what extent does the market know your product
- All about distribution of goods and information
- Advertising announces the existence of a product, creates existence or salience
- Place: channel actually makes products available to consumers
How are these instruments different in another way? How is pricing different from product (in
what dimension)?
- Price can be changed quite easily
- Pricing is a fast instrument; you can change price and have an immediate response
- Managers tend to use price when they want to get something done now
- Product is on the other end of the spectrum; making new products is very slow
- Length of product cycles depends on the industry; consumer adoption can take time
,For instance smartphones have been around for quite a while; you would expect consumers to
pick up on this trend quickly, however, this took multiple years. Product is not only a slow
instrument for managers, also for consumers to respond to.
Essentially when you're thinking about price, most firms choose a value between two extremes:
lowest price = cost (could be below cost in order to increase market share)
1. Price floor: marginal cost is the lowest price you are rationally willing to pay if you're selling
for profits in the short run
2. Price ceiling: willingness to pay
Price is somewhere between marginal cost and consumer willingness to pay. Price actually divides
this surplus. The value firms generate is the WTP on the one hand minus the amount it costs the
firm to make an extra unit (marginal cost). Price is all about dividing value between consumers and
firms.
Value (generated by the firm) = WTP - marginal cost
Surplus = WTP - Price
Margin = Price - Cost
Ultimatum Game: Person A is the divider, person B is the responder. A proposes to B how to divide
the €10. B says yes or no. When yes, the money gets divided as A proposes. When no, the money
will disappear. Theory A proposes the minimum amount to person B; rationally person B accepts
as B still wins as he/she otherwise would receive nothing. In practice, A proposes more than €1 or
€0.01. A fears that he/she would also end up in getting nothing. Also from an ethical perspective;
short-run utility maximization is worth less than a long-term relationship.
People are still reacting when the share goes up (feelings of fairness keep playing a role).
Fear of rejection: dictator game. Dictator makes lower offers, but not much lower as in the
ultimatum game. Another way to study altruism.
In the ultimatum game, person A offers a higher amount because of the fear of rejection; according
to basic economic principles, B would always accept. Hence, A’s response is not rational.
(This is a full-information environment; information asymmetry would lead to different results.)
The higher the utility for a product (water, smartphones), the more competitors will enter the
market and the more the price will be driven down.
The ultimatum game elicits fear of rejection, and therefore A offers high amounts of money. In the
dictator game has no choice and has to accept the offer. A’s offers are somewhat lower but not
much. This points at altruism. It indicates that short-run utility maximization is worth less than a
long-term relationship.
, Lecture 2 - Customer Preferences
Issues in Measuring Consumer Preference
Consumer preferences measurement:
1. Intention to buy (intention)
→ Too hard a question
→ Overconfident about buying probability
2. Self-reported importance weights (search)
→ Lack of discrimination, everything is important
3. Trade-offs (consideration)
→ Benefits and costs
→ What is desired most?
4. Actual purchase data (action)
→ Counts
→ Sales force reports
This graph is great as it translates intentions (words) into actions.
(Toward conjoint analysis) Use cost-benefit trade-offs:
Conjoint: survey-based research technique designed to force customers to make tradeoffs,
thereby revealing their true preferences
→ Products and services are treated as combinations of features
→ Procedure produces a mathematical model of each customer’s “value system”
Conjoint analysis aims to do two things really well:
1. Willingness to pay: measure what individual consumers are willing to give up to obtain
certain product benefits
2. Distribution of willingness to pay: measure how consumers differ in their willingness to pay
