Presentation Transcript

1. PriceDifferentiation

   Week 10
2. Pricedifferentiation One of the most fundamental concepts of PRO Charging different prices to different customers, either for exactly the same goodor for slightly different versions of the same good Terminology: we speak of price differentiation rather than of price discrimination Includes phenomena such as group pricing, product versioning, regional pricing and channel pricing A powerful way for sellers to improve profitability Both art–dividing market into segments–and science*
3. Third degree price discrimination*
4. In this case the seller benefits and all customers are at least as well off, too; but as we will later see, this is not always the case Why not always? Segments are hard to find* A risk of cannibalization A risk of arbitrage E.g. alreadyifmorethan 10% ofhighpayingcustomerswouldfind a wayofpayingthelowprice, wewouldbelosingmoney
5. Grouppricing, exactlythesameproduct Terminology: different from what passanger airlines, hotels and cruise lines do, while offering lower rates to groups of customers – which is volume discounting that we consider later Student discounts Seniorcitizendiscounts „Ladies’ Night“ specials Familyspecials Discountsforfavoredcustomers Favorabletermsofferedbymanufacturerstolargeretailers Lowerpricesofferedtogovernement, educationalinstitutions and nonprofitsbysuppliers
6. Group pricing There must be an unambigious indicator of group membership; it must be difficult for members of one group to masquerade as members of another* Group membership must strongly correlate with price sensitivity The product should not be easily traded or exchanged among purchasers The segmentation must be both culturally and legally accepted; age – ok; race, gender – not; Robinson-Patman Act (konkurentsiamet) prohibits many forms of group pricing that wholesalers want to use for retailers
7. Grouppricing Most common in services (not so much in direct consumer sales): e.g. Disneyworldchecking kids age Haircuts and health care are non-transferable Airlineshistoricallybegancheckingpassengeridsinorder topreventarbitrage In b2b, oftencombinedwithlaterdescribedproductversioning
8. Channelpricing Barns and Noblehasdifferentpricesonlinethan at itsoutlets Airlinesweb-onlyfares are notavailablethroughtravelagencies ContinentalAirlines – a $325 ticketcosts $43 todistributethrough a travel agent and $18 throughcompanywebsite – ONLY ONE OF THE REASONS Fashion and homefurnishingmerchantshavedifferentpricesin mail-order catalogs THE MAIN DIFFERENCE ispricesensitivity: e.g. personal loansthrough internet vs callcenterclient vs retailbranchcustomer; and ifyoutendtousebot’sorconsolidatorwebsites, you are usuallyeventhemostpricesensitive
9. Regionalpricing, extremelycommon InLatinAmerica, McDonalds pricesburgersdifferentlyaccordingtozipcode, saysTheEconomist Flying betweenthe US and Estonia, usuallyhas a higherprice, whenyou are comingfromthe US There is a difference between a price of a beer, when you are (a part of a captive market) at an airport bar or at a corner bar Everyexamplethereinexploresdifferencesinpricesensitivity
10. Couponing and self-selection Group pricing is often both difficult and unpopular As a seller must categorize customers on the basis of sensitivity before quoting them a price It often seems unfair to customers Both list price and discounted price are available to all customers It must take time, effort or cost in terms of flexibility, if you want to obtain a discount Retailers have discount coupons in newspapers, direct mail and magazines Retailersoftenoffermail-inrebatesforpurchasersof a good Movietheaterschargelowerpricesfor a weekday matinee thanfor a Saturdaynight show Brandnameretailers, e.g. RalphLauren, theGap, LizClaiborneoperateoutletstoresinout-of-the-waylocations; suchas Lasnamäe
11. Couponing and self-selection The seller has chosen a mechanism, that allows customers to self-select, depending on the value they place on time and flexibility Reseach has shown, that coupon users are more flexible than nonusers of coupons (Narasimhan, 1984) Peak-load, day-of-week, time-of-day pricing segments the market as some customers are flexible to change their plans
12. Productversioning Inferiorgoods Mobil/Exxon and Shell sell excessgasolineinbulk at lowpricesto „off-brand“ independentdealers A well-knows premium wine producer sells some of its production under a different label, at about half the price Brand-namevegetablecanners sell theirproducttoretailersas a „housebrand“ Damaged goods (Deneckere and McAfee, 1996) Bizarre?!? The 486SX processor ($333) and the 486DX processor ($588) Enterpriseresourceplanning (ERP) softwareisofteninstalledwiththefullsetofoptions, and thenon-purchaseditems are configurednotto start
13. Productionversioning Superiorgoods Spendrups brewery in Sweden; medium- or low-priced lagers aimed at the mass market, came out with Spendrups Old Gold, which… was not good, but still priced 25% to 50% above its other brands – an obvious complement to the inferior-good strategy, creating a superior good in order to extract a higher price from less price-sensitive customers Proctor-Silex, in 1985, priced the top-of-the-line iron at $54.95, and the next best model at $49.95; the only difference being a red light, indicating when the iron is ready to use: „There is a segment of the market that wants to buy the best, despite the cost“ It enabled the less price sensitive segment to self-select and extracted additional $4.00 in contribution margin from each high-end buyer
14. Productversioning Productlines Verticalproductlines – a hotelchargesmoreforanocean-view room, thanfor a parking-lot-view room; Dellbrandsitscomputersvertically, aswell, withhigherpricedproducthavingprogressivelybetterfeatures; thisisincontrasttothehorizontalproductlines, suchasoneconsistingof „Classic“ Coke, DietCoke, CherryCoke, DietCherryCoke, etc., all withsimplydifferentfeatures
15. Pro – „all thefeaturesof Basic plusadvancedtools and customizationoptionstoboostefficiency and accuracy“ Premier – „all thefeaturesofPro and comprehensivetoolsforgreaterinsightintoyourbusiness“ Enterprise – „ourmostcomprehensivebusinessmanagement tool forgrowingbusinesses, with all thefeaturesofPro and Premier“ Verysmallbusinesses need lessfunctionality, havefewerusers, are morepricesensitivethanlargebusinesses – again a self-selectionmechanism
16. Expedia – a Hertzone-dayrentalfromthe Seattle airport on a midweekdayinMay; or NY Notdrivenmuchbycostdifferencesase.g. life-cyclecostsdonotvarymuchamongmodels; no differenceindailyincrementalcost The small cost differences create the possibility of upgrading (also practiced in e.g. cruise lines) When compared to group pricing, „paying more to get more“ is widely accepted The pricing menus offered by Intuit and Hertz are openly communicated
17. Time-baseddifferentiation Amazonoffers 5-9 day „super-saver“ shippingfreewhile $3.97 for „standard shipping“, again, notonlycostbased, butalsotimeofdeliveryisusedas a segmentationvariable Passenger airlines offering cheaper tickets earlier Time of booking, but also factors such as ability to have a Saturday night stayover are used for segmenting travellers into business and leisure segment, considered separately Software and hardwaresupportcontractsfor „two-hourresponse“ and „two-dayresponse“ Fashion goods mark down later in the season The ability of customers to wait and purchase later on a discount is the basis of markdown management, considered separately Of course, the higher price charged by Amazon also relfects the incremental costs, but the company is also using time of delivery as a segmentation variable
18. Product versioning or group pricing A roundtrip ticket from San Francisco to Chicago, costing 250$ when purcased a week in advance and including a Saturday night stay-overvs. 750$ if purchased at the last minute, without restrictions: group pricing or product versioning? Customer: group pricing Airline: distinct product – flexibility of being able to purchase late and return without staying over at a Saturday night Viewed one way, we could say that the airlines created an inferior product as the most efficient and least controversial way to institute group pricing
19. Volumediscounts, „buymoretosavemore“ A six-pack and a singlebeer Largebottleoflaundrydetergentcostslessperounce A cellularoperatorhadpricepackages, whereyougetmoreminutesperbuck, whenyoubuymoreminutes
20. In b2b and wholesale, volumediscountingis at leastasprevalent
21. Price jumps, newspaper orders, the numerous schemes of volume discounting are called nonlinearpricing 250 copies - $562.50 260 copies - $455.00
22. Volumediscounts Transaction and order costs A software seller – a fixedcostof $1000 perinstallation and a variablecostof $40 peruser; 10 users - $140/user; 100 users - $50/user Decreasingmarginalutility A cold drink on a hotday A demand function for a financial analysis software, for a number of employees of the client, calculating the monetary gain for the client The demand curve within the company: d(p) = 500-2p; For a fee 125$, 250 licenses sold for revenue of 31250$, however for a two-tier pricing, the second price of 75$ would sell 100 additional copies for 75000$ Increasingpricesensitivity A corporatecustomer, whospendsmillions on galvanizedpipeannually, hasmoretimetoponderthedecision
23. Incremental discounting – „buy one, get the second at half price“* Discounts at the total volume of business frequent flyer programs a localcofeeshopofferingevery 10th cupfree– notonlyforloyality, butalsodealswiththehigherpricesensitivityofthosepurchasingfrequently b2b quarter sales volume discounts – electronics sales – 0.5% rebate for $1M-$1.499M sales; 0.75% for <$2M; 1% for >$2M sales; the same essentially true for freight transportation In freight transport, a higher discount, if a shipper commits to a higher volume over a time period Combining different terms and discount structures leads to a very wide variety of volume discount schemes (Nagle and Holden, 1994) (Wilson, 1993), in order to capture maximum contribution Software companies require registering, not only to fight with piracy, but to also to avoid arbitrage Some bulk and volume purchasers are required to sign a contract, that they do not resell A magazine, on the other hand, is interested in as many sales as possible
24. Volumediscounting and oligposony/monopsony Historically, the„bigthree“ US automakerswere a oligopsony Verylargefreightconsolidatorsore.g. Wal-Martcanuseitsstatusasthebiggestretaileroftheworld, toextractverylowpricesfrombusinesspartners Branchesof US govermentrequireintheirprocurementcontractsthesuppliertoprovidethem „mostfavoredbuyer“ status
25. Calculating differentiated prices In case the market segments are independent – no cannibalization Unit cost for a portable MP3 player - $200 Additional cost per sale – Internet, incl. shipping: $35 (price elasticity is 2.5); retail store: 70$ (price elasticity is 2.2) Contribution-maximizing price: (2.5/1.5)*($200+$35)=$392 and (2.2/1.2)*($200+$70)=$495
26. Optimal pricing with arbitrage A situation to avoid, except when arbitrageur has lower transportation cost – in which case which it could become the distributor If the price-response curve is continuous and downward sloping, there exists a single optimum Often, the prices are determined for major markets (e.g. North America, Western Europe, Japan) and price bands are used for smaller markets We are dealing with the members of the triad, but could just as well consider regions or cities Transportation costs do not have to be symmetric – e.g. taxes imposed on imports
27. Optimal pricing with cannibalization The more the low-price product cannibalizes the high-price product, the higher we need to price the low-price product At alpha=0.36, no more low-w.t.p. customers are buying and the only low-price customers are cannibalized high-w.t.p. customers Breakeven point at alpha=0.13, at that point we are better off without segmenting – even low rates of cannibalization can outweigh the benefits of price differentiation
28. Findingtheoptimal market segments A seller needs to identify groups with differing wtp. and to be able to price differently If the widget maker could choose the ideal way to divide the market into two segments, how should he do it, in order to maximize contribution? The ideal would be to segment the market at wtp. 10$, whereas the prices would be 10$, for the higher wtp. group, and 7.5$, for the lower wtp. group, resulting in total contribution of 15000$, which is 33% higher than in the unsegmented case – although substantially lower than the 22500$ for the third degree pricing