Summer+2009+Section+09+PJ+Week+5

=Week 5 Class Discussion - "Price"=

Pricing and the Psychology of Consumption
Businesses and organizations want to build long-term relationships with their customers and we talked about how a monthly membership will keep the product fresh in the minds of their customers. The example was a gym membership and how that by billing their customers every month, gyms kept their customers paying longer. We also discussed how some people who join are very motivated at first, but then lose interest or commitment, so may not renew or continue.

In class there were a few questions with the arguments presented in Pricing and the Psychology of Consumption. Much of the discussion was about whether or not psychological pricing practices were transferable to industries that are not traditionally membership based. And a second, albeit calmer, topic of conversation surrounding this article, was the supportive evidence and examples used to defend this theory.

Price Framing
An example of price framing that was brought up was regarding Ryanair, which gets consumers interested with a $20 ticket, but Ryan Air starts adding charges such as baggage charges, charges for water, fees to reserve your seat on the plain, express check out, ect. It was even discussed that there was a significant amount of press earlier this year regarding the idea of Ryanair charging for customers on a flight to use the bathroom. Whether it was a legitimate potential charge or if it was a marketing ploy just for press is still under debate. Ryanair is a prime example of how pricing isnt only something used for revenue, but as a strategic tool for marketing its product.

Mechanics of Coke’s Strategy/Economic Rationale
The class discussed the moral implications and marketing implications of Coke's experiment with coke machines that would vary pricing based on temperature (the machine would have a sensor that automatically varied pricing). While there didn't seem to be a consensus on the moral implications of these machines, the general feeling was that Coke could have changed the way they packaged this idea in order to avoid the PR backlash it encountered when revealed (ie. don't focus on the fact of the price increasing in warmer weather, call it a "discount" for cold weather purchases). It seems that the fact of demand increasing for the Coke and the likelihood of additional labor expenditures to refill it more frequently, might be reasonable justification to increase costs during higher temperature months. It also occurs to this writer that the machine likely uses more power in warmer weather in order to maintain cold Coke, costing the host of the machine additional energy expenditures. In addition, had the CEO of Coke not made the statements that he had, in the manner in which he he did, Coke probably would have gone ahead with the plan and no one would have been the wiser. I have every expectation that the price adjustment software is still waiting to be used, and in all likelihood it will be.

This appears no different than the summer gasoline phenomenon. Gas prices go up when demand goes up (except for this year, 2009, when prices are up, demand is actually down, and the reserves are full, so why are fuel prices so high?). Why not "human gas", Coke? It is unclear why Coke decided to tip their hand and make this strategy public; it would have been easy to have just implemented the new price variation hardware onto their vending machines. Few people would notice, and even if they did it would be a //fait accompli// at that point. It seems that Coke really doesn't need to justify //why// prices are now variable; those WTP the higher price will, and those who aren't, wont.

The “Numbers” Game
The class discussed how the market drives the "numbers" and whether it is wrong to sell the same product to different groups of buyers at different prices. This process is referred to as price discrimination and it occurs in a multitude of business arenas.

"Hot" day vs. "cold" day prices. It may be ethically suspect, but is a savvy maneuver of a sophisticated marketing manager with a defined pricing strategy.

People seemed so appalled at the idea of changing prices, not that I would agree with this tactic per se, but this is a normal pricing practice. On a daily basis you pay more for convenience - gas station prices for snacks are higher than what they would cost in the grocery store. If you go to the airport, you are paying a premium price for everything from bottled water to hand sanitizer; you have no alternatives at the airport and if you need/want these items, you will pay.

I think we tend to forget about the things we have come to accept with regard to marketing and pricing. Many of us, myself included, belong to a price club. We pay for the opportunity to buy in bulk "knowing" that we are getting a better deal because we pay annually for that deal. However, many of the products sold at the price clubs are the same price and even more expensive when compared to deals at other retailers. But instead of looking for the cheapest price, people have confidence in the fact that the price IS lower because that is what I pay for. You take for granted that because you belong to the club, that is the best deal you can get.

I think that the PR from impletmenting the different prices would be a problem for Coke which can be seen by the fact that Coke got such bad publicity for even developing the idea. Coke clearly uses different prices for different location but never different prices at the same location.

Let’s talk about “free”
The class watched a video on "freeconomics" and got into the discussion what is really free.

Video link: []

This new model, while delivering some amazing value to consumers, is really just an extension of the model used by advertisers in the past: deliver "eyeballs" to paying customers via some method of attraction. In the past, this was achieved by creating television or radio content that would appeal to a particular demographic; now, it's web content and/or applications. Technology is allowing more firms to capitalize on the zero-price phenomenon--the difference between "really cheap" and "no cost" really has to be considered a different market structure with a wholly separate demand curve. One amazing development, however, is the notion of the "freemium" in which users can opt for a "lite" version of a product or service (often ad-supported) for free until they decide to purchase the full version. I can't speak for anyone else, but with all the advertising that I am bombarded with on the internet, televison, radio, print media at all hours of the day, I hardly feel like anything is really free. As this marketing strategy expands, and it surely will, consumers will have to understand that they are paying with their time, if not their coin.

This is a very interesting concept. In my professional world of marketing and advertising agencies, this type of strategy has become a huge concern. With the explosion of the internet, more and more information, specifically strategic design, is available free to the public. In order to maintain thought leadership in our industry, we are being forced to give strategy work away for free. This is the type of work we changed 10-20k for just a few years ago. Furthermore, more and more clients are "expecting" comp creative work up-front and free, otherwise known as spec-work. A more recent phenomenon is outsourcing creative work to china. Clients set up an "auctions" for cheap labor where designers in third world countries bid on work. There are so many bidders it drives down prices, increases competition, and devalues the high creative work we offer our clients.

Mapping your competitive position
When mapping your competitive position, focus on customer benefits, not companies costs. This is an abstract yet valuable approach toward product placement. We discussed disruptive entry, which is entry below or above market standards. For example, iPhone was initially set at a higher than expected market price but later dropped below the expected price line to kill competition of other similar products. This positioning was an attempt by Apple to gain control of market pricing for the phones with highly valued customer benefits. When the iphone price was lowered to the current price it caused problems for all the phone that were priced in the 200 range. Apple has developed a segment that currently has no true competition. No phone has been developed that has the same features and ease of use that the iphone has. The new iphone 3Gs comes out June 19th and has even better features and other advantages over the previous iphones.

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Team Top Gun
Interesting to know that most of the groups supported the focus on the younger generation and then providing a path to keep the customer as they grew older. What makes this interesting is that Virgin actually chose only to focus on the younger generation and not worry about the individuals as they got older. We felt that Virgin had the right idea to focus on one neglected room and offer services that differed from industry standard. By offering no contracts and hip/cool lifestyle features to their phones Virgin is able to capture a profitable share of the youth segment. However we felt that this initial focus should be used to allow Virgin enter the market in meaningful way in order to establish a foot hold before expanding. It appears that Virgin is content with their niche or they have determined that the conditions for expansion have not been met yet. One idea that came up from our discussion was to have Virgin sell prepaid cards at as many places as possible. A vending machine in schools was one of the ideas that was even brought up. If a kid had enough coin for the month, he could go to a vending machine or kiosk and put $25 in and fill up his minutes. This would be a great way to avoid scaring away the unfaithful, uncommitting customers that Virgin wants.

I don't know that our team fully developed any ideas for discouraging the "churn" factor that is an ever-present danger with the pre-paid model. Our best attempt at this was to apply an expiration date to our cards to encourage customers to use the minutes they had and to, in some way, force them to return to buy more minutes. Even this plan, however, leaves them open at the time of expiration to competitors. Our team also discussed the concern that a pre-paid model would definitely atrract a response from our competition. It would be critical for the company to be cognizant of this issue and to continually evaluate how to communicate their product as the preferred choice.

Team Frowny Turkey
Team Frowny Turkey chose the "no contract" option for their marketing strategy. Our rationale for choosing the no contract option hinged on the target market that we had identified as under-served.15-29 year olds had less credit options. 15-18 year olds could not enter into legally binding contracts in most markets. The no cntract option, paired with kiosks sales and loaded cards that added minutes gave the best options for breaking into the overall cellphone market and carving out a niche that gave us an opportunity to establish a marketplace wihtin the marketplace. We now know the option has merit in that it has allowed "no-contract " services providers like " Cricket" to enter the market and florish.

asateamwethoughthat
Team asateamwethoughtthat also choose the "no contract option" as a base for their marketing strategy. We saw two segments within the 15 to 29 demographic, those who are young enough and reliant enough on parents to be on a "family plan" under their parent's contract, and those, likely in the older brackets but potentially any person in this demographic that has some financial independence, who would purchase their own plan. We felt that this latter segment would be the focus of our marketing efforts. Relative to pricing and plan designs, we would eliminate contracts despite the estimate of a 6% "churn" in retention per month (2% was the average). We would incent continued service and "responsible patronage" through attractive phone upgrades, "bling" (accessories), free music, free minutes or texts, and other rewards. For example, timely payments would garner "points" toward these perks in the next cycle of either one year or six months. Phones would be relatively "cheap", but could be upgraded through points awards over time. We supported the idea of simplified billing, since this was a major concern of our target market. The most effective way to do this was to offer a prepaid plan. However, since not everyone would see this as the best option, we would offer the standard, complicated plan as well. In this plan, by incorporating some of the fees, we could still boast a simpler plan than our competitors. On a lighter note, the team came to recognize that the acronym for our team may not help from a "marketing our team" standpoint (A.A.T.W.T.T.).

The Known Unknowns
Our team opted to focus on the youth segment and sought to differentiate our product by appealing to their sense of fashion. We knew we could not compete with more sophisticated phones from our competitors, so instead our strategy was to make our phone a fashion accessory: offer users a wide array of customizable options (face plates, skins, headsets, ringtones, etc.) which offer higher marginal revenues. We belived that the margins on accecories would be much larger than the phones. This approach would likely offset any losses incurred due to churn. Our phone services would be offered as a pre-paid (i.e., no contract), over-the-counter product instead of post-paid, customer-service driven one. We also would offer the option of a contract in exchanged for lower monthly fees. Our group did not resolve the question of whether to focus exclusively on this cohort (and expect them to defect once they built up credit and could move onto more premium services) or whether to develop a second-stage product (e.g., contracts, higher-quality hardware, post-paid billing) that would appeal to a more mature consumer. But, we believed a mixture of contract and prepaid services would be the best approach to appeal to the younger consumer while minimizing the effect of a churn rate. With this in mind, we hoped to increase the monthly margin, decrease acquisition costs associated with contract based service plans, and off set the churn rate by utilizing effective marketing strategies. We wanted to be presented as a simple solution for anyone that wants a cell phone has access to one with no strings attached.