Spring+2010+Section+09-SS+Week+5


 * __Pricing and the Psychology of Consumption.__** ** Last Week Recap By the A-Team **

· Think different o Jump to the next curve · Niche thyself o Don’t be afraid to polarize people · Don’t worry, be crappy o Not crappy products, but products with elements of crappiness in them.
 * Value proposition **

=**Price** = = =

** S ** trengths
 * W ** eaknesses
 * O ** pportunities
 * T ** hreats

**__ Analysis Framework: Porter’s five forces __**

 * Bargaining power of customers
 * Bargaining power of suppliers
 * Threat of new entrants
 * Competitive Rivalry within an industry
 * Threat of substitute products

: Markets evolve; inertia is the demon to expel.

**__Hypercompetition.__**
**Richard D'Aveni** of Tuck School of Business coined the term "hypercompetition". Often a characteristic of new markets and industries, **hypercompetition** occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages that cannot be sustained. In response, companies must constantly compete in price or quality, or innovate in supply chain management, new value creation, or have enough financial capital to outlast other competitors.

In this interview clip Professor D'Aveni says in '94, after power came on following a blackout on Cape Cod and he found out about the sudden fall of the Soviet Union - which no one had predicted - he had to rethink his views and write about "unsustainable advantages in an unpredictable world". He also says that the world has gotten even more crazy and unpredicatable since then []


 * __Key Idea to note__: Diversification of innovative ideas is key for a company, just like a retirement or investment portfolio. By diversifying the product base the risk of for that company is less; if for instance one of the innovative ideas does not produce the intended results out in the market there are other options to fall back on.

Pricing policies affect consumption Customers perception of price determine their likelihood of consuming a product
 * __Pricing and the Psychology of Consumption.__**
 * Customers who use products that they pay for are more likely to purchase the product again
 * This is due to the sunk cost effect ; Customers feel compelled to use a product that they've paid for to avoid feeling like they've wasted money
 * Transaction type: Cash vs. Credit
 * Credit card customers are less likely to remember the cost that they paid

Consumption closely tracks the timing of payments
 * Gym membership example
 * Usage peaks in the months following payment ; those who use their memberships are likely to renew => 50%

Price Bundling masks the cost of the individual product
 * This strategy can increase short term demand but can reduce overall consumption
 * Season ticket example ; with little sunk cost pressure, many customers don’t use all of the tickets that they pay for

Suggestions for using this information Yield management Stagger payments to smooth consumption Link Payments to benefits
 * Prepare for actual rather than the paid for attendance
 * Reduce on-hand staffing
 * Over-sell an event
 * Prevent overcrowding => Increasing customer satisfaction
 * HMO example
 * Lower overall costs by getting people to engage in preventative care that they already paid for

Price Framing.
Sensitizing the market about what benefits are offered and paid for: - All inclusive: Focuses consumer on core benefit, letting other details get taken for granted. - Partitioned: Consumers tend to put undue weight on secondary elements that are easier to evaluate because they seen more often.

Mechanics of Coke’s Strategy/ Economic Rationale • Price Discrimination • Economic Rationale

Hot Vs. Cold days sales price
 * The “Numbers” Game **

Is there an ethical consideration? • Is it “wrong?” – Selling the same product to different groups of buyers at different prices. – “Hot” day v.s. “Cold” day prices • Is there a benefit? – Value pricing • Is there a better way to go? – Price framing / unframing? [] Price Gouging: Economics and Ethics

** “Freeconomics” **


 * Every economy that becomes digital enviably becomes free.

Wired's Editor In Chief Chris Anderson discusses why $0.00 is the future of business.  media type="youtube" key="RZkeCIW75CU" height="344" width="425"


 * Direct & Indirect Network Effects **


 * Mapping Your Competitive **** Position **

What price should I charge? How can I use price as an element of strategy?

Gather data on products’ benefits and prices. Employ regression analysis to find out which benefit explains most of the variance in products’ prices.
 * Regression Analysis **

Example of Competitive Pricing Map (real data with regression on key value item)



**In-class case analysis exercise: "Virgin Mobile"** []

Environment.
Overcrowded: Six national carriers; 50% Industry penetration Increasingly Mature Capital Intensive Highly Competitive

Key Decision.
Selecting a pricing strategy

Three choices provided: (1) Clone industry pricing structure

(2) Similar to industry pricing structure, Actual pricing below the competition

(3) A whole new plan

The A-Team:

The Marketing Magicians: Our Vision for Virgin: The Cell Service Provider that "Makes a Difference".

**Team C**
Option #1: CLV $408

Option#2: CLV $358

Option#3: CLV $312