Customers

1. Customers Chapter 4

2. Reference Price • What is the value (utility) • What is perceived Alternative? • “Reference value” • What are the differentials • Positive(+)/Negative(-) (quality, features) • Effect on pricing strategy • “Suggested Retail” • Order of Presentation (Top Down) • Initial Price sets bar

3. Economic Value • Value based on use • Value varies with customer • Risk • Cost of error/failure • Price sensitivity (see below) • Education of customer part of pricing plan • Value determines what cost is justified

4. Reference Price Effect • Perceived value is key • Factors affecting • Location • Store (Nordstom’s vs BJ’s) • Within Store (Generic aisle) • High vs low placement • eye level vs low • End-cap (assumed on sale) • Order of presentation • Pricing metric (payment, cost, …)

5. Difficult Comparison Effect • New Products (have no way of judging value) • Odd shapes or sizes (BJ’s) • Similar packaging of generics to brand names • Per ounce vs per pound (toothpaste) • Add-ons to make product unique (cars)

6. Switching Cost Effect • Compatibility (Word, Internet Explorer) • Training (ibm) • Familiarity (Jello, McCormack) • “Try free for a month” • Bundling (computer system/box)

7. Price-Quality Effect • Perceived quality related to price (e.g., Pledge training) • Affected by Familiarity with product • New product, what’s it worth? • Prestige may be associated with good • Gucci • Ability to perceive quality low (phones) • May be related to risk and cost of problems (lawyer’s fees)

8. Expenditure Effect • Effect on budget is issue • Less income or higher price will increase sensitivity • WalMart vs Nordstrom customer • Affected by quantity (large families more price sensitive) • Ex: Construction unions divide & conquer

9. End-Benefit Effect • Product gives multiple values • Focus on value received rather than price • If end-benefit high, look at % of cost, not $ • Construction unions again • Electrical/plumbing probs • Severe consequences =>want quality • Michelin ad/Centrino Ad

10. Shared-Cost Effect • If customer pays only part of cost • Business-class travel • Health care (copay, etc.) • Poor use emergency room

11. Fairness Effect • Price evaluated within its context • Income • Past prices • “Necessity” vs “Luxury” • Raise reference price and discount (coupons, rebates, etc.)

12. Framing Effect • Is purchase seen as a “gain” or a “loss?” • Diminishing marginal utility to gains • Losses more heavily weighted • Diminishing marginal disutility to losses • Implications: • Frame purchase • “opportunity costs” • Price high and discount • Unbundle gains • “service added free” • Bundle Losses • “total cost is”

13. Use of Value Perception • Identify segments (use/value/customer) • Table wine vs cooking wine • Identify starting price • Alternatives? Percentage of Cost? • Determine what can affect demand • Labeling/packaging affects perceived value • Cork vs screw-off cap

14. Value Diff.: Low Perceived Pain High Price Buyer Value Diff.: Low Perceived Pain Low Convenience Buyer Value Diff.: High Perceived Pain High Value Buyer Value Diff.: High Perceived Pain Low Relationship Buyer Customer Segmentation High Value Percieved Pain of Price Price Low Low High Value of Differentiation

15. Price Elasticity • Elasticity = (ΔQ/Q)/(ΔP/P) • Elasticity = (ΔQ/ΔP)/(Q/P) • Notice role of current levels of Q and P • Relationship of P and MR is • P = MR ( 1 + (1/Elasticity) ) • The higher the elasticity, the closer P to MR • Example: • P1=100, Q1=50, P2 =90, Q2=60, • ε = (10/55)/(-10/95) = => Elastic -1.73

16. Why Care about Elasticity? • TR = P * Q • Price Elasticity is effect of P on Q • Elastic (>1) => Quantity moving faster • Inelastic (<1) => Price moving faster