Describe and analyze the pricing policy a company that employs dynamic pricing ( what are the main segments, how do they keep them separated, what is the policy with each of them, how is pricing perceived by consumers, sources of reference prices)
The aspect of pricing covered in the lecture session 2 and 3. (Document has been provided)
You could also do a comparative analyses of 2 different companies of the same sector (lets say a low cost and a regular airline). You are not expected to precisely know how their pricing strategy actually looks like, but try and infer to it from the publicly available pieces of information.
Book Title Pricing Strategies Predicting Price-Change Response: Cognitive Factors @ SAGE Publications, 2011 Categories of Mental Responses The market’s response to a price change is determined by what the price elicits in the customers’ mind. Three categories of mental response: Cognitions Emotions Perceptions – first responses, play an important role in the other responses @ SAGE Publications, 2011 Price Awareness Customers rarely have a detailed and accurate awareness of prices. The first step in knowing what an item’s price is involves the perception of the numbers. Our first response is to the price’s leftmost digit – can bias the customer’s thoughts and feelings. The remaining digits are the ending digits. @ SAGE Publications, 2011 Pricing Strategies Based on Digit Placement Two common strategies: Round-number pricing - using one or more consecutive 0s as ending digits Just-below pricing – using 99, 98 or 95 as ending digits The potency of the left-most digit suggests that a seller set a price just below the round number when doing so lowers the left-most digit. @ SAGE Publications, 2011 Two Types of Knowledge About Prices After perception of the digits, the second step in price awareness is making the perceived digits meaningful. Two types of added meaning: Price-level knowledge Price-meaning knowledge @ SAGE Publications, 2011 Price-Level Knowledge Is the awareness of the level of a price Is necessary for making a reasonable purchase decision Has three prominent sources: Items that have been purchased Items that have not been purchased Beliefs about the factors affecting the price level @ SAGE Publications, 2011 Awareness of the Prices of Purchased Items Past purchases contribute to the pricing knowledge used for future purchases. Factors that influence price awareness: Price level of the item purchased Price variation over time Price variation between brands Opportunity to learn prices @ SAGE Publications, 2011 Implications of Pricing Factors There is more price awareness for: Big-ticket items Items whose prices are relatively stable over time Items in product categories where there is little inter-brand variation Items where the customer had opportunities to think about its price @ SAGE Publications, 2011 Awareness of the Prices of Items That Have Not Been Purchased Sources of this awareness: Price information search Incidental learning Price information search is: Tied to consumer motivation to carry out the search Constrained by limitations in the consumer’s awareness of competitors @ SAGE Publications, 2011 Influence of the Internet on Price Awareness In product categories where most major sellers list their prices on the Internet, there is likely to be greater price awareness. Products sold in supermarkets, drug stores and clothing stores are unlikely to have sufficient price information posted on the Internet. @ SAGE Publications, 2011 Price-Origin Beliefs Beliefs concerning the factors that cause a price to be high or low that can be used as rules of thumb for making price-level inferences These beliefs: Could be more detailed or less detailed May or may not be accurate @ SAGE Publications, 2011 Common Price-Origin Beliefs Items that show higher-quality materials will have higher prices. Items that have more useful features will have higher prices. Prices of items whose production is more labor-intensive are likely to be higher. Larger packages of a product will have lower per-ounce prices than smaller packages. @ SAGE Publications, 2011 The Customer’s Internal Reference Price (IRP) A price or price range that is constructed in the customer’s mind and is used as a basis for evaluating an encountered price All three sources of price-level knowledge can contribute to the IRP – how specific the IRP is depends on the price-level knowledge used to create it: Much knowledge = specific price Less knowledge = price range @ SAGE Publications, 2011 When Price Differs from the IRP A difference between the item’s price and the customer’s IRP will affect the customer’s response to the item’s price. When a customer’s IRP is a price range, the price must be outside of this range before it will affect the customer’s response. @ SAGE Publications, 2011 Managing Price-Level Knowledge When the seller’s prices tend to be lower than those of most competitors, it is in the seller’s interest to increase the customer’s price awareness. When the seller’s prices tend to be higher, it is the seller’s interest to decrease the customer’s price awareness. @ SAGE Publications, 2011 Increasing Price-Level Awareness Increasing price-level awareness can be done by: Simplifying the price structure ◦ Price points ◦ Price simplification Using media advertising @ SAGE Publications, 2011 Decreasing Price-Level Awareness Decreasing price awareness can be done by complicating: Prices ◦ Difficult price format ◦Partitioned price The product ◦ Branded variants @ SAGE Publications, 2011 The Influence of Ending Digits on Price Knowledge A price’s ending digits are those digits to the right of the price’s leftmost digit. It has been found that using: ◦ Round-number pricing acts to increase awareness ◦ Just-below pricing acts to decrease it Just-below pricing also tends to bias the cognitive processing of price information. @ SAGE Publications, 2011 Price-Meaning Knowledge The knowledge of what the price may communicate about the product, the seller and/or the offer Two forms: Price-Quality Effects Price-Ending Meanings @ SAGE Publications, 2011 Price-Quality Effects Consumers (at least sometimes) use the level of a price as a cue to the quality of the product or seller. Price-quality heuristic: assumption that products with higher-quality materials or more useful features will have higher prices If a large amount of buyers use the price- quality connection, then elasticity is low. @ SAGE Publications, 2011 Are Price and Product Quality Related? One study suggests that for products used to satisfy objective-performance needs, price level is very limited in its ability to predict quality. When subjective performance is critical, the relation between price and quality could be stronger. @ SAGE Publications, 2011 Managing Price as a Quality Cue Price level is used as a cue particularly when the customer finds it difficult: To evaluate product quality directly When the consumer believes that large quality differences exist Despite the price-quality cue, the seller cannot always set higher prices. @ SAGE Publications, 2011 Constraints on Setting Higher Prices Within the price-quality relationship, the seller must keep in mind that: A consumer may like a product, but his/her budget limits purchase The price can influence the experience of the product’s quality only within a certain range @ SAGE Publications, 2011 Price-Ending Meanings The use of round-number pricing supports the image of high quality in a product or retailer and suggests the image of classiness. The use of just-below pricing suggests that the item has been discontinued, is being sold at a relatively low everyday price or is of low quality. @ SAGE Publications, 2011 Sharp-Number Pricing A pricing strategy that minimizes the use of both round-number and just-below pricing, such as $3.17, $8.44 or $176.54 Suggests to consumers that the retailer is engaged in a careful price-setting process Encourages acceptance of the seller’s price in a negotiation Is more common among low numbers @ SAGE Publications, 2011 Pricing Strategies Predicting Price-Change Response: Emotional Factors @ SAGE Publications, 2011 Importance of Emotional Factors Price-related feelings: Have a strong effect on the buyer’s response to a price Are usually negative since a price involves giving up something of value Can be conceptualized by the pain of paying – how much it hurts to pay @ SAGE Publications, 2011 The Perception of Prices The buyer’s perception of money is flexible – we tend to perceive money in terms of gains or losses. Reference point: The frame of reference in these perceptions Is often the status quo Is entirely in one’s mind and can change quickly (reference-point shift) @ SAGE Publications, 2011 Framing in the Perception of Prices Since the buyer’s feelings are related to perceived gains and losses, the seller should consider how to manage the buyer’s perceptions. Framing: the management of the factors that influence the set of gains and losses that comprise the buyer’s perception of price; methods relate to price format @ SAGE Publications, 2011 The Value of Gains and Losses Prospect-theory value function: a description of how people feel about gains or losses, or the value they place on gains or losses of various sizes Two important aspects: The incorporation of the Weber-Fechner Law The postulation of loss aversion @ SAGE Publications, 2011 The Weber-Fechner Law There are “diminishing returns” for the mental effects of a stimulus – each additional unit of external stimulation will add less to the mental effect of the stimulus than its predecessor. Applied to pricing: each additional dollar will add less to the pain of paying than its predecessor @ SAGE Publications, 2011 Loss Aversion Loss aversion: the tendency of a loss to hurt more than an equal-sized gain feels good Example: A salary increase of $2,000 will feel good. A salary decrease of $2,000 would hurt more than the increase felt good. @ SAGE Publications, 2011 Four Possible Perceptions of Price Perception of a Price as a Single Loss Perception of a Price as Two Losses Perception of a Price as a Loss and a Gain Perception of a Price as a Gain Forgone @ SAGE Publications, 2011 Perception of a Price as a Single Loss Occurs when the price is equal to, or in the range of, the customer’s IRP; is the simplest perception The size of a price change in percent terms will be an important factor in determining the buyer’s pain of paying. Purchase aggregate: a set of related purchases that consumers consider as one purchase @ SAGE Publications, 2011 Perception of a Price as Two Losses Occurs when a product’s price exceeds a consumer’s IRP The first loss is the expected price. The second loss is the perceived surcharge. A price perceived as two losses will be more negatively evaluated than that price perceived as one loss. @ SAGE Publications, 2011 Avoiding the Perception of Price as Two Losses The seller can avoid negative evaluations of a price that is perceived as two losses by: