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Unbundled Pricing - A Reference Price Solution

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Results from a consumer behavior experiment on customer acceptance of paying for extras. We propose a reference price based solution to managing consumer behavior.

Unbundled Pricing - A Reference Price Solution

  1. Unbundled Pricing andCharging For ExtrasValuing FreeRags Srinivasan@ragsIterative Path
  2. What is in this reportBackgroundHypothesisExperimentResults and Implications
  3. Marketers are used to selling all inclusivebundlesCustomers are trained to see the product/service as a monolith with onepriceGaming Bundles Cable TV Airline Travel
  4. They cannot continue to give away extras for freeThe economy ismelting and customersare becomingincreasingly pricesensitiveWith pricing pressuresand cost overrunsthere is no coverCosts of providingthe extra servicescontinue to increaseThere is urgent need for revenue optimization!
  5. Businesses Need Better Value RealizationBanksEffective pricingfor servicesNews MediaMoving fromFree to FeeTelecomMoving from All-you-can-eat toMetering
  6. Case Study: Airline IndustryAccording to a Coststudy - $15 marginalcost per bagIncreasing cost ofmeal serviceFalling ticketprices = nodifferentiationThere is an increasingneed for airlines tocharge separately forpaper tickets, meals,checked baggage, etc.
  7. Some airlines are taking it to an extreme…… the carrier had been investigating fitting coin slots to thedoors of aircraft toilets, similar to those installed at train stations.See related:Unbundling thein-flight toilet
  8. How can marketers practice unbundled pricingwithout turning off customers?
  9. What is in this reportBackgroundHypothesisExperimentResults and Implications
  10. If customers never paid for something, how can amarketer price it?Customers have always paidnothingThere is nothing to compareagainstThey are bound to feel “nickeland dimed”
  11. The answer lies in Reference PriceReference price iswhat the customer isused to paying for aproduct and expect topay despite the valuethey get$0.00Revenue Optimization and Value Realization startwith customer reference price
  12. We believe that improving the reference priceincreases customer acceptanceHypothesis: If marketerscan improve this referenceprice, they can increaseconsumer acceptance ofthese extra chargesOne way to do this may beto provide consumers withtwo options
  13. What is in this reportBackgroundHypothesisExperimentResults and Implications
  14. We devised a between-groups experiment forAirline Unbundled PricingGroup 1 had just oneoption: proposed pricing forfreebiesGroup 2 had two options:with expensive and standardpricingGroup 1 or 2 decided by coin toss –different survey shown randomly toeach respondent
  15. Respondents were told they were taking asurvey for an airlineRespondents were asked to rate on ascale of 1 – 10 their likelihood ofpurchaseWe targeted MBAs and others inLinkedIn and Facebook networks
  16. For example…No premium Option With premium Option Our Airline is consideringcharging $2 for in-flight softdrinks. How likely are you topurchase the service? Our airline is planning tointroduce two in-flight drinkoptions.(1) Offer premium softdrinks from luxurybrands like Evian at aprice of $4 a bottle.(2) Continue to offer softdrinks including bottledwater and soda but at aprice of $2 per bottle.How likely are you to chooseOption 2 at $2 a bottle?
  17. We analyzed the survey results bycomparing the sample meansCompared the meanlikelihood values ofthe two groups usingt-testWe had almost 60responses for eachgroupHighly Unlikely-1Highly Likely - 10
  18. What is in this reportBackgroundHypothesisExperimentResults and Implications
  19. How likely are you to pay a $25fee to check-in your bag?t-stat 9.368332827Conclusion: People are more accepting of baggage fees whenpresented with a premium option.051015202530351 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly LikelyNo PremiumOptionWithPremiumOption
  20. How likely are you to pay $2 forin-flight soft drinks?t-stat 8.241069952US Airways abandoned its six month practice of charging $2 for soft drinks and$1 for coffee/tea after customer outcry.The Wall Street Journal05101520253035401 =HighlyUnlikely2 3 4 5 6 7 8 9 10 =HighlyLikelyNo PremiumOptionWithPremiumOption
  21. How likely are you to pay $4 forpillows and blankets?t-stat 6.533785889Conclusion: People would pay $4 for pillows and blankets when offered an $8option0510152025303540451 = Highly Unlikely2 3 4 5 6 7 8 910 = Highly LikelyNo PremiumOptionWithPremiumOption
  22. But options do not increase airlinepreference!Given these options, how likely are you to choose our airline in the future?t-stat 1.809522874051015202530351 =HighlyUnlikely2 3 4 5 6 7 8 9 10 =HighlyLikelyNo PremiumOptionWithPremiumOptionThere is no statistically significant difference between the two groups onoverall airline preference. Even with options, people were no more likelyto prefer the airline because of its pricing.
  23. What does this mean to you as a marketerFindings from this study apply in general to all use casesFocus on referencepriceProvide OptionsThis helps to translatecustomer value toWTPPriced options nudgecustomers to assign areference price to free$1.99Customer ChoiceBut customerpreference of yourbrand is notguaranteed
  24. For More Informationhttp://iterativepath.wordpress.com Pricing and MarketingStrategyhttp://unbundling.wordpress.com Revenue Optimization
  25. $0
  26. $4.98addedthenremoved

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