The document discusses economic value pricing, which is based on pricing a product at or below a competitor's price plus the additional value it provides to customers. It notes some reasons for pricing below a product's economic value, including uncertainty over benefits, newness, temporary discounts, and large purchases. The document also discusses using economic value pricing to evaluate if a product or advertising is priced correctly, estimating price elasticities, ways to improve pricing analysis, pricing along a demand curve to different customer groups, product and customer-based segmentation models, and threats to pricing power like substitution.

1. pricing

2. 3 Cs

3. Economic Value PricingDefinitionEconomic Value to the Customer (EVC) is based on the insight that a customer will buy a product only if its value to them outweighs the value of the closest alternative, or when the utility of a product depends on its value to the customer minus its price.Therefore, to sell a product, a firm needs to price at or below its competitor’s price plus the value advantage its product has to the customer over the rival product.

4. Pricing below EVCUncertainty effect – people don’t believe the benefits you claimNewness effect – people don’t understand the benefitsTemporary Discount effect –discounting from list drives sales, vs lower priceExpenditure effect – large single purchaseIts just not right – Price gougingStrategic – winner takes all market

5. EVC for AdvertisingIs EVC a good model for advertising?Is there an EVC for advertising?

6. EVC as a Pricing DiagnosticIs a product priced correctlyOverpricedValue message misaligned to differentiation value

7. Price ElasticityPrice Elasticities. The price elasticity of a product measures the responsive­ ness of sales to a change in price. Price elasticity is defined as the percent change in quantity sold given a 1% change in price.This helps analysts figure out whether revenues will be the same, higher or lower after a change in price. If elasticity=1, revenues will be the same from a price change. If elasticity is >1, revenues will be higher with a price decrease. If elasticity<1, revenues will be higher with a price increase.Estimating a constant price elasticity. One problem with the formula ΔQd/Qd for the price elasticity is that it can take two different values for whetherΔPd /Pd P or Q are the original or final values. This shouldn’t matter if you are comparingprice elasticities across segments and are always consistent about what values you use (for example the value that is used in the denominator, should be the one used to calculate the numerator).

8. Pricing AnalysisWays of improving historical pricing analysis.(1) CRUCIAL. Calculate different price elasticities for each type of customer, each region, each product.(2) Use more data than just aggregate sales and prices • DHL employed software that included the reactions of customers whocalled and got a quote but didn’t ship - that is, a failed sale. By in­ cluding data from this group of customers, they improved their ‘quote to book ratio’ from 17 percent to 25 percent.(3) Use panel data econometrics where you include controls for places and times in your regression analysis. The problem is that this can get very expensive both in terms of personnel and costs of acquiring data.

9. Pricing along the demand curveIn the last lecture, we thought hard about how to measure the demand curve. But it is important to also think about why it slopes downwards. The answer is variation in how much our customers value our product.The most crucial insight of this class is that we shouldn’t think about where we should price along our demand curve. Instead we should think, how many different prices to different customers can I charge along my demand curve?

10. Segmentation ModelsProduct attribute basedCustomer based

11. Customer Based SegmentationNational (big brannd) vs localInternational vs home marketAre there ther opportunities?

12. Product attribute based segmentationMust be able to structure price to meet key attributeCreating different products based on the atributeRemnant vs premiumOptional extras – can be burdensome over time

13. Price Erosion ThreatsFalling demandLow differentiationIncreasing supply and substitutes

14. Pricing powerMarket has limited capacityIncreasing demandStrong differentiation In April, 2009, in the UK, Amazon offered 100 popular MP3s at just 29p (0.50c) per download. Apple’s iTunes store responded by raising prices on the most pop­ ular MP3s to 99p, or $1.50. Apple could do this because of switching costs and superiority of iTunes experience.

15. Out PricingUsing 3 PsProductPromotionPlaceLowering price may be a trapless revenuesIndicate low qualityFragile market – disloyal customers