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Pricing by Preston McAfee
The document discusses various aspects of pricing strategies, including pricing 101, monopoly pricing, price discrimination, and consumer psychology. It highlights how pricing can vary based on customer segmentation, market competition, and psychological tactics to influence buying decisions. Examples from various industries illustrate these concepts, emphasizing the complexity and strategic nature of pricing in business.
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- 2. Your last nameis your password. If you have any questions or have forgotten your password, please contact the Coordinating Board. Microsoft Confidential 2
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- 4. Microsoft Confidential 4 Professional Experience •Microsoft, Chief Economist & CVP • Google, Research Director • Yahoo, Chief Economist Economics Professor • UWO • UTexas • CalTech • MIT • U of Chicago Expert Testimony • Exxon-Mobil • BP-Arco • FTC v. Rambus • Peoplesoft-Oracle • US Congress Author & Editor • Articles: 100+ on Auctions, Pricing, Strategy, Antitrust, ML, Computational Advertising • Books: Competitive Solutions, Introduction to Economic Analysis • Editor: Am Econ Rev, JET, Econ Inquiry, TEAC Market Design • Co-designer, U.S. Spectrum auction • Mexican spectrum, microwave auctions
- 5. Pricing strategy determines customersegmentation and price points Microsoft Confidential 5 Engineering Economics Sales & Marketing Engineering enables product features and generates core consumer valuations Sales & Marketing goes to market, conveys value proposition to customer base
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- 8. Microsoft Confidential 8 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
- 9. Microsoft Confidential 9 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
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- 11. “all phone pricesare offered only with activation of a new line of service with verizon wireless, under the terms and conditions of selected service plan.” “prices exclusive to t- mobile.com and valid only with new service activation.” Microsoft Confidential 11 Pricing 101
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- 14. Microsoft Confidential 14 Pricing101 Complex, Difficult, Inscrutable Offer
- 15. Microsoft Confidential 15 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
- 16. prices depend oncustomer characteristics offer discounts to elastic (price sensitive) customers discounts offered on basis of factors correlated with price sensitivity Microsoft Confidential 16 Monopoly Pricing
- 17. Microsoft Confidential 17 MonopolyPricing mcmcmcp 25.1 4 5 1 mcmcmcp 67.1 5.1 5.2 1 For different demand segments, typically want different prices or price discrimination (AKA value-based pricing)
- 18. Microsoft Confidential 18 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
- 19. Microsoft Confidential 19 PriceDiscrimination
- 20. Microsoft Confidential 20 PriceDiscrimination
- 21. Microsoft Confidential 21 PriceDiscrimination
- 22. Mar 2005 July2005 June 2006 Large Business $289.99 $334.99 $294.95 GSA/DOD $266.21 $334.99 $294.95 Home $275.49 $267.99 $265.45 Small Business $246.49 $267.99 $265.45 Microsoft Confidential 22 Price Discrimination Part Number A 019 3405
- 23. Microsoft Confidential 23 Example“Damage” Pharmaceutical pricing • Same active in ingredients in veterinary and human meds, quality assurance only given for humans version 486SX, 487SX Chips • Disabled math co-processor IBM LaserPrinter E • Added chips to slow processing Sony 74, 60 minute mini- discs • Differ by instructions on disc Amazon “super saver” free shipping (7-10 days) • Hold the item in the warehouse for a few days • Copied by many online retailers, price sensitive consumers willing to wait Price Discrimination
- 24. Microsoft Confidential 24 IBMLaserPrinter 10L (4029-040) IBM LaserPrinter 5E (4029-010) Added chips to slow processing Price Discrimination
- 25. Microsoft Confidential 25 PriceDiscrimination
- 26. Microsoft Confidential 26 PriceDiscrimination
- 27. Microsoft Confidential 27 PriceDiscrimination
- 28. Microsoft Confidential 28 PriceDiscrimination
- 29. Microsoft Confidential 29 PriceDiscrimination
- 30. Microsoft Confidential 30 PriceDiscrimination
- 31. Microsoft Confidential 31 PriceDiscrimination High: $59.95 (3x Low Price) Low: $21.73 (66% off High Price)
- 32. Microsoft Confidential 32 AWSSpot Market Prices When price spikes, VM evicted and work lost Price Discrimination
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- 34. Microsoft Confidential 34 PriceDiscrimination
- 35. Microsoft Confidential 35 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
- 36. Microsoft Confidential 36 Types: Prices End in 9 • Helps customers convince themselves it’s worth buying • Works best with luxury goods Anchoring • Establish a high a reference price (so lower price looks like a great deal) Present Bias (TCO) • Significantly discounting future costs (purchase price vs. TCO) Survivorship Bias • Discounting failures or missing observations • Examples: Movie stars, pro athletes & tech startup entrepreneurs Consideration Sets • People use “consideration sets” to make decisions • Offer three alternatives (GBB: good, better, best) • Branding to put product in consideration sets Salient Attributes • Focus on most “important” factor and ignore the rest Shrouded Attributes • Neglect to read the fine print Psychology
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- 38. • Value (andprice) of storage is based several factors: Microsoft Confidential 38 Psychology
- 39. Microsoft Confidential 39 Psychology $Per Millions Standard Storage Infrequent Access Additional Charge Reads $0.40 $1.00 +150% Writes $5.00 $10.00 +100% 2) Pricing info below is “buried” in pricing page1) AWS Access Fees: Retrieval: same as monthly per GB price + more fine print
- 40. Microsoft Confidential 40 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
- 41. Weekly Circulars Microsoft Confidential41 Grocery prices vary dramatically from week to week Why? Turkeys are cheapest when demand is highest Competition Grocery prices vary dramatically from week to week Why? Turkeys are cheapest when demand is highest Weekly Circulars
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- 44. Microsoft Confidential 44 Competition Source:camelcamelcamel.com Acer 24” Monitor $109.99 $179.99 Amazon Price
- 45. Microsoft Confidential 45 Acer24” Monitor Competition Source: camelcamelcamel.com Amazon Price 3rd Party Price
- 46. Microsoft Confidential 46 Competition 2¢ difference is a 30% profit increase for retailer Ten cent differences common nearby
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- 48. Microsoft Confidential 48 I.Pricing 101 II. Monopoly Pricing III. Price Discrimination IV. Psychology of Pricing V. Competition VI. Dynamics
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