Pricing Strategies
Week 6
EWMBA 206

Ganesh Iyer

1

Analysis Framework

Competitor
Analysis

Perceptual mapping

Company Analysis
Marketing Myopia

First mover advantages

Customer Analysis
Positioning

Segmentation

Marketing Strategy
Pricing process
Pricing and innovation

Product

Marketing Orientation

Branding

Price
Promotion
Place

Market
Ganesh Iyer

2

Economics of Pricing
Two Problems with Single Price Strategy
 Leave money on the table
 Some customers are willing to pay more


Pass-up Profit
 Some potential customers were not served even though the firm could have served them at prices above the marginal cost

Ganesh Iyer

3

Price Discrimination
Customization by Observable Characteristics

•

Based on observable characteristics that signal buyers’ price sensitivity

http://www.chessclub.com/ : Students: $29.95/year; Adults: $59.95


AMC theaters can observe the consumer-type using his student ID, seniors
» Customer 1
No student ID
$6.75
» Customer 2
Haas student ID
$4.75
» Customer 3
Haas student ID
$4.75
» etc.

Ganesh Iyer

4

Price Discrimination
Purchase Location


Consumers at different purchase locations have different price sensitivity
 Cure for anthrax: $450 in the U.S. $190 in Canada http://www.canadadrugs.com  Staples website asks for zip code http://www.staples.com/



Select segmentation variables that ensure
 different segments purchase at different locations
 high enough shipping cost to prevent arbitrage

Ganesh Iyer

5

Customize By Time of Purchase


Peak-load pricing: designed to re-distribute usage from peak time to off-peak time
 Redeye flight.
 Electronic road pricing.

Ganesh Iyer

6

Electronic Road Pricing

Ganesh Iyer

7

Price Discrimination
Palm Pilot: Product-line in Action

Palmm505 Palmm500 Palm VIIx
$399
Color
$399
$449

Palm Vx
$299

Palm IIIxe
$179

Palm m100
$129
Ganesh Iyer

8

Microsoft Office:
Product Line (Versioning) in Action

Office 2000
Developer

Office 2000
Premium

Office 2000
Small Business
Ganesh Iyer

Office 2000
Professional
Office 2000
Standard

9

How to Price Discriminate Using through Product
Line Design?


Key to Successful Versioning
 Identify the best ways to distinguish the different versions of the product/service  Need to determine which features will be highly valuable to some customers but of little value to others.
 Goal: Create the “right” # of versions -- targeted at the “right” customer segments by setting the “right” prices.
 Strategic Issue -- Cannibalization: Will the high-end customers buy the higher priced version? How to dissuade them from buying the lower priced version?

Ganesh Iyer

10

Product Line (Versioning)
Segmentation, Targeting & Cannibalization


Example 1: Pricing Dell Laptops



Table: Perceived Economic Value
Personal Users



Business Users



Segment Size

60

40



Dell 350 MHz

$ 500

$ 750



Dell 550 MHz

$ 750

$ 2500

Ganesh Iyer

11

Product Line (Versioning)
Segmentation, Targeting & Cannibalization


Example 1: Pricing Dell Laptops



Option I: Dell 350 MHz only:
 Targeting: Business Users
– Price $ 750
– Total Revenue $ 30,000
 Targeting: Business Users & Personal Users
– Price $ 500
– Total Revenue $ 50,000



Ganesh Iyer

Optimal targeting if introducing 350 MHz: Business Users + Personal Users

12

Product Line (Versioning)
Segmentation, Targeting & Cannibalization


Example 1: Pricing Dell Laptops



Option II: Dell 550 MHz only:
 Targeting: Business Users
– Price $ 2500
– Total Revenue $ 100,000
 Targeting: Business Users & Personal Users
– Price $ 750
– Total Revenue $ 75,000



Ganesh Iyer

Optimal targeting if targeting 550 MHz: Business Users

13

Product Line (Versioning)
Segmentation, Targeting & Cannibalization



Option III: Both 350 MHz & 550 MHz :
 What will be the price of 350 Mhz = 500
 What are the options available to Business Users?
 Buy 350 MHz at $ 500 or 550 MHz at $ X?
 Surplus from 350 MHz = $ 750 - $ 500 = $ 250
Thus, price of 550 MHz