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1. PRICING
Price is the amount of money and services (or goods) the buyer exchanges for an assortment of products and services provided by the seller. The Definition of Price-Management Professional price management includes the goal-oriented use of innovative, customer-benefit-aligned price strategies along with the management and analyses of strategic aspects of pricing (price strategy, price goals and price positioning), price setting (price level and price system), price implementation, price communication (combined with price presentation and price negotiation) and price controlling (information systems and price analysis). Various factors influence price management Price management is composed of an initial price span that vary between a price floor (direct variable cost) and a price ceiling (that is determinate by the demand). In the gap between them, we have corporate objectives, regulatory constraints and competitive factors (the last one contribute to lower the price). In the and the final price span (price corridor) is smaller than at the beginning. PRICE STRATEGY Derived from the aims of the price management and the corporate strategy: Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals , produces the principal policies and plans for achieving those goals , and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers and communities. Five major elements of strategy are areas (region and markets) of activities, strategy to win (it includes image, price and styling), vehicles for the development (internal or external like joint venture), define exactly what to do and how fast to develop and looking at the economic logic and in particular how to obtain returns. A Price Strategy is a balanced and holistic action-and goal-concept which is in line with long-term marketing- and company-goals PRICE POSITIONING Price positioning is the effort of a company to design its’ products so that they deliver the highest perceived value to customers and differ from competitors’ offers. The goal is to position each product at exactly the right spot to capture the greatest reward for the benefits based on customers’ perceived benefits and prices of products of the main competitors. Positioning is known as all efforts of a company to design their supply in a way that it is placed in the customers perception as special, valued and different from competitors. Price Positioning is known as the price-related placement of the supply in the price/performance field. The performance could be functional (attributes serving the concrete customer problem solution), emotional (attributes generating a positive emotions), symbolic (attributes satisfy the need for social acceptance) or social (attributes serving the solution of social problems). Price Positioning doesn’t depend on price only, but it includes also performance and brand. Low-Price Positioning Success Prerequisites
- Sufficient size of low-price segment and a sufficient number of customers who are willing to pay
- To generate sufficient revenues, low-price suppliers must realize a sustainable cost advantage
- Low-price suppliers must offer an adequate quality
- High marketing expertise is needed to provide a sufficient supply of usability in spite of performance- simplification
- High cost-consciousness within the company Implementation process A low-price positioning is closely connected to the strategy of cost leadership. The realization of economies of scale and experience curve effects, the minimization of costs along the whole value-added chain and a wide performance-simplification are important. In low price positioning the product is generally standardized, there is a limited assortment, the focus is on functional performance and less on the other; price is seen as USP and there is a permanent low prices with few special offers and no discounts; for the distribution there are no or few supporting services and few sales channels (own shops); the communication is aggressive but made of easy and memorable slogan and made through cost efficient media. Low-price strategy and low price positioning are two totally different things. In a low price strategy, the price is really low, detailed (price cuts) but there are not any regional differences while in a low price positioning the price is permanently 40% lower than competitors (and sold without packaging) and there are announcements only in the case of increases in price. Another differences are that in the low price strategy there is an extensive quality assurance if a problem occurs while in low price positioning there is the immediate elimination of products with some quality defects. Medium Price Positioning A medium-quality product is offered at a consistently medium-level and industry-average price. Opportunities Threats
- Medium priced brand product are positively loaded and avoid polarizing attributes like “cheap” or “braggy”
- Costs of search and perceived risks are minimized
- Customers perspective “sufficient performance at a fair price” - Threat of no profitable product (compared to low price and premium price positions) - Threat of attacks from above or below - Possible cost pressure may lead to limitation of performance advantages Implementation process Important is the maintenance of a good and constant quality level (above low-price supplies), as well as to build up a positive image through appropriate brand management and ubiquity. Price differentiation is the main profit lever. Regarding the product is important to build up performance based preferences (in particular emotional, symbolic and social), to provide a good usability and offer a variety and differentiation; for the price to assure a price continuity and consistency, make accurate use of special offers, differentiated the price and bundle/ unbundle in a careful way; the distribution happens in channels with generally high reach, it is important quality control of distribution channels and usually there are also specialist shops; there are high investments in communication of performance advantage and brand image, high share of classical advertising and use of mass media with emphasis on performance and quality. Premium Price Positioning Opportunities Threats
- High margins in connection with appropriate quantities allowing for high profits
- Low price elasticity allows higher cost plus’s
- No risk of price wars
- Increasing wealth and demographic developments stimulate growth of premium segments
- Achieve and maintain a permanent high level in quality (image base differentiation only is insufficient)
- High requirements towards brand management to stabilize the premium position
- Temptation to cater to a mass market
- High cost pressure
PRICE COMPETITION
Price leader Price follower One or more providers, that mainly determine price development within the market, especially in oligopolistic markets with few providers Firms that are influenced by one or more providers with dominant market position towards adjusting prices to the dominant providers ‘pieces. Possible reasons for price following are: avoidance of price wars or securing a stable competition/ situation PRICE WARS Due to increasing pricing pressure possible long run profits are sacrificed to short run improvements in sales quantity. Competitive reactions can lead to a running pricing competition. The result is that market shares of both competitors are nearly unchanged but they are now at a significant lower level in profits. Price wars are the most intensive form of competition and can cause substantial financial losses. The own price of a firm is in this case higher than the competitive price: you need a specific cost structure to sustain the war. In a price war, prices of all market actors decrease dramatically within a short period of time. The implications are for the company loss of volume, loss of brand equity and decrease in innovation ability; for the industry the creation of a competitive advantage, threat due to substitution products and threat of bankruptcy and for the consumers in the short run he has lower prices but there is a lower product quality in the long run and impossibility to make price assumptions. It originates a price spiral between firm’s reaction and consumer behaviour. The only possible exit from price spiral:
- Product Differentiation: better tailoring of offerings to customer needs can both add value and differentiate product
- Price Differentiation: innovative pricing concepts through price bundling (service packages), non linear price differentiation, performance based price differentiation, person based price differentiation (customer and non customer), regional price differentiation or multiple person pricing. à Lesson 4 PRICE VARIATION A Price Variation is when a vendor changes (lowers/raises) the price of its products within the planning period to consciously influence the market. They can be temporary as special offers, discounts, price building, couponing or bonuses and permanent (skimming strategy and penetration strategy). Temporary Price Variations Price discounts are unsteady, direct or indirect and timely limited decreases in price. The advantage are overcoming short term liquidity shortages, motivation of sales force, increase of price political flexibility, adjustment of prices to different power relations in sales channels, improvement of distribution level, market presence and market acceptance, increase of end customer sales by reclamation of new customers, retention of old customers, increase of buying intensity and impulse buying. The disadvantages are customer learning of low price, negative carry over effects in after action phase, threat of absorption of discounts by retail market, conflict of aims with product choice, boost of customers’ brand disloyalty, limited opportunities of segment specific treatment of end customers, undermining price image products and a decrease customer WTP. The short term effects are store switching, brand switching, new consumers and more consumption, the long term effects are brand loyalty and store loyalty. Discounts can raise positive emotions while looking for the best deal (and customer are more likely to buy cheaper product), long term low prices reduce search costs Discounts Permanent low prices
- Different discount activities may always serve as new stimuli
- For attractive discounts, customers become less loyal
- Save customers from time consuming price comparisons
- Free choice of product alternatives for
- Consumers search for deals, but spend more money on non discount products
- By discounting demand may be more predictable customers
- Raise the credibility of the store’s pricing strategy
- Secure the customers and raise their loyalty The opportunities of discounts are the positive impact on price emotion, price interest, price perception and price judgment, an increase in short term profits and a targeted control consumption. The risk of discounts is mainly long term price learning and so the reference price is lowered, the likelihood of purchase may decrease, the cannibalization of existing deals and consumers are trained to become more price sensitive. Some suggestion for price communication of discounts and avoid learning of low price levels is to set external reference price and to add temporal or regional restrictions to discount or multi-channel approach (e.g. selling discounted SBB tickets through other brand). Permanent price variation: skimming strategy and penetration strategy Skimming strategy is the one that is possible to observe in the case of Apple’s iPod (high price at the beginning that is lowered over time), penetration strategy happens in the case of Toyota Lexus in America (low at the beginning and it increase over time). Skimming strategy make possible skimming on higher WTP for innovations and to create a high unit contribution margins (introduction phase already profitable) but the high profit that it creates attract competitors. This strategy is possible if there is high quality/ positive image of product, high WTP of a sufficient number of customers and if the product is not easy to imitate. Penetration strategy allows to reach high sales volume growth, cost structure advantage due to experience effects and complication of market entry for competitors. The problem is that there is a longer payback period of product and price increases may lead to decreases in sales volume. Prerequisites are high price sensitivity and sufficient funds/ high capital demand (possible financial losses at very low starting price, fast build-up of high capacities) PRICE SETTING Finding the right price Price setting can be determinate in term of competition, cost or customer value (WTP based value). Concerning the competition there are three different level:
- Heavy competition with similar or identical product
- Madium competition with similar product
- Little competition with related product Competition based pricing determine a price that is equal to selling price that is equal to competition price +/- difference in price (if it is plus there is a premium strategy, if minus a cheap alternative), the primarily target is reaching desired sales volume and there is also a differentiation between adjustment strategy and niche strategy. The competition based pricing is fast, cheap and allow to reach specific sales goals. The problem is that product bundles of companies often not comparable, competition based prices often contain estimation errors, customers WTP is often neglected, therefore revenue is given away and profitability could possibly be reduced to reach turnover or market-share goals. For the evaluation and to reach the optimal price is possible to use a decision tree methods or the decision support systems. Decision tree methods (slide 55) Characteristics of this method are the lack of knowledge of consumer behaviour and competitors are taken into account, not an alternative sales volume is assigned to a set price, but alternative sales volumes are investigated with different likelihoods and price is chosen by the manager according to one of the following principles related to willingness to risk:
- Expected Value: Choose the price with highest expected value.
- Maximin: Chose the price that leads to the highest contribution margin if a pessimistic perspective is
costs. TBEA (Example lesson 2, slide 47) a. Set a possible price b. Evaluation of unit contribution margin d by subtraction of variable unit cost k from price p: 𝑑 = 𝑝 − 𝑘 c. Evaluation of Break-Even-Volume qBE by division of fixed cost Kfix by unit contribution margin d: 𝑞'( =
d. Assessment, whether Break-Even-Volume is exceeded at the given price and assessment of the likelihood of reaching this volume. à Expected sales volume > Break-Even-Volume Product is profitable à Expected sales volume < Break-Even-Volume Product is not profitable A demand function is implicitly consulted, due to the necessary prediction of sales volume at the given set price IBEA can be useful to analyse both change in fixed costs (think about how the fixed costs might change as a result of a marketing decision such as advertising expenditure, investments in production capacity, sales training and then evaluate the new incremental break-even-volume ΔqBE required to remain profitable: ΔqBE = change in expenditures / contribution margin = ΔKfix/d) or change in contribution marginà think about how the contribution margin might change as a result of a marketing decision such as price increases or cuts, product reformulations influencing variable costs. To keep total profit constant, the following relationship has to hold: 𝑞?@A×∆𝑑 = ∆𝑄×𝑑EFG and then evaluate the new incremental break-even-volume: 𝛥𝑞𝐵𝐸 = 𝑞𝑜𝑙𝑑 𝑋 𝛥𝑑 / 𝑑𝑛𝑒𝑤 IBEA Terminology
- Old unit volume (qold) is the expected number of sales transactions during the planning period under the assumption that the marketing action under scrutiny is not taken,
- New unit contribution (dnew) = New unit price - New unit variable cost (i.e., Unit contribution under the assumption that the marketing action under scrutiny is taken),
- Old Unit Contribution = old unit price - Old unit variable cost. (i.e., unit contribution under the assumption that the marketing action under scrutiny is not taken), and Margin Accounting – maximizing contribution margins (slide 51) Price-optimization by contribution margin calculation means to determine the price with the highest contribution margin that is the profit maximizing oneà Maximizing contribution margins therefore equals maximizing profits In this analysis different prices are given, the reachable sales volume is estimated and contribution margins for the different price-positions are calculated. It is the logically adequate method of optimizing prices, it has an easy implementation (neither specifications of functions nor mathematical optimizing methods) and it is highly practicable. On the other hand, it implies knowledge of demand reaction to price position, without offering a solution for their determination and also knowledge of competitors’ reactions and their impact on sales volume is implied. Pricing based on WTP The price reflects customer WTP for product and optimal scooping out of potential yields but to measure the WTP is often complicates and competition prices and costs are not taken into account. For the evaluation and to reach the optimal price is possible to use the marginal analytic models. Marginal analytic models (slide 63) You can analyse what is happening to the demand changing the price only if you assume to change the margin. So marginal-analytic models maximize a given target function by differential calculus, so optimal prices can be determined. The demand function is determined as a mathematical function, all prices within
a specific interval are investigated, not only certain price points and the optimal price is not determined by a comparison of single (discrete) values but by a marginal investigation. Marginal analytic models enable an analytically exact determination of optimal price regarding sales and profit goals, the ideal process of price setting creates awareness of basic cause-effect-relations and all possible prices are taken into account. But the demand- and cost-functions are often based on simplified assumptions far away from reality, it requires sound empirical foundations especially for the demand function and parametric assumptions (a certain functional form is assumed). Simultaneous Price Management by Target à Pricing and Target Costing (slide 67/69) Target pricing: it means finding target price of product by market oriented calculation. In particular, you analyse company goals (market share, revenue), competition price and customer WTP to define the optimal target price. Then the target cost of product is determinate through a ROI oriented calculation. You calculate reactions of demand to find optimal target price p. By subtracting profit margin from target price is possible to get target cost. Then the target cost is split into performance and cost-parts to determine how much each step in the production process may cost. Then there is a phase of target cost control (calculation of standard cost, incurring for production with existing structures and technologies) and calculation of gap between target and standard cost. The last phase is closing cost gap: taking measures to reach target cost by cost configuration in development phase and cost rationalizing in production and marketing phase. By this method there is market orientation of pricing decisions and target cost splitting enables early testing of existing technologies and performance aspects for efficiency and marketability. Disadvantages are that knowledge of an optimal, market-related price is assumed and additional use of market-oriented tools is needed to determine price. Use of process is limited to early cost configuration of product/service and possible price and/or cost dynamics may require updating the calculations.
3. PRICE DEMAND FUNCTIONS AND ELASTICITY Factors driving price elasticity up are product characteristics (high similarity and compatibility of competing products, high buying frequency, mass quality, positioning in a mass market, mass distribution, frequent use of products for special offers and strong price advertising and little complexity of product), the market characteristics (high competitive pressure for vendors, high price transparency, industry with low ROI or high concentration on customer side) and customer characteristics (well developed price awareness, low perception of risk, good product knowledge, low brand awareness, low meaning of image and prestige, low quality awareness or low meaning of convenience). Cross price elasticity A measure for impact of other product prices on own sales volume. It specifies the relation of changes in sales volume of a product to changes of prices of another product. 𝜀O' =
Products are substitute if a price increase of product B leads to an increase in sales volume of product A. They are complementary if a price increase of product B leads to a decrease in sales volume of product B. Possible forms of the demand function Multiplicative model Q(p)=a×p-β Direct price effect is asymmetric. Undershooting competitive price (or decreasing the price) has a stronger effect than exceeding the competitive price (or raising the price). Assumption is realistic if market share is < 50%.
seasonable effects) and usually analysed on aggregated value only without a determination of individual willingness-to-pay and the determination of prices for price strategies which require knowledge about the willingness-to-pay on individual value (i.e. price differentiation, price bundling) not possible. Price Experiments (slide 34/35) Stimulus are composed of three variables: independent variable (experimental factor such as own price), controlled variable (e.g. own advertising) and environmental-related variable (e.g. competitors advertising). They determine the organism that is the test units (e.g. potential buyers) and a response that are the dependent variable (e.g. own sales volume). Price Experiments – Experimental Designs Pre-experimental design: Examination of only one experimental condition without taking control variables (ads) into accountà e.g. all households get advertising indicating a decrease in price for product x – measuring sales volume increase of product x. Ex-post-facto-design: characteristics of the participants are used as independent variables (e.g. gender, opinion). Quasi-experimental design: ex post separation of participants into experimental groups, depending on measured variables à e.g. measuring income after the purchase of a product. Separate participants into high and low income groups. Experimental design: Allocation of participants to experimental groups at random. These groups differ in the value of one independent variable, under extensive control for other variables that might influence the effect of the independent on the dependant variable. In lab research, purchase situation are mirrored as realistic as possible. Prices are varied in different experimental groups. Impact on sales is measured. It is relatively cheap and it allows a great control over experimental manipulations and disturbances. Cons are that often there are rather artificial purchase
situations and it has low external validity.
In field research prices are varied in a real buying situations and the impact on sales volume is tested. It is conducted in a natural environment and allow the observation of everyday behaviour. There is low control
of disturbances and experimental manipulation is possibly difficult to implement à low internal validity, high
external validity. It allows to measure close to market results and the natural buying behaviour is observed. The problem is that there is no representative sample, possible overstating of results due to ideal shelf-care and therefore avoidance of out-of stock- situations, control for several variables is difficult (e.g. advertising- actions of competitive products), there is a relatively large consumption of resources (staff, logistics, recruiting of retails for sample) and long test-duration. Experimental Auctions There are different kinds of auctions. In the English auction (it is an "ascending bid auction" and it is not incentive-compatible) bids are publically announced (open auction), there are no limits for counterbidding, little by little raising of bids by bidders, the auction ends if no higher bids are placed and the highest bidder gets the item. The price equals the highest bid and for winner it might not be the real willingness to pay. It can be the result of a strategic behaviour: negative impact on profit of an other bidders. In the Dutch auction (a type of "descending bid auction" and not incentive-compatible auction) bids are publically announced (open auction), the auctioneer starts the auction with a high starting price, which he/she lowers successively. The auction ends, as soon as a bidder accepts a price and this bidder gets the good at the accepted price. In the maximum-bid auction ("First price sealed bid auction" and not incentive-compatible) bids are placed secretly (closed auction), bidders place only one offer and the auction ends after a specified period of time. The highest bidder gets the good and the price equals the highest bid. In the Vickrey auction ("Second price sealed bid auction" and incentive-compatible) bids are placed secretly (closed auction) and bidders place only one offer. The auction ends after a specified period of time and the highest bidder gets the good. The price equals the second highest bid.
Assessment of auctions to Identify the demand function Through auctions the individualized price is identified, they are low cost and valid tool to measure price effects. The disadvantages are that strategic thinking might influence bidding behaviour, risk appetite influences bidding behaviour and there is a possible after-bid dissonance of bidders (especially English (Winner’s Curse) and Dutch auction). Experts‘ Judgments Experts are own employees (corporate management, managers, sales staff), external consultants or employees of market research organizations with special knowledge regarding markets/market segments, products or price management in general or vendors. In this method, experts shouldn’t be less than 5 – 10 experts and they have to include experts with different expertise and different industry positions. Neutral person carries out the interview is necessary and and a discussions of results in a joint meeting. Procedure The framework has to be define and in particular, definition of offering (e.g. product with specific service components) and analysis of competitive- and market environment. Important to consider are the current price and related sales volume. Then the demand is estimated with the determination of price points (realistic upper- and lower bound) and an estimation of expected sales volume for every price point (bottom price, medium and top price). At the end there is the discussion and aggregation of results and in particular plausibility checks, discussion of estimates and adjustments and aggregation of single demand estimates aggregated demand function. This method is low cost, easy and user-friendly. The survey approach helps, to structure problems and push back emotions and competitive situations may be anticipated. Cons are that the quality of results depends on the quality of experts ‘estimates (threat of wrong assumptions, wishful thinking), estimates come from "internal" experts, not from customers and individual estimates sometimes deviate by factor one to 10-20. Direct Customer Surveys For direct customer surveys, the data of interest is directly asked for. Demand-relations and price elasticity are assessed by directly "asking" for maximum WTP and by "asking" of reactions to changes in price. Incentive compatible methods Aim of the analyst (market research agency) is measuring the true willingness-to-pay while aim of the participant (consumer) is willingly providing the information about his true willingness-to-pay. BDM-Mechanism You have to state your willingness to pay for the product X and then a random number Y is drawn. There is a conditional payment:: if your willingness to pay X is equal or higher than the random number Y à You have to pay Y but if your willingness to pay X is less than the random number Y à You cannot buy the product. Incentive-alignment: you have an incentive to reveal your true willingness to pay (Nash Equilibrium) Reasons for incentive compatibility property are that purchase offer (= willingness-to-pay) has no direct influence on price and the highest possible price to be paid for the product is equal to the participant’s maximum offer (and therefore, willingness-to pay). The advantage of the method is the goal-oriented query of single data, that is easy and user-friendly, there are estimates from customers and higher validity for industry goods than for consumer goods. The cons are that price is investigated in isolated fashion, while the customer in reality trades off aspects of utility and price („atypical„ high effects of price) and threat of discrepancy between verbal statements and actual behaviour (use incentive-aligned methods whenever possible). Other approaches to measure consumer reactions to price are Van Westendorp method (consists of asking for consumers WTP and strictly speaking one can not specify a demand function with this method. Only the
tight, to cover possible area completely but also not too wide, to not cover unrealistic areas or attribute-levels that are apart from respondents’ experience.
- definition of experimental design (following statistical requirements). All possible alternatives are constructed
- evaluation of product alternatives (by conjoint-measurement). It can be traditional conjoint measurement (entire deals are ranked according to preferences), adaptive conjoint analysis (ACA) where there is a determination of unacceptable attribute values, a preference ranking of attribute values of non directional attributes and their weight and finally a paired comparison, choice based conjoint (CBC) the respondent has to pick an offering but without ranking them, or constant sum conjoint (CSC) where the respondent has to award 100 points according to his personal preference. CM, CBC, CSC are full profile approach (while ACA is partial profile approaches), products are composed by combining one attributes at a time. They are realistic and a low number of judgements is needed while as cons there is increasing complexity with increasing number of attributes and there is a relatively high time use. In ACA the evaluation of products is done according to partial profiles. Therefore, the product is composed from a subset of attributes. This method enables use of significant higher number of attributes but is not as close to reality as full profile approach.
- estimation of respondents’ partial utility-value for the different attributes and their values. Then the entire utility of a product for an individual can be derived (linear preference model is assumed).
- identification of demand function (through the deterministic/ stochastic model). This is possible because none option is assumed. The utility of a product is higher than the utility of none option.
- Identification of Attributes and Their Value (slide 10) The choice of attributes and their attribute-levels is crucial, because it influences how consumer behave during a conjoint-analysis task. The following aspects should to be taken in account:
- Which attributes are relevant? o Which attributes drive the customer decision? o The relevant attributes should be discussed with the management. o Their judgments should be complemented by discussions/focus-groups with customers.
- Range of attributes: o Not too tight, to cover possible area completely. o Not too wide, to not cover unrealistic areas or attribute-levels that are apart from respondents’ experience.
- Number of attribute-levels: o Use a similar number of attribute-levels over attributes, because the number of attribute- levels has an impact on the weight respondents assign to each attribute. o Problem: especially for the attribute "Price", one might be tempted to test higher numbers of levels. Cover a realistic range of attributes. You look at the market range, you look at the minimum and maximum price level. You want also to have a balanced number of attributes. Selection of Conjoint-Measurement-Methods
- Traditional Conjoint Measurement
- Choice Based Conjoint (CBC)
- Constant Sum Conjoint (CSC)
- Adaptive Conjoint Analysis (ACA) PRICE DIFFERENTIATION (lesson 4, slide 2/3) Price differentiation is a pricing strategy in which a company sells the same product at different prices in different markets.
Prerequisites are that consumers have different maximum prices and price elasticity’s. It is possible, to divide the consumers in at least two groups, according to their max. price and the created groups are separable to a certain extent. The company has a monopolistic range, that exists on imperfect markets, so it is actually able to skim the consumer’s surplus. The market consists of consumers which typically differ in pricing-relevant criteria, such as WTP, income, preferences, consumer behaviour etc. Price-related market segmentation divides the consumers by such criteria, which are then addressed by the different prices. Price differentiation also considers the heterogeneity of consumers in their WTP. Two subtasks of price-related market segmentation:
- Identification of market segments (definition of segmentation criteria and socio-, psycho-, and demographics vs. needs)
- Targeting (normative aspect: Determination of segment-specific marketing-mix and operational aspect: Implementation of segment-specific marketing-mix) (slide 6/7) First Degree Price Differentiation – Customer individual price differentiation Procedure
- For a given product, individual prices are set.
- Ideally: Prices match consumers’ WTP (and exceed variable costs) Customer loyalty Customers saving time and money More options to chose from Convenience Profit growth by skimming consumer’s surplus Revenue growth by increasing sales and acquisition of new customers Realizing economies of scale Adjustment of price structure to competitors Avoiding competition/ allocation of niches Raising the switching costs Build up market entry barriers Reduce price transparency
Customer goals
Competitive goals
Strategic triangle
Company goals
Types of price differentiation according to Pigou Implementation-techniques of price differentiation First degree price differentiation (perfect discrimination) (^) Auctions Performance based price differentiation Second degree price differentiation (self- selection) Regional price differentiation Quantity based price differentiation Third degree price differentiation (consumer criteria) Person based price differentiation Time based price differentiation Price negotiation Multiple person creation of price
members of a group. Usually the average price per person decreases with increasing group size. Possible limit is the threat of systematic abuse by customers (e.g. demand bundling). Price Bundling (slide 46/47, 49/52) “Price bundling” is referring to a situation where a supplier offers several products/services as a bundle for one single price. The bundle-price is usually lower than the sum of the products ‘single-prices (price- advantage). There are different kinds of bundling: unbundling (only the single products are purchasable), mixed bundling (both single products or bundles are purchasable) and pure bundling (where only the bundle is purchasable). The benefits for the seller are to exploit customer WTP, cross selling and a cost reduction that leads to profitable growth. From the customer perspective, there are discount and incentives, comfort and convenient aspects to have all the product already bundled, the selling is solution oriented more than product oriented and transaction cost are lower. Goal of bundling is to reallocate WTP ‘s such that the customer has an incentive to make the purchase and the supplier has a profit-advantage.
