MARKETING

Lecture 09 & Lecture 10

Professor Amitav Chakravarti

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 Framework: Centered Around
Major “Decisions”
Identify
Market CUSTOMER COMPANY COMPETITION
Opportunities

Set
SEGMENTATION TARGETING POSITIONING
Strategy

Formulate
Marketing PRODUCT PRICE PROMOTION PLACE
Program

•2
 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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 Economic Value to the Customer
(EVC)
! What is EVC?
! maximum price a customer is willing to pay
! based on total life cycle cost
! compared to an existing or competitive product

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Measuring Customer Value

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Measuring Customer Value
ECONOMIC VALUE TO CONSUMER
1. Identify Lifecycle (Focal
Product)
2. Identify Cost Elements
3. Identify Total Lifecycle
Cost
4. Determine Equivalent
Units of Comparison
Product
5. Repeat Steps 2 & 3 for
Comparison Product

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 Issues in Using EVC
! EVC is helpful for
! Pricing (price expectations)
! Segmentation
! New product introduction
! Problems with EVC
! Based on life cycle cost (difficult to figure)
! Customer differences (prefer short life & low price)
! Convince customers (myopic - pay now, gain later!)
! Functional and psychological benefits ignored

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 Measuring Customer Value: Price
Elasticity
! Price Elasticity (E) =
% change in quantity demanded
% change in price

|E| > 1 => Elastic demand, a small change in

price produces a large change in demand
|E| < 1 => Inelastic demand, a small change in
price produces a smaller change in demand
|E| = 1 => Unitary Elastic demand, a change in
price produces an equivalent change in demand 9
Demand Curve for Motor Oil
(a product with few substitutes)

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Extrapolating to “New” Price Points

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 Survey Methods
! See note posted on Website
! Monadic Testing
! Gabor-Granger Method
! Van Westendorp Method

! Competitive Testing
! Brand Price Trade-off (BPTO)
! Conjoint Analysis (under New Product
Development)
! But first, why are they important?

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 Pricing Objectives
• Cost Oriented Approaches
• Types: Standard Markup; Cost-plus

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 Margins Along the Distribution Channel
Manufacturer
$7.50

Wholesaler
Purch. Price from Man. = $7.50
Selling Price to Retailer = $8.70
Retailer
Purch. Price from W/S = $8.70
Selling Price to Consumer = $10.00
Consumer
Selling Price to Next CM – Cost of Acquiring Good from previous CM
Channel Member’s Margin =
CM’s Selling Price to Next CM

$10.00 – $8.70
Retailer Margin =
$10.00 14
 Pricing Objectives
• Cost Oriented Approaches
• Types: Standard Markup; Cost-plus; Experience Curve
• Profit Oriented Approaches
• Types: Target Profit; Target Profit-on-Sales; Target ROI
• Competition Oriented Approaches
• Types: Above/At par/Below; Loss-leader; Product-Line Pricing

• Problems
•Which costs to consider?
•Difficult to predict sales volume
•Ignores Competition
•Ignores Customer (i.e., Demand)

• Demand Oriented Approaches

• Start with what the consumer is willing to pay (Target Pricing)
• Benefit from heterogeneity in consumer preferences (Strategy/Tactic)
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 Pricing Strategies & Tactics
• Demand Oriented Approaches
• Example: Subsidy Pricing
• Example: Market Skimming (Hi) vs. Market Penetration (Lo)
• Conditions Favoring Market Skimming (Penetration)
• Often used in combination over PLC of a product
1. Large segment of initial
adopters willing to buy at high
initial price (i.e., price
sensitivity)
2. High price does not attract too
many competitors
3. Customers interpret high price
as high quality
4. Lowering price has relatively
minor effect on increasing sales
volume & reducing unit costs

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“Innovators”
 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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~ 300% expensive!
 The 100-Calories Paradox
“…overpriced and underfilled.”
But 100 Calorie Craisins was a Flop
 Consumer Hit-or-Miss Examples
• Store Atmosphere (“Emporiums of Cool”)

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 Public Policy Examples: Hit-or-Miss
• Voting Turnout (“Make it easy”)
• CCTs (Conditional Cash Transfer)
– Education, Preventative Healthcare, etc.
– Crime and gun violence

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 GO & STOP Signals
(in purchase decisions)

APPROACH /
AVOIDANCE GO Signal
CUES
HEURISTIC PURCHASE
INFORMATION DECISION
PROCESSING (BUY? NOT BUY?)

STOP Signal
 GO & STOP Signals
GO SIGNAL:
a thought, feeling, or a subconscious response that creates an approach
tendency and energizes the potential buyers toward the product.
e.g., product quality, design, packaging, brand name, in-store experience, self-
signaling, social signaling

STOP SIGNAL:
a thought, feeling, or a subconscious response that creates an
avoidance tendency that inhibits consideration or purchase.
e.g., pain of payment, risk, uncertainty, anticipated regret, guilt, social signaling,
self-signaling
 GO & STOP Signals

GO signals
Definitely
Buy STOP signals
GO-signal
Probably activators
Buy
Purchase Intention

Undecided
Actual Behavior
STOP-signal
Probably inhibitors
Not Buy

Definitely
Not Buy
LOW HIGH

Signal Intensity

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0
 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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 JC Penney – Pre-2011
! In deep, deep trouble…
! Enter Ron Johnson…
! Apple Stores, Genius Bar
! Target (Michael Graves line)
! Stanford Univ. Hospital
! Solution: A better “Customer Experience”
! “…how do you explain the fact that people flock to Apple Stores
to buy Apple products at full price when Walmart, Best Buy, and
Target carry most of them, often discounted in various ways, and
Amazon carries them all—and doesn’t charge sales tax! People
come to the Apple Store for the experience—and they’re willing to
pay a premium for that.”
! Changes: (1) “Market Square” Concept (2) Simplify dizzying array
of discounts/coupons (590 discount schemes per year!!)
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 JC Penney – Pre-2011
! In deep, deep trouble…
! Enter Ron Johnson…
! Apple Stores, Genius Bar
! Target (Michael Graves line)
! Stanford Univ. Hospital
! Solution: A better “Customer Experience”
! Changes: (1) “Market Square” Concept (2) Simplify dizzying array
of discounts/coupons (590 discount schemes per year!!)
! “That means the customer ignored us 99 percent of the time. Steve
[Jobs] would have called this insanity. [590 promotions]…and the
customer ignored us. It's like in junior high school, if you keep calling
a girl and she doesn't call back, you seem desperate."
! “I would like to build trust, and it starts with the price tag. I want
truth in the price tag…people were just tired of coupons.”
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 JC Penney – Post-2011
! In deep, deep trouble…
! Enter Ron Johnson…
! Apple Stores, Genius Bar
! Target (Michael Graves line)
! Stanford Univ. Hospital
! Solution: A better “Customer Experience”
! Results
! 3 Months: 19% drop in sales (losses $163 million)
! 6 Months: 23.1% drop in sales (losses $433 million)
! 12 Months: 25% drop in sales (losses $552 million)
! Johnson fired after a little over a year…

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 CONSUMER INSIGHT
(PRICING) ERRORS
Two most frequent sources of errors:

1. Signal Side-Effect Neglect

• Obsession with one of the signals
• Overlook the (side) effects of the proposed
marketing/policy actions on the “other” signal
JOHNSON’S MISPREDICTION:
SIDE-EFFECT NEGLECT
GO signals
Definitely
Buy STOP signals

Probably
Buy
Purchase Intention

Undecided
Predicted
Probably Effect
Not Buy

Actual
Definitely LOW Effect HIGH
Not Buy

Signal Intensity
Odd-Even Prices (e.g., “9-ending” prices)
Dress (Catalog): Simester, Anderson, and colleagues

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 Tata Nano: The World’s Cheapest Car
! “Today's story started some years ago when I observed families riding
on two wheelers, the father driving a scooter, his young kid standing
in front of him, his wife sitting behind him holding a baby and I asked
myself whether one could conceive of a safe, affordable, all weather
form of transport for such a family.”
 Tata Nano: The World’s Cheapest Car
! “Today's story started some years ago when I observed families riding
on two wheelers, the father driving a scooter, his young kid standing
in front of him, his wife sitting behind him holding a baby and I asked
myself whether one could conceive of a safe, affordable, all weather
form of transport for such a family.”
! “Let me assure you and also assure our critics that the car we have
designed and we will be presenting to you today will indeed meet all
the current safety requirements of a modern day car.”
TATA’S MISPREDICTION: SIDE-
EFFECT NEGLECT
GO signals
Definitely
Buy STOP signals
Probably
Buy Actual
Effect
Purchase Intention

Undecided

Probably
Not Buy Predicted
Effect
Definitely
Not Buy
LOW HIGH

Signal Intensity
GO & STOP Signals: Tata Nano
(Social-Signals & Self Signals)
 CONSUMER INSIGHT (PRICING)
ERRORS
Two most frequent sources of errors:

1. Signal Side-Effect Neglect

• Obsession with one of the signals
• Overlook the (side) effects of the proposed
marketing/policy actions on the “other” signal

2. Signal Sensitivity Neglect

• Acknowledge both signals, but…
• Neglect differential/relative sensitivity of GO vs. STOP
signals
 So far we talked of situations when…
GO-SIGNALS & STOP-SIGNALS ARE EQUALLY
IMPORTANT
GO signals
Definitely
Buy STOP signals
Probably GO-signal
Buy
activators
Purchase Intention

Undecided

Probably STOP-signal
Not Buy
inhibitors
Definitely
Not Buy
LOW HIGH

Signal Intensity
GO-SIGNAL ACTIVATORS or STOP-
SIGNAL INHIBITORS?
GO-signals GO-signals
STOP-signals STOP-signals

Approach Mindset Avoidance Mindset

Markets/Purchase Situations Differ in their Sensitivity to Approach and
Avoidance Cues
But 100 Calorie Craisins was a Flop
Not just consumer insights…

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 Public Policy Examples
! Monetary Incentives
! …but Blood Donations (Sweden)?!
! Monetary Fines
! …but Day Care Pickups (Israel)?!
! Non-Monetary Incentives
! …but Voting (Switzerland)?!
! CCT (Cond. Cash Transfers)
! Education, Healthcare, etc.
! Crime and Gun Violence
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 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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A Potential Solution: GO & STOP Signals
(in purchase decisions & public policy)

GO Signal
PURCHASE
APPROACH / HEURISTIC
DECISION/ACTION
AVOIDANCE INFORMATION
(BUY? NOT BUY?
CUES PROCESSING
ACTION? INACTION?)

STOP Signal
A Potential Solution: GO & STOP Signals
in Purchase Decisions & Public Policy
GO SIGNAL:
a thought, feeling, or a subconscious response that creates
an approach tendency and energizes the potential buyers
toward the product.
e.g., product quality, design, packaging, brand name, in-store
experience, self-signaling, social signaling
STOP SIGNAL:
a thought, feeling, or a subconscious response that creates
an avoidance tendency that inhibits consideration or
purchase.
e.g., pain of payment, risk, uncertainty, anticipated regret, guilt,
social signaling, self-signaling
 MEASUREMENT ISSUES
BRAINSTORMING & EXPERIMENTS

-Don’t Ask, Do Test (i.e., Experiments)

-A $100 Experiment/Study!

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~ 300% expensive!
 IDENTIFY CONSUMER INSIGHT FOR GROWTH OPPORTUNITIES
Generate GO-STOP check-list
Identify GO-activators & STOP-inhibitors
CHECK FOR BLINDSPOTS
Check for mispredictions caused by (i) Side-Effect Neglect &
(ii) Sensitivity Neglect

TEST INSIGHTS
Do experiments to avoid misprediction (& figure pricing)

DEVELOP PRODUCT STRATEGY

Volumetric forecasts, Financial analysis
Positioning statement
 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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 Behavioral Pricing Strategies
! The Role of Marketing Strategy & Tactics
! Inhibit STOP Signals (pain minimization)
! Mode of Payment
! Odd-Even Prices (i.e., “9-ending” prices)

! Round vs. Precise Prices

! Amplify GO Signals (benefit maximization)

! Discounts vs. Rebates
! Shifting the “Reference Price”

! The role of “Fairness”

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 Price Fairness
Reference Price = Standard of comparison against
which an observed price is compared.
! Internal: Influenced by Decision Maker’s
! Experience
! The last price you paid; the price of brand usually bought
! Knowledge
! The price often charged; the average price of similar products
! Price Expectations
! Inflation
! Idea of Price “Fairness”
! Cost-based vs. Demand-based (price discrimination)

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The Wall Street Journal
November 2, 2005

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• Also, Software Piracy
• Industries with High Fixed Costs & Low Variable Costs
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 Price Fairness
Standard of comparison against which an observed price is
compared.
! Internal: Influenced by Decision Maker’s
! Experience
! Knowledge
! Price Expectations
! Idea of Price “Fairness”
! Cost-based vs. Demand-based (price discrimination)
! Cost of raw materials vs. Other Costs (R&D, Patent)

Your country’s team goes to Miami Heat vs. New York Knicks (97)
knockout stage… Playoffs, Games #1 & #2 = $20, $30, $40
Regular Game = $20 Playoffs, Game #5 = $50, $80, $90
Knockout Game = $40 Playoffs, Game #7 = $20, $30, $40
Q: Is this fair?
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 Price Fairness
Standard of comparison against which an observed price is
compared.
! Internal: Influenced by Decision Maker’s
! Experience
! Knowledge
! Price Expectations
! Idea of Price “Fairness”
! Cost-based vs. Demand-based (price discrimination)
! Cost of raw materials vs. Other Costs (R&D, Patent)
! Demand (a priori) vs. Demand (mid-way changes)

Your country’s team goes to A hardware store sells a variety of tools,

knockout stage... including snow shovels…
Regular Game = $20 Regular Price = $15 per shovel
Knockout Game = $40 Morning after snowstorm = $20 per shovel
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64
 Price Fairness
Standard of comparison against which an observed
price is compared.
! Internal: Influenced by Decision Maker’s
! Experience
! Knowledge
! Price Expectations
! Idea of Price “Fairness”
!Cost-based vs. Demand-based (price discrimination)
!Cost of raw materials vs. Other Costs (R&D, Patent)
!Demand (a priori) vs. Demand (mid-way changes)
!Demand for non essentials vs. Demand for essentials

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 Price Fairness
Standard of comparison against which an observed
price is compared.
! Internal: Influenced by Decision Maker’s
! Experience
! Knowledge
! Price Expectations
! Idea of Price “Fairness”
!Cost-based vs. Demand-based (price discrimination)
!Cost of raw materials vs. Other Costs (R&D, Patents)
!Demand (a priori) vs. Demand (mid-way changes)
!Demand for non essentials vs. Demand for essentials
!Demand-based pricing vs. Supply-restriction

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 Agenda
PRICING
DECISIONS
ECONOMIC PSYCHOLOGICAL
FRAMEWORK FRAMEWORK

Customer Value GO-STOP Signal Framework

Measuring Customer Value Sources of Pricing Mistakes
- Economic Value to Consumer Avoiding Pricing Mistakes
Role of (a) Marketing
- Price Elasticity
Strategies & Tactics, and (b)
- Survey Methods “Fairness”

Pricing Objectives
Pricing Strategy & Tactics

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