Consumer Marketing Lecture 6: Pricing and Promotion

profit function

[(Price - marginal costs) x volume) - fixed costs

cost-plus pricing

-set price by adding a fixed percentage markup to average unit cost -widely used, simple, easy, tangible (plenty of data available), justifiable, quick to implement

cost-plus pricing drawbacks

it does not guarantee cost recovery or profit: average unit cost depends on expected sales volume

• Ignores customers' willingness to pay and competitors' prices: can lead to underpricing or overpricing.

example of value based pricing

uber when demand is higher, uber raises prices the pricing has to do with what the customer is willing to pay - customer may be desperate to get home and will be willing to pay a premium price

value based pricing

-customer driven (value based) pricing -starts with a good understanding of the benefits that a product delivers relative to other products

• Aims to capture the product's value in the mind of the customer
• Requires understanding of psychological aspects of pricing

relevant questions to as when thinking about value based pricing

• "What is our product actually worth?"
• "What value do our customers perceive?"
• "How can we bridge the gap between reality and perception?"

what is the marketing's job?

to measure and then shift perceived value

how do marketers measure and then shift perceived value?

-communication -distribution -product -even price

what managers believe a "wise" consumer means

Consumers know what they want and their preferences are stable. ▪ Each offer is evaluated on its own merits, independently of the surrounding alternatives. ▪ Willingness to pay is the result of evaluating the object we are interested in. ▪ Market research instruments accurately tell us what consumers really prefer and how much they would pay.

attraction effect

adding a similar but dominated option increases the share of similar but superior option which is now easier to justify

ownership of a product makes us…

over value it

endowment effect

owners assign greater value to a product than non-owners

the reality about consumers

▪ Preferences are often constructed, not revealed. ▪ What consumers prefer can depend on the context and the alternatives available. ▪ Preferences can change depending on how the alternatives are presented. ▪ Consumers evaluate offers relative to reference points, such as expectations, comparison prices, or what they already own.

acquisition utility

Value of the good received relative to the purchase price: Perceived value of the good - purchase price

transaction utility

Perceived merits of the deal: Expected (reference) price - purchase price

total purchase utility =

acquisition utility + transaction utility

what determines the reference price?

the context in which you are purchasing example: fancy resort hotel vs small-run down grocery store

consumption follows…..

the timing of payments

payments that occur at or near the time of consumption

increase attention to a product's cost, boosting the likelihood of its consumption.

payments made long before or long after consumption

reduce attention to a product's cost and decrease the likelihood that it will be used

unbundled transaction

-Little ambiguity as to what costs are paying for what benefits

• Strong association of costs and benefits - coupling
• Heightened attention to sunk costs
• Decreased willingness to forgo consumption of a pending benefit

bundled transaction

• Greater ambiguity as to what costs are paying for what benefits
• Psychological disassociation of costs and benefits - decoupling
• Decreased attention to sunk costs
• Increased willingness to forgo consumption of a pending benefit

price promotions

Temporary monetary incentives intended to encourage purchase, offering a lower effective price or more product for the same expenditure.

limited duration

price discounts coupons

incentive to purchase

cashback/rebate multi-buy offer

price promotion can increase sales by…

▪ Induce brand, store or category switching ▪ Encourage consumers to purchase earlier than usual ▪ Purchase extra quantity of the product ▪ Stimulate consumption ▪ Category expansion

three faces of price promotions

1. economic
2. informational
3. affective

economic route of promotions

▪Promotions provide monetary savings, increasing the economic attractiveness of a purchase ▪Price promotion improves the utility maximizing consumer's payoffs and therefore the likelihood that the promoted product is purchased. ▪Components of promotional response -> decision of when, what, how much to buy (Gupta 1988).

informational route of promotions

▪ Inferences and expectations drawn from price promotions

• Promotions as cues for price cut (Inman, McAlister, and Hoyer 1990)
• Deal restrictions as signals of deal value (Inman, Peter, and Raghubir 1997)
• Social signals associated with promotion use (Ashworth et al. 2005; Argo and Main 2008)
• Price promotions as signals of product quality (Raghubir and Corfman 1999) and efficacy (Shiv, Carmon, and Ariely 2005)

affective route of promotions

▪ Feelings and emotions related to price promotions.

• Smart shopper feelings (Schindler 1998)
• Entertainment and enjoyment (Chandon, Wansink, and Laurent 2000)
• Elevated mood (Heilman, Nakamoto, and Rao 2002)
• Betrayal and jealousy (Feinberg, Krishna, and Zhang 2002)