Marketing Management: Pricing Strategies

Marketing Management Overview

• Key Concepts: Marketing framework involves multiple components, including positioning, segmentation, targeting, and elements of the marketing mix (4 P's: Product, Price, Place, Promotion)

Pricing Strategies

• Cost-based Pricing:

  • Involves adding a margin to the cost of the product.
  • Mark-up can be influenced by industry norms, personal experiences, or heuristics.

• Value-based Pricing:

  • Focuses on capturing the economic value to a customer (Economic Value to Customer - EVC).
  • EVC defines the highest price a consumer is willing to pay, computed using the formula:
    EVC = \text{Price of the reference product} + \text{Value differential}

• Price Discrimination:

  • Adjusting prices based on different consumers' willingness to pay, maximizing profit by customized pricing based on distinct segments of the market.

Economic Value to Customer (EVC)

• Step 1: Identify the reference product.

  • Reference product should ideally fulfill the same need but may differ in quality or function.

• Step 2: Compute the value differential.

  • Assess the dollar value of difference between the focal product's true value and the reference product's value.
  • Methods: Analyze buyer's cost structure or employ market research (e.g., conjoint analysis) if the cost structure is unknown.

• Example Calculation:

  • Consider an operating system with a crash cost of 100,000 and a useful life of 2,500 hours.
    EVC = 75,000 + (19,000 - 12,500) = 81,500

Reasons for Price Customization

• Maximizing Profits: Higher willingness to pay (WTP) consumers are sometimes undersold when a single price is used.
• Types of Price Discrimination:
  • First degree: Charges each customer based on their individual valuation.
  • Second degree: Allows customers to self-select based on different pricing plans.
  • Third degree: Distinguishes customers based on observable characteristics (e.g., students vs. professionals).

Scenarios for Price Discrimination Effectiveness

• Conditions for Feasibility:
  1. Observable customer characteristics for targeting.
  2. Correlation between customer characteristics and willingness to pay.
  3. Avoidance of a second-hand market where customers could resell at higher prices.
  4. Building barriers (fences) to prevent cross-segment purchases.
  5. Addressing ethical concerns related to fairness in pricing practices

Product Line Pricing

• Illustration with Airline Pricing:

  • Set different prices for business travelers (WTP = 1,200 for first-class and 650 for economy) versus leisure travelers (first-class 550 and economy 400).

• Consumer Surplus:

  • Potential consumer surplus is calculated as follows:
    \text{Consumer Surplus} = \text{WTP} - \text{Price Paid}

• Setting Prices for Maximum Profit:

  • Must ensure travelers maximize their willingness and choose products aligned with their respective valuations.
  • Example study cases discussed involve attempts at price settings while maintaining competitiveness and ensuring no loss in consumer surplus.

Exercises and Implications

• Several exercises solving for optimal price settings and profits based on consumer characteristics lead to increased understanding of market dynamics and pricing strategies.