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Chapter 14 Pricing Concepts For Establishing Value (Part II) Todays concepts Describe the difference between an everyday low price strategy (EDLP) and a high/low strategy Describe the pricing strategies used when introducing a


  1. Chapter 14 Pricing Concepts For Establishing Value (Part II)

  2. Today’s concepts Describe the difference between an everyday low price • strategy (EDLP) and a high/low strategy Describe the pricing strategies used when introducing a • new product Describe dynamic pricing • Describe price discrimination • 2

  3. Pricing strategies • Everyday Low Pricing (EDLP) – Promises to consumers a low price without the need to wait for sale price events or comparison shopping • Consumers: reduces search costs à adds value • Firms: saves effort and expense needed to mark down prices 3

  4. Pricing strategies • High/low pricing – Relies on promotion of sales – Attracts two different segments • Price insensitive customers (when price is high) • Price sensitive customers (when price is low) Amazon case – Big discounts can attract new users (whom would not have purchased the product otherwise!!) • E.g., Groupon case 4

  5. The Groupon Effect on Yelp Ratings [Byers et al. 2012] ★★★★☆ 1500 Yelp rating 750 ★★★☆☆ 0 More -240 -180 -120 -60 0 60 120 180 240 Offset from Groupon offer date (days) customers! (a) Rating vs. offset, centered on offer date Fig. 1: Yelp review scores and volumes for Groupon 5

  6. The Groupon Effect on Yelp Ratings [Byers et al. 2012] Lower ★★★★☆ Ratings! 1500 Yelp rating 750 ★★★☆☆ 0 More -240 -180 -120 -60 0 60 120 180 240 Offset from Groupon offer date (days) customers! (a) Rating vs. offset, centered on offer date Fig. 1: Yelp review scores and volumes for Groupon 6

  7. The Groupon Effect on Yelp Ratings [Byers et al. 2012] ★★★★☆ 1500 What do you Yelp rating think is going on here? 750 ★★★☆☆ 0 -240 -180 -120 -60 0 60 120 180 240 Offset from Groupon offer date (days) (a) Rating vs. offset, centered on offer date Fig. 1: Yelp review scores and volumes for Groupon 7

  8. The Groupon Effect on Yelp Ratings [Byers et al. 2012] Why do ratings decrease? 8

  9. The Groupon Effect on Yelp Ratings [Byers et al. 2012] Why do ratings decrease? – Groupon Businesses are More Likely to be “Bad” Businesses • Limited evidence – Groupon users are often engaging in experimentation – Groupon reviews are less likely to be artificially inflated (fake) 9

  10. New Product Pricing Strategies Two strategies: 1. Penetration pricing 2. Price skimming 10

  11. Penetration pricing • Set initial price low to build sales, market share, profits • Good if cost of production decreases with quantity produced (economy of scale) 11

  12. Penetration pricing • Pros – Creates customer base quickly – Builds market share – Quick profits – Discourages competitors from entering the market • Cons – Sacrifices higher profits (low margins) – Firm has to keep up with high demand – Signaling problem: Low price à low quality – May not create loyal customer base 12

  13. Penetration pricing example • Cable, Internet companies, streaming services 13

  14. Price Skimming • At first high prices – Target consumers willing to pay premium to have innovation first • When market saturates – Lower (skim) price • Target most price-sensitive segment • Popular with technology products 14

  15. Price Skimming • Pros – Increased Quality Perception – Benefits from Early Adopters Brand ambassadors • – Fast costs recovery • Cons – Cannot last long • Competitors soon launch rival products – Consumer Dissatisfaction • Negative feedback from early adopters as the firm lowers its prices 15

  16. Price Skimming Example Apple – New IPhone enters the market at a very high price Reduced when or just before new version hit the markets • 16

  17. Dynamic pricing: The Case of Uber 17

  18. Dynamic pricing: The Case of Uber • How does Uber set prices? 18

  19. Dynamic pricing: The Case of Uber • How does Uber set prices? 19

  20. Dynamic pricing: The Case of Uber • How does Uber set prices? Rates automatically increase, when the demand for drivers is higher than drivers around you. 20

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