Chapter 14 Pricing Concepts For Establishing Value (Part II) - - PowerPoint PPT Presentation

Pricing Concepts For Establishing Value (Part II) Chapter 14

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• 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

Today’s concepts

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• Everyday Low Pricing (EDLP)

– Promises to consumers a low price without the need to wait for sale price events or comparison shopping

Pricing strategies

• Consumers: reduces search costs

à adds value

• Firms: saves effort and expense

needed to mark down prices

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• 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)

– Big discounts can attract new users (whom would not have purchased the product otherwise!!)

• E.g., Groupon case

Pricing strategies

Amazon case

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The Groupon Effect on Yelp Ratings [Byers et al. 2012]

Offset from Groupon offer date (days)

• 240
• 180
• 120
• 60

60 120 180 240

★★★☆☆ ★★★★☆ Yelp rating

750 1500

(a) Rating vs. offset, centered on offer date

• Fig. 1: Yelp review scores and volumes for Groupon

More customers!

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Offset from Groupon offer date (days)

• 240
• 180
• 120
• 60

60 120 180 240

★★★☆☆ ★★★★☆ Yelp rating

750 1500

(a) Rating vs. offset, centered on offer date

• Fig. 1: Yelp review scores and volumes for Groupon

More customers! Lower Ratings!

The Groupon Effect on Yelp Ratings [Byers et al. 2012]

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Offset from Groupon offer date (days)

• 240
• 180
• 120
• 60

60 120 180 240

★★★☆☆ ★★★★☆ Yelp rating

750 1500

(a) Rating vs. offset, centered on offer date

• Fig. 1: Yelp review scores and volumes for Groupon

What do you think is going

• n here?

The Groupon Effect on Yelp Ratings [Byers et al. 2012]

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Why do ratings decrease?

The Groupon Effect on Yelp Ratings [Byers et

• al. 2012]

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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)

The Groupon Effect on Yelp Ratings [Byers et

• al. 2012]

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New Product Pricing Strategies

Two strategies:

• 1. Penetration pricing
• 2. Price skimming

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• Set initial price low to build sales, market share, profits
• Good if cost of production decreases with quantity

produced (economy of scale)

Penetration pricing

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• 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

Penetration pricing

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• Cable, Internet companies, streaming services

Penetration pricing example

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• 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

Price Skimming

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• 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

Price Skimming

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Apple

– New IPhone enters the market at a very high price

• Reduced when or just before new version hit the markets

Price Skimming Example

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Dynamic pricing: The Case of Uber

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• How does Uber set prices?

Dynamic pricing: The Case of Uber

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• How does Uber set prices?

Dynamic pricing: The Case of Uber

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• How does Uber set prices?

Dynamic pricing: The Case of Uber

Rates automatically increase, when the demand for drivers is higher than drivers around you.

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• Surge price in action [Nosko et al. 2015]

Dynamic pricing: The Case of Uber

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Dynamic pricing: The Case of Uber

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• Surge price in action [Nosko et al. 2015]

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• Surge price in action [Nosko et al. 2015]

Dynamic pricing: The Case of Uber

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• What is the goal (or goals) Uber is trying to achieve with

the surge price algorithm?

• 1. Match demand with supply
• 2. Reducing waiting time

Dynamic pricing: The Case of Uber

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• We have seen:

– Pricing strategies

• EDLP
• High/Low pricing

– New products pricing strategies

• Market penetration
• Skimming

– Dynamic pricing (Uber)

Recap

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When a firm sets a very low price for one or more of its products with the intent to drive its competition out of business, it is using predatory pricing

– Illegal under both the Sherman Antitrust Act and the Federal Trade Commission Act

Ethics of Pricing: Predatory Pricing

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• Identical goods or services are sold at different prices by

the same provider in different markets

• It requires

– Market segmentation, e.g.,

• Student vs non-students

– No arbitrage

• Lower-priced users cannot resell to high-priced users!

Ethics of Pricing: price discrimination

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Example fro NYT

To discriminate you need to separate

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• 1. Personalized pricing (or first-degree price

discrimination)

• 2. Product versioning (or second-degree price

discrimination)

• 3. Group pricing (or third-degree price discrimination)

Ethics of Pricing: price discrimination

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• Information: The firm is able to identify each consumer

type

• Arbitrage: Not possible
• Prices: Will be different to each consumer and each unit

First-Degree Price Discrimination

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First-Degree Price Discrimination

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• Information: The firm cannot differentiate consumers

ex-ante, but it must know the aggregate characteristics

• f the market

– Can still segment!

• Arbitrage: Not possible
• Prices: Will change according to the quantity (or quality)

the consumer buys

– Electricity providers – Airlines (first class, economy, etc.)

Second-Degree Price Discrimination

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Second-Degree Price Discrimination

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• Most common
• Information: can distinguish consumer groups through a

signal (location, age, gender, etc.)

• Arbitrage: Not possible
• Prices: Will change according according to consumer

groups (student, senior)

Third-Degree Price Discrimination

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Third-Degree Price Discrimination

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• Some internet retailers use personal information that

users leave (involuntarily) online to price discriminate

– Type of browser used – Location – Age, gender, etc.

• In the news

Price Discrimination in e-commerce

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• Price discrimination

– First-degree: “personalization” – Second-degree: quantity/version – Third-degree: groups

• Internet and big data are facilitating first degree price

discrimination

Recap