Pricing Stratagy
Pricing Stratagy
Pricing Stratagy
2
d (elevenpence halfpenny: just under a shilling, which
was 12d). This is still seen today in gasoline (petrol) pricing ending in
9
10
of the local currency's smallest
denomination; for example in the US the price of a gallon of gasoline almost always ends in US$0.009 (e.g.
US$3.289).
Digit
ending
Proportion in the 1997
Marketing Bulletin study
0 7.5%
1 0.3%
2 0.3%
3 0.8%
4 0.3%
5 28.6%
6 0.3%
7 0.4%
8 1.0%
9 60.7%
In a traditional cash transaction, fractional pricing imposes tangible costs on the vendor (printing fractional
prices), the cashier (producing awkward change) and the customer (stowing the change). These factors have
become less relevant with the increased use of checks, credit and debit cards and other forms of currency-free
exchange; also, the addition of sales tax makes the pre-tax price less relevant to the amount of change
(although in Europe the sales tax is generally included in the shelf price).
The psychological pricing theory is based on one or more of the following hypotheses:
Consumers ignore the least significant digits rather than do the proper rounding. Even though the cents
are seen and not totally ignored, they may subconsciously be partially ignored. Some
[who?]
suggest that this
effect may be enhanced when the cents are printed smaller (for example, $19
99
).
Fractional prices suggest to consumers that goods are marked at the lowest possible price.
When items are listed in a way that is segregated into price bands (such as an online real estate search),
price ending is used to keep an item in a lower band, to be seen by more potential purchasers.
Judgments of numerical differences are anchored on left-most digits, a behavioral phenomenon referred to
as the left-digit anchoring effect (see Thomas and Morwitz 2005). This hypothesis suggests that people
perceive the difference between 1.99 and 3.00 to be closer to 2.01 than to 1.01 because their judgments
are anchored on the left-most digit.
The theory of psychological pricing is controversial. Some studies show that buyers, even young children, have
a very sophisticated understanding of true cost and relative value and that, to the limits of the accuracy of the
test, they behave rationally. Other researchers claim that this ignores the non-rational nature of the
phenomenon and that acceptance of the theory requires belief in a subconscious level of thought processes, a
belief that economic models tend to deny or ignore. Research using results from modern scanner data is
mixed.
Now that many customers are used to odd pricing, some restaurants and high-end retailers psychologically-
price in even numbers in an attempt to reinforce their brand image of quality and sophistication.
Research
Kaushik Basu used game theory in 1997 to argue that rational consumers value their own time and effort at
calculation. Such consumers process the price from left to right and tend to mentally replace the last two digits
of the price with an estimate of the mean "cent component" of all goods in the marketplace. In a sufficiently
large marketplace, this implies that any individual seller can charge the largest possible "cent component" (99)
without significantly affecting the average of cent components and without changing customer behavior.
[2]
The euro introduction in 2002, with its various exchange rates, distorted existing nominal price patterns while at
the same time retaining real prices. A European wide study (el Sehity, Hoelzl and Kirchler, 2005) investigated
consumer price digits before and after the euro introduction for price adjustments. The research showed a clear
trend towards psychological pricing after the transition. Further, Benford's Law as a benchmark for the
investigation of price digits was successfully introduced into the context of pricing. The importance of this
benchmark for detecting irregularities in prices was demonstrated and with it a clear trend towards
psychological pricing after the nominal shock of the euro introduction.
[3]
Another phenomenon noted by economists is that a price point for a product (such as $4.99) remains stable for
a long period of time, with companies slowly reducing the quantity of product in the package until consumers
begin to notice. At this time the price will increase marginally (to $5.05) and then within an exceptionally short
time will increase to the next price point ($5.99, for example).
[4]
Research has also found psychological pricing relevant for the study of politics and public policy.
[5]
For
instance, a study of Danish municipal income taxes found evidence of "odd taxation" as tax rates with a nine-
ending were found to be over-represented compared to other end-decimals.
[6]
Historical comments
Exactly how psychological pricing came into common use is not clear, though it is known the practice arose
during the late 19th century. One source speculates it originated in a newspaper pricing competition. Melville E.
Stone founded the Chicago Daily News in 1875, intending to price it at one cent to compete with
the nickel papers of the day. The story claims that pennies were not common currency at the time, and so
Stone colluded with advertisers to set whole dollar prices a cent lowerthus guaranteeing that customers
would receive ample pennies in change.
[7]
Others have suggested that fractional pricing was first adopted as a control on employee theft. For cash
transactions with a round price, there is a chance that a dishonest cashier will pocket the bill rather than record
the sale. For cash transactions with an odd price, the cashier must make change for the customer. This
generally means opening the cash register which creates a record of the sale in the register and reduces the
risk of the cashier stealing from the store owner.
[citation needed]
In the former Czechoslovakia, people called this pricing "baovsk cena" ("Baa's price"), referring to Tom
Baa, a Czech manufacturer of footwear. He began to widely use this practice in 1920.
[8]
Price ending has also been used by retailers to highlight sale or clearance items for administrative purposes. A
retailer might end all regular prices in 95 and all sale price in 50. This makes it easy for a buyer to identify
which items are discounted when looking at a report.
[citation needed]
In its 2005 United Kingdom general election manifesto, the Official Monster Raving Loony Party proposed the
introduction of a 99-pence coin to "save on change".
[9]
Wal-Mart, a major retailer, makes use of .98 price endings as opposed to .99 endings.
A recent trend in some monetary systems is to eliminate the smallest denomination coin (typically 0.01 of the
local currency). The total cost of purchased items is then rounded up/down to, for example, the nearest 0.05.
This may have an effect on future "odd-number" pricing to maximize the rounding advantage for vendors by
favoring 98 and 99 endings (rounded up) over 96 and 97 ending (rounded down) especially at small retail
outlets where single item purchases are more common. Australia is a good example of this practice where 5
cents has been the smallest denomination coin since 1992, but pricing at .98/.99 on items under several
hundred dollars is still almost universally applied (e.g.: $1.99 $299.99) while goods on sale often price at .94
and its variations. It is also the case in Finland, the only country using the euro currency which does not use the
1 and 2 cent coins.
Time-based pricing
Time-based pricing refers to a type offer or contract by a provider of a service or supplier of a commodity, in
which the price depends on the time when the service is provided or the commodity is delivered. The rational
background of time-based pricing is expected or observed change of thesupply and demand balance during
time. Time-based pricing includes fixed time-of use rates for electricity and public transport, dynamic
pricing reflecting current supply-demand situation or differentiated offers for delivery of a commodity
depending on the date of delivery (futures contract). Most often time-based pricing refers to a specific practice
of a supplier.
Time-based pricing is the standard method of pricing in the tourist industry. Higher prices are charged during
the peak season, or during special-event periods. In the off-season, hotels may charge only the operating costs
of the establishment, whereas investments and any profit are gained during the high season. (This is the basic
principle of the long run marginal cost (LRMC) pricing, see also Long run). Time based pricing is occasionally
used by transportation service providers, whereby higher prices are charged during rush-hours, or,
alternatively, some type of reduced-rate tickets are invalid at that time.
Time-based pricing of services such as provision of electric power includes, but is not limited to:
[1]
time-of-use pricing (TOU pricing), whereby electricity prices are set for a specific time period on an
advance or forward basis, typically not changing more often than twice a year. Prices paid for energy
consumed during these periods are preestablished and known to consumers in advance, allowing them to
vary their usage in response to such prices and manage their energy costs by shifting usage to a lower
cost period or reducing their consumption overall;
critical peak pricing whereby time-of-use prices are in effect except for certain peak days, when prices
may reflect the costs of generating and/or purchasing electricity at the wholesale level
real-time pricing (also: dynamic pricing) whereby electricity prices may change as often as hourly
(exceptionally more often). Price signal is provided to the user on an advanced or forward basis, reflecting
the utilitys cost of generating and/or purchasing electricity at the wholesale level; and
peak load reduction credits for consumers with large loads who enter into pre-established peak load
reduction agreements that reduce a utilitys planned capacity obligations.
Time-based pricing is recommendable for utilities both in regulated or market based environment. The use of
time-based pricing is limited in case of low difference between peak- and off-peak demand, unavailability of
adequate time-of-use metering. Also, customer response to time-based pricing should be considered
(see: Demand response).
A regulated utility will develop a time-based pricing schedule on analysis of its cost on a long-run basis,
including both operation and investment costs. A utility operating in a market environment, where electricity (or
other service) is auctioned on a competitive market, time-based pricing will reflect the price variations on the
market. Such variations include both regular oscillations due to the demand pattern of users, supply issues
(such as availability of intermittent natural resources: water flow, wind), and occasional exceptional price peaks.
Price peaks reflect strained conditions on the market (possibly augmented by market manipulation,
see: California electricity crisis) and convey possible lack of investment.
Tacit collusion
Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to
play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting,
excessive advertising or other forms of competition. Thus, there may be unwritten rules of collusive behavior
such as price leadership (tacit collusion). A price leader will then emerge and sets the general industry price,
with other firms following suit. For example see the case of British Salt Limited and New Cheshire Salt Works
Limited
[1]
.
Duopoly Example
Tacit collusion is best understood in the context of a duopoly and the concept of Game Theory (namely, Nash
Equilibrium). Let's take an example of two firms A and B, who both play an advertising game over an indefinite
number of periods (effectively saying 'infinitely many'). Both of the firms' payoffs are contingent upon their own
action, but more importantly the action of their competitor. They can choose to stay at the current level of
advertising or choose a more aggressive advertising strategy. If either firm chooses low advertising while the
other chooses high, then the low-advertising firm will suffer a great loss in market share while the other
experiences a boost. However if they both choose high advertising, then neither firms' market share will
increase but their advertising costs will increase, thus lowering their profits. If they both choose to stay at the
normal level of advertising, then sales will remain constant without the added advertising expense. Thus, both
firms will experience a greater payoff if they both choose normal advertising (however this set of actions is
unstable, as both are tempted to defect to higher advertising to increase payoffs). Apayoff matrix is presented
with numbers given:
Firm B normal advertising Firm B aggressive advertising
Firm A normal advertising Each earns $50 profit
Firm A: $0 profit
Firm B: $80 profit
Firm A aggressive advertising
Firm A: $80 profit
Firm B: $0 profit
Each earns $15 profit
Notice that Nash's Equilibrium is set at both firms choosing an aggressive advertising strategy. This is to
protect themselves against lost sales.
In general, if the payoffs for colluding (normal, normal) are greater than the payoffs for cheating (aggressive,
aggressive), then the two firms will want to collude (tacitly). Although this collusive arrangement is not an
equilibrium in the one-shot game above, repeating the game allows the firms to sustain collusion over long time
periods. This can be achied, for example if each firm's strategy is to undertake normal advertising so long as its
rival does likewise, and to pursue aggressive advertising forever as soon as its rival has used an aggressive
advertising campaign at least once (this threat is credible since symmetric use of aggressive advertising is a
Nash equilibrium of each stage of the game). Each firm must then weigh the short term gain of $30 from
'cheating' against the long term loss of $35 in all future periods that comes as part of its punishment. Provided
that firms care enough about the future, collusion is an equilibrium of this repeated game.
To be more precise, suppose that firms have a discount factor . The discounted value of the cost to
cheating and being punished indefinitely are
.
The firms therefore prefer not to cheat (so that collusion is an equilibrium) if
.
Forms
Classical economic theory holds that price stability is ideally attained at a price equal to the
incremental cost of producing additional units. Monopolies are able to extract optimum revenue by
offering fewer units at a higher cost.
An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such
covert cooperation as price leadership tends toward higher profitability for all, though it is
an unstable arrangement.
In barometric firm price leadership, the most reliable firm emerges as the best barometer of market
conditions, or the firm could be the one with the lowest costs of production, leading other firms to
follow suit. Although this firm might not be dominating the industry, its prices are believed to reflect
market conditions which are the most satisfactory, as the firm would most likely be a good forecaster
of economic changes.
Value-based pricing
Value based pricing, or Value optimized pricing is a business strategy. It sets prices primarily, but not
exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product, the
market price, competitors' prices, or historical prices.
[1]
[2]
The goal of value-based pricing is to align a price with the value delivered. It is based on the notion that a
customer receiving high levels of value will pay a higher price than a customer receiving lower levels of value
for the same product or service.
A benefit of value-based pricing strategy is its potential to increase revenue, by expanding the number of
customers served, and increasing margin growth by differentiating prices to customers. Value based pricing is
intended to make companies become more competitive and more profitable than using simpler pricing
methods. Examples of value-based pricing could include prices set based on the economic value the product or
service provides for the customer's business. Alternatively, other examples could be the number of users of a
product or the value of its use to different users, or the number of annual transactions per customer and the
value per transaction. Value-based pricing can also be used in product development and product management
to configure products to maximize value for specific types of customers or segments of customers.
Value-based pricing is predicated upon an understanding of customer value. In many settings, gaining this
understanding requires primary research. This may include evaluation of customer operations and interviews
with customer personnel. Survey methods are sometimes used to determine value a customer attributes to a
product or a service. The results of such surveys often depict a customer's 'willingness to pay.' Frameworks for
value-based pricing include Economic Value Estimation
[3]
are Relative Attribute Positioning, Van Westendorp
Price Sensitively Meter, Conjoint Analysis.
Another value pricing method uses Customer Value Research, which is Bernstein & Macias' method for gaining
the customer's perception of value through the use of both qualitative and quantitative research methods.
In healthcare
Value-based pricing is being considered
[4]
by the UK government as a way to price pharmaceuticals on
the NHS. According to proposals under consultation, the scheme would be introduced in 2013 when the current
agreement, the Pharmaceutical Price Regulation Scheme
[5]
, comes to an end. Exactly how the scheme will
operate is still being discussed
Pay what you want (pricing Stratagy)
Pay what you want is a pricing system where buyers pay any desired amount for a given commodity,
sometimes including zero. In some cases, a minimum (floor) price may be set, and/or a suggested price may
be indicated as guidance for the buyer. The buyer can also select an amount higher than the standard price for
the commodity.
[1]
[2]
Giving buyers the freedom to pay what you want may seem to not make much sense for a seller, but in some
situations it can be very successful. This is because it eliminates many disadvantages of conventional pricing. It
is obviously attractive to buyers to be able to pay whatever they want, for reasons that include eliminating fear
of whether a product is worthwhile at a given set price and the related risk of disappointment or buyer's
remorse. For sellers it obviates the challenging and sometimes costly task of setting the right price (which
may vary for different market segments). For both, it changes an adversarial conflict into a friendly exchange,
and addresses the fact that value perceptions and price sensitivities can vary widely among buyers.
[2]
In the book Smart Pricing
[2]
(p. 29), it is suggested that successful pay what you want programs are
characterized by:
1. A product with low marginal cost
2. A fair-minded customer
3. A product that can be sold credibly at a wide range of prices
4. A strong relationship between buyer and seller
5. A very competitive marketplace.
While most uses of pay what you want have been at the margins of the economy, or for special promotions,
there are emerging efforts to expand its utility to broader and more regular use, as noted in the Enhanced
Forms section below.
Variant terms include "pay what you wish," "pay what you like," "pay as you want," "pay as you wish," "pay as
you like," "pay what you will," "pay as you will." "Pay what you can" is sometimes used synonymously, but is
often more oriented to charity or socially-oriented uses, based more on ability to pay, while pay what you want
is often more broadly oriented to perceived value in combination with willingness and ability to pay.
History and commercial uses
Pay what you want has long existed on the margins of the economy, such as for tips and street performers, as
well as charities, but has been gaining breadth of interest in recent years.
[when?]
Theaters began using it for
selected nights,
[2]
and use for restaurants has been spreading, at least since its use for One World Everybody
Eats, founded in 2003 in Salt Lake City.
[3]
The restaurant is now owned by a nonprofit group that requires
customers pay at least $4 for their entree.
A major boost in awareness occurred in October 2007, when Radiohead released their seventh album, In
Rainbows, through the band's website as a digital download using this pricing system.
[4]
In December 2007, punk/metal record label Moshpit Tragedy Records became the first to operate fully under
the pay-what-you-want download system.
[5]
In 2010, Panera Bread used the system in a St. Louis, Missouri suburb, and has generated further attention by
opening more since.
[1]
Introduced during May 2010, the Humble Indie Bundle was a set of six independently developed digitally
downloadable video games which were distributed using a pay-what-you-want system (with inclusion of a
buyer-controllable charitable contribution). At the end of the sale, 1.27 million dollars had been raised. They
have since done twelve more bundle sales, generating a total of over $19 million in revenues, and securing in
April 2011 an investment of $4.7 MM by Sequoia Capital.
Pay what you want schemes are also closely related to crowdfunding.
Economics
With the prominence of the Radiohead experiment, economics and business researchers began a flurry of
studies, with particular attention to the behavioral economic aspects of pay what you wantwhat motivates
buyers to pay more than zero, and how can sellers structure the process to obtain desirable pricing levels? One
early such study (possibly the first) was the one done by Kim et. al. in January 2009
[6]
.
As pointed out by Kim,
[6]
pay what you want is a form of participative pricing, in that the buyer participates in
the pricing decision. It may also be viewed as a participative form of price discrimination. While some uses of
price discrimination have created negative reactions (and even legal restriction), the participative nature of pay
what you want inherently avoids the consumer perception of unfairness in imposed (or even hidden) prices
discrimation, since, in this case, it is the buyer who sets the price, not a seller who imposes it.
A study quantifying the significant added value of including a charitable contribution component in pay what you
want, as a way to increase buyer willingness to pay, gained coverage in the general press in 2010.
[7]
Enhanced Forms
Efforts have been made to expand on the benefits of pay what you want, to make it more useful and profitable
to sellers, while maintaining its inherent appeal to buyers.
One such enhancement is reflected in the Humble Indie Bundle, which has added a buyer-directed charity
component to further increase buyer willingness to pay. This is similar to the research study
[7]
noted above.
Another enhancement is an expanded process, called Fair Pay What You Want (FairPay), which shifts the
scope from a single transaction view, to an ongoing relationship over a series of transactions. It adds tracking
of individual buyers' reputations for paying fairly (as assessed by the seller), and uses that reputation data to
determine what further offers to extend to that individual buyer. In that way it seeks to incentivise fair pricing by
buyers (to maintain a good reputation, and thus be eligible for future offers), and to enable sellers to limit their
risk on each transaction in accord with the buyer's reputation.
Freemium
Freemium is a business model by which a product or service (typically a digital offering such as software,
media, games or web services) is provided free of charge, but a premium is charged for advanced features,
functionality, or virtual goods.
[1][2]
The word "freemium" is a portmanteaucombining the two aspects of the
business model: "free" and "premium".
Origin
The business model has probably been in use for software since the 1980s, particularly in the form of a free
time- or feature-limited ('lite') version, often given away on a floppy disk or CD-ROM, to promote a paid-for full
version. The model is particularly suited to software as the manufacturing cost is negligible, so as long as
significant cannibalization is avoided little is lost by giving it away for free.
However, this term for the model appears to have been created only much later, in response to a 2006 blog
post by venture capitalist Fred Wilson summarizing the model:
[3]
Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very
efficiently through word of mouth, referral networks, organic search marketing, etc., then offer premium priced
value added services or an enhanced version of your service to your customer base.
Jarid Lukin of Alacra then suggested the term "freemium" for this model.
[4]
The term has since appeared
in Wired magazine and Business 2.0, which has since been used by bloggers such as Chris
Anderson and Tom Evslin. In 2009, Anderson published the book Free, which examines the popularity of this
business model. As well as for traditional software and services, it is now also often used by Web 2.0 and open
source companies.
[5]
As explained by several of the references cited above, freemium is closely related to tiered services. It has
become a highly popular model, with notable success, such as quite prominently in LinkedIn,
[6]
and in the form
of a "soft" paywall, such as those launched by The New York Times,
[7]
and by Press+.
[8]
Alternative models for
monetizing digital offerings, noted in "See also", include Pay what you want, which also loosens conventional
pricing constraints. Badoo is an international dating and discovery site that also uses the model.
[9]
Restrictions
Ways in which the product or service may be restricted in the free version include:
[10]
Feature limited (e.g. a "lite" version of software, such as Skype)
Time limited (e.g. only usable for 30 days, such as Microsoft Office)
Capacity limited (e.g. for an accounts package, can only be used to read a limited number of article,
Harvard Business Review)
Seat limited (e.g. only usable on 1 computer rather than across a network)
Customer class limited (e.g. only usable by educational users)
Effort Limited (e.g. all or most features are available for free, but require extended unlocking which can be
shortcut for a fee, such as some software for virtual printing on pdf)
Premium pricing
From Wikipedia, the free encyclopedia
Premium pricing is the practice of keeping the price of a product or service artificially high in order to
encourage favorable perceptions among buyers, based solely on the price.
[1]
The practice is intended to exploit
the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional
reputation or represent exceptional quality and distinction.
Strategic considerations
The use of premium pricing as either a marketing strategy or a competitive practice depends on certain factors
that influence its profitability and sustainability. The disadvantages of this pricing strategy includes Such factors
include:
Information asymmetry (e.g., when buyers have no independent basis to test claims of "exceptional
quality" for a particular product or service -- assuming the concept is well-defined to begin with);
Market status as a Luxury good or a Superior good; and
Market dynamics such as the level of competition and entry barriers.