Price Decoy

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En provenance du cours de University of Virginia

Customer Value in Pricing Strategy

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University of Virginia

Customer Value in Pricing Strategy

127 notes

Cours 2 sur 4 dans Specialization Pricing Strategy Optimization

The traditional approach to pricing based on costs works to pay the bills, but it leaves revenue on the table. You can, in fact, price your products in a way that increases sales--if you know what your customers are willing to pay and can leverage psychology to create better deal and discount plans. In this course, we'll show you how to price a product based on how your customers value it and the psychology behind their purchase decisions. Led by Darden faculty and Boston Consulting Group global pricing experts, this course provides an in-depth understanding of value-based pricing and how to use it to capture more revenue. By the end of this course, you'll be able to... -- Apply knowledge of customer value to price products -- Leverage core value-based pricing techniques to inform pricing decisions -- Measure customer willingness to pay using models (surveys, conjoint analysis, other data) -- Use knowledge of consumer psychology to set prices beneficial to both consumers and sellers

À partir de la leçon

Considering the Human Nature of Customers

Last week you considered pricing using a rational utility model. But humans are not always rational beings--and your pricing strategy needs to consider other behavioral drivers. We'll look at the psychology behind consumer purchase decisions and the mental accounting that impacts those decisions. Next we'll consider consumer price perceptions and ways to frame prices and create better deals and discount plans that work for both the consumer and the seller. Then, we'll take a look at two real-world cases, the Portland Trailblazers and Fidelity Investments so that you can practice using tools from throughout the course in a real-world case. You'll finish the course with fresh insights into value-based pricing and its applications.

Anchoring and Price Primacy5:08

Visual Tricks, Free as a Special Price, and Hedonic Bundling9:21

Price Decoy6:17

Rencontrer les enseignants

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing

The last mental shortcut we're going to review here is called price decoy.

What do I mean by decoy?

Let's visit some examples here.

Now imagine you are on the market trying to buy some bread machine and

in scenario A you are really faced with two options here.

Machine A which cost $59 and you have Machine B that's a $129.

So naturally, in situation like this, consumers are really

making a trade-off between price and the perceived quality here.

So you are going to get consumers who are price-conscious to favor bread machine

A here.

And you are going to get consumers who prefer to higher

quality machine to prefer Machine B here.

Now, imagine what would happen in a different scenario, so in scenario B,

again, you will be faced with the exact same two machines here.

With an additional machine.

That's bread machine C that's priced at $199.

If we assume consumers’ preferences are stable,

introducing third item really shouldn't change how people’s

preferences are depending on how they make choices between these two.

But it turns out that this machine see that's price of a higher level

can be considered a decoy. Because the introduction of this decoy

is going to change people's overall preference.

Now imagine you are in the scenario B,

looking at the lineup between these three machines.

Which machine would you prefer?

So naturally, with the introduction of Machine C,

there is $199 machine that is no longer expensive on the market.

Because, if you compare 129 to $199 this is relatively cheaper.

So, it's either justifiable and as a result, wth the introduction

of a more expensive item that you may never really hope to sell.

It's going to make sure that more consumers are going to prefer this middle

option, as a result of having the decoy in their consideration set.

And obviously, price decoy does not only involve price,

it can also involve attribute level of information.

So again, let's use an example here.

Imagine in scenario A, you are trying to decide yet again between two machines,

but here you have more information on the different product attributes here.

So, you can see Machine A is inferior because it doesn’t have an automatic timer

compared to Machine B, and it also has a lower capacity compared to Machine B.

So again, in this situation,

consumers are making a trade-off between the lower price option that has inferior

feature versus a more expensive option that has much better feature.

So it's a relatively hard trade-off to be making.

Now, imagine what happens when we introduce a third option and we have

some leeway in terms of how that third option has in terms of attribute feature.

So I'm going to assume again this Machine C that we are introducing here is priced

at a higher level, not only is it initially higher in terms of price,

the attributes that's going to be presented actually matter too,

if you really want to promote Machine B here.

So what you need to do in this case, really this option C is the dominate.

You want it to be the dominate option, so what do I mean by dominated?

So, in this case, you want to make sure that the feature you have

on Machine C is actually to be less than Machine B on

at least two feature dimensions.

So, Machine B is much better than Machine C,

both in terms of timing feature and also in terms of capacity.

And also because Machine B is also cheaper, so really,

machine B wins on three dimensions here.

And if you compare Machine A with Machine C.

Again, to make consumers comparison easier, I have deliberately placed

the attribute level of Machine C to be identical to Machine A.

A, so that it is not better.

And when you compare the price of $59 to a $199 again, Machine

A is going to do much superior in terms of price.

Now you may ask yourself who in the world will buy this machine C

that is both more expensive and has worse feature.

While the point is that, It's not retailer's intention to sell Machine C.

The introduction of Machine C as a dominated option,

which is another way to say that it's an Inferior option but

also happens to be more expensive and the introduction of this dominated

option is to make it easier for consumer to make a trade off decision.

Because when they make their comparison, they can easily see that Machine B

is the clear winner here and they are no longer being faced with these two

items single trade-off between better quality and higher price.

So, in this case price decoy is really about introducing additional

option to shift consumers' existing price preference.

Now overall, we have reviewed quite a few mental shortcuts so far.

And the key take away is that all of these mental shortcuts

impact consumers when they make an impression on price perception.

So next time, when you try to determine the price of your product,

just be mindful about how these little tricks can make your price more or

less appealing to your consumers.

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