122630150 Revenue Management and Pricing

Pricing and Revenue Management
(c) Stowe Shoemaker, Ph.D
Les Miserables
• The duty of the innkeeper is to sell to the first
comer, food, rest, light, fire, dirty linen, servants,
fleas, and smiles; to charge for the open
window, the closed window, the chimney
corner, the sofa, the chair, the stool, the bench,
the feather bed, the mattress, and the straw bed;
to know how much the mirror is worn and to
tax that; and by five hundred thousand devils, to
make the traveler pay for everything, even the
fleas that is dog eats.
(c) Stowe Shoemaker, Ph.D
Objective of this section
• Understand steps to better pricing
• Understand Competitive Value Analysis
• Review basics of revenue management
• Understand price customization
• Understand Value

(c) Stowe Shoemaker, Ph.D
The Challenge of Pricing
Taxi
(c) Stowe Shoemaker, Ph.D
“There is no easy way to find out what the actual
true price of any car is. Oh sure, there is a
“sticker price,” but only a very naïve fungal
creature just arrived from a distant galaxy
would dream of paying this. In fact, federal
law now requires that the following statement
appear directly under the sticker price:
WARNING TO STUPID PEOPLE
DO NOT PAY THIS AMOUNT
-- Dave Barry
(c) Stowe Shoemaker, Ph.D

• 60.3% claimed they definitely would ask about the
room rate the next time they made a reservation
• 35.7% claimed they would definitely check rates at
other properties the next time they planned to visit
this hotel
Assume that you go to make a reservation at
the luxury hotel you are loyal to and you find
out that they are charging you $50 per night
more than they usually do because they have only
a few rooms left. Please answer each of the
questions based on this knowledge.

(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
1. Assess what value your customers place on a product or
service
- How to create value
- What is the economic value of this product or service to
customers
- Case study on Coca-Cola

2. Look for variation in the way customers value the product
- Do customers vary in their intensity of use
- Do customers use the product differently
- Does product performance matter more to some
customers, even if the application is the same
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
2. Look for variation in the way customers value the product -
continued
- How do differences in both perceived value and non
value factors influence price sensitivity and divide
customers into market segments
- How can members of different segments be identified
prior to purchase
- How can fences between segments be established
- How can the firm avoid violating legal constraints
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
3. Assess customers‟ price sensitivity
- How could an effective marketing and
positioning strategy influence the
customers‟ willingness to pay
- Market research techniques using Excel
- Behavioral aspects of pricing
4. Identify an optimal pricing structure
- Bundle pricing



(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
5. Consider competitors reactions
- Who are key current and potential
competitors
- If competitors are currently in this
market, what actual transactional prices
do they charge
- Given competitors‟ past behavior,
personalities, and organization structures,
what is their goal in pricing
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
5. Consider competitors reactions - continued
- What are competitors‟ strengths and
weaknesses relative to the firm
- How might a firm use information to
influence competitors‟ behavior in ways
that would make its goals more
achievable or profitable

(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
6. Monitor prices realized at the transaction level
- pricing across different channels
7. Assess customers‟ emotional response
8. Analyze whether the returns are worth the cost
to serve
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
9. Understand costs
• What is the incremental variable cost of
sales
• At what levels of output will additional
expenditures on semi-fixed costs be
required, and how much will they be
• What are the avoidable (not yet sunk) fixed
costs involved to offer this product at the
proposed price
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
10. Understand Supply
• Cost structure
• Capacity utilization
• Product perishability
• Extent of product differentiation
• Number and diversity of competitors
• Impact of sales volume on cost
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
11. Understand Demand
• Price sensitivity of selective demand
• Efficiency of price shopping
• Degree of brand loyalty
• Industry growth rate
• Buyer concentration
• Complementary product
(c) Stowe Shoemaker, Ph.D
Steps to Better Pricing
12. Understand Distribution Channels



(c) Stowe Shoemaker, Ph.D
(c) Stowe Shoemaker, Ph.D
Competitor Analysis and
Positioning: Key to Pricing
(c) Stowe Shoemaker, Ph.D
The competitive advantages and disadvantages which are
shown in the matrix of competitive advantages can be
condensed into one single index, the index of competitive
strength. All relative performances of the product on the
individual factors are weighted with their importance and
summed up.
Index of Competitive Strength
(c) Stowe Shoemaker, Ph.D
Example: Importance Question
• Next, please think for a moment about the reason for visiting a specific
hotel in Las Vegas for gambling. Please tell me how important each
reason is for you in your decision to visit one specific property over
another. Please use a 1 to 10 scale, where a “1” means the reason is not
at all important and a “10” means the reason is very important in your
decision to choose one establishment over another for gambling. You
may use any number on this 1 to 10 scale.

[Ask questions in random order]

• How important is…_______________…in your decision to choose one
place to visit over another?

– It is a place my friends like to go
(c) Stowe Shoemaker, Ph.D
Example: Attitude Question
• Now I am going to read you a list of features that may or may not
describe some of the hotels in the Las Vegas area. We‟ll use a 1 to 10
scale, where a 1 means it “does not describe the hotel at all” and a 10
means “describes the hotel perfectly”. If you have not been to the hotel
personally, please base your answers on what you have heard, or what
you believe to be true.

[Ask questions in random order]

• How well does this feature describe…(brand to be rated)?
– It is a place my friends like to go
(c) Stowe Shoemaker, Ph.D
Calculation of Competitive Index
1. Sum the importance ratings for all features and
multiply by the number of scale points. (The numbers
are in column A in Table on next page)
2. For each attribute, multiple average importance x
average performance. Answers in Column C
3. Sum all numbers in column C
4. Calculate the CSI as -- Total C/Total in A
5. Repeat steps for competitor's: see columns D and E

(c) Stowe Shoemaker, Ph.D
Calculation of Competitive Index
Importance

A
Company
Rating
B
Company
Score
C
Competitor
Rating
D
Competitor
Score
E
Feature Scale: 1-10 Scale: 1-
10
A*B Scale: 1-10 A*D
It is a place
friends like to go
7.3 7.6 55.48 6.4 46.72
Atmosphere is
very pleasant
8.8 7.7 67.76 7.6 66.88
One place seems
to have better
odds
7.4 6.8 50.32 6.0 44.40
Slot machines
filled in a timely
manner
7.5 6.8 51 6.8 51.00
Type of
promotions
offered
7.4 7.7 56.98 6.8 50.32
TOTAL
INDEX
38.4 *10=384 281.54
73.3

259.32
67.5


(c) Stowe Shoemaker, Ph.D
Relative Performance
Example: Casino
L
e
v
e
l

o
f

I
m
p
o
r
t
a
n
c
e

high
low
Brand
Feel
Safe
Good
Entertainment
Value of
Promotions
Slot Club
Non
Smoking
Friendly
Staff
Service
Package
Price
Matrix of Competitive Advantages
(c) Stowe Shoemaker, Ph.D
Steps to Developing a Positioning Strategy
1. Identify the competitors
– From customer‟s point of view
– Different competitors in different segments
(c) Stowe Shoemaker, Ph.D
Best Way to Define True Competitors
• Ask 50 – 100 customers at check-in, “If you did
not stay here tonight, where would you stay?”
• Those hotels who, if they took a pricing action,
would force you to take a pricing action
• Where do you currently “walk” guests?
(c) Stowe Shoemaker, Ph.D
Best Way to Define True Competitors
• Based upon a definition of the core
customer; different competitors for
different segments
• Avoid emotional opinions


(c) Stowe Shoemaker, Ph.D
Steps to Developing a Positioning Strategy
2. Determine how the competitors are perceived
and evaluated
3. Determine the competitors‟ positions
• Critical to also have reference points for
data analysis

(c) Stowe Shoemaker, Ph.D
1. Identify competitive set
• Upper tier: member of competitive market
with a rate premium above our hotel
• Direct tier: member of our competitive
market, with a rate price point approximately
“equal” to our hotel
• Lower tier: member of our competitive
market, with a rate price point below our
hotel


(c) Stowe Shoemaker, Ph.D
• Calculate for your three core customers in all three
competitive tiers: a total of nine analysis
• Three core customers
• Business transient
• Pleasure transient
• Group customer
• Thee competitive tiers
• Upper tier
• Direct tier
• Lower tier




(c) Stowe Shoemaker, Ph.D
2. Conduct competitive pricing analysis
Shops for
– Local hotel reservations office
– Hotel 800 number
– GDS system
– Internet
• Shop for leisure peak, leisure non-peak, business
peak, business non-peak, group peak, and group
non-peak
(c) Stowe Shoemaker, Ph.D
3. Use chart to plot each competitors‟ overall
value
– Horizontal axis: plot each competitors‟
overall value assessment
– Vertical axis: plot each competitors lowest
available retail rate obtained via blind shop
– Center axis: your hotel with rate equal to
lowest available retail price point
(c) Stowe Shoemaker, Ph.D
Feel
Safe
There
Friendly
Employe
es
Place My
Friends
Like to Go
Always
Have Good
Entertaiment
Drink
Orders
Taken in
Timely
Manner
Cashier
Lines Are
Short
Restaurants
Offer Great
Value
Can get
change
quickly
Slot
Machines
Filled in
Timely
Manner
Like the
Promotion
s Offered
You Can Get
Complimentari
es
overall
average
Importance 8.20 8.20 6.27 4.80 6.12 6.37 7.49 6.33 5.67 4.80 6.15 6.40
Rio 7.26 6.60 6.49 6.47 5.93 5.91 5.70 5.54 5.35 5.05 4.96 5.93
Bally 6.55 5.28 3.96 4.59 5.11 5.05 4.05 4.70 4.60 3.75 4.20 4.71
Boulder 7.40 6.88 6.40 5.74 6.50 5.90 6.54 6.11 5.89 6.16 6.05 6.32
Caesar 7.19 5.85 6.15 5.81 5.37 5.43 4.32 4.82 5.07 3.62 3.97 5.24
Circues 4.70 4.60 4.07 4.24 4.59 4.63 4.55 4.15 4.21 3.80 3.81 4.30
Excalibur 6.61 5.64 5.01 4.89 5.03 5.42 5.01 5.19 5.04 4.06 4.47 5.12
Fiesta 6.19 6.00 4.75 4.64 5.48 5.43 5.61 5.60 5.34 4.66 5.25 5.36
Rate CSI
Rio $179.00 59.97
Bally $185.00 47.91
Boulder $160.00 63.92
Caesar $189.00 53.16
Circues $159.00 43.41
Excalibur $140.00 52.07
Fiesta $155.00 54.3
(c) Stowe Shoemaker, Ph.D
$179
$185
$189
$180
$159
$155
$140
59.97
Rio
47.91
Bally
63.92
Boulder
53.16
Caesar
43.41
Circus Circus
52.07
Excalibur
54.3
Fiesta
Creating Loyalty (44)
Process
Value
(Added
and
Recovery)
Communication
Fluid
Exit Exit
Exit
Exit
(c) Stowe Shoemaker, Ph.D
Value-Based Pricing
• Involves choosing a price after developing
estimates of market demand based on how
potential customers perceive the value of the
product or service.
• Can satisfy diverse product strategies, including,
for example, market penetration or profit
maximization.
• Should be the preferred pricing methodology
(c) Stowe Shoemaker, Ph.D
Question: Where Would You Buy Gas?
Station A: Sells gasoline for $ 2.30 per gallon, and gives a
$ 0.10 discount if the buyer pays with cash.

Station B: Sells gasoline for $ 2.20 per gallon, and charges a
$ 0.10 surcharge if the buyer pays with
a credit card.
(c) Stowe Shoemaker, Ph.D
Examples
• Which do you choose? A____ or B____
– A. Receive $50
– B. 55% chance of receiving $100; 45%
chance of earning nothing
(c) Stowe Shoemaker, Ph.D
Examples
• Which do you choose? C____ or D____
– C. Loose $20
– D. 20% chance of loosing $100; 80%
chance of losing nothing
(c) Stowe Shoemaker, Ph.D
Answer to Previous Question Pertains
to Prospect Theory
(c) Stowe Shoemaker, Ph.D
Daniel Kahneman Toasting Noble Prize
(c) Stowe Shoemaker, Ph.D
Prospect Theory: Basic Idea
• Value is associated not with actual levels of
consumption, but with anticipated changes in well
being
• Buyer assesses prospective decision outcomes
(prospects) by mentally categorizing them as
either gains or losses relative to reference point
(c) Stowe Shoemaker, Ph.D
Explanation
Station A sets reference point at $2.30 and then
rewards buyers who pay cash; that is; a gain relative
to the reference point;

Station B first establishes a reference point at
$2.20 and then penalizes buyers who use credit
cards; a loss relative to the reference point

This is in contrast to economic theory that predicts
that gains and losses of equal size are valued the
same

(c) Stowe Shoemaker, Ph.D
Losses
Gains
Positive Value
Negative Value
Reference Point
(state of well being)
Station A ($2.30 – 0.10)
Station B:
($2.20 +.10)
Value Function
1.6
1.0
(c) Stowe Shoemaker, Ph.D
Examples
• Which do you choose? A____ or B____
– A. Receive $50
– B. 55% chance of receiving $100; 45%
chance of earning nothing
• Which do you choose? C____ or D____
– C. Loose $20
– D. 20% chance of loosing $100; 80
chance of loosing nothing

(c) Stowe Shoemaker, Ph.D
Answer
• If you chose A in Question 1, then you should
choose C in Question 2
• If you chose B in Question 1, then you should
choose D in Question 2
• How many had a reversal?
(c) Stowe Shoemaker, Ph.D
Rationale for Answers
• Prospect theory states that people are risk adverse (e.g.,
conservative) when considering gains; in contrast, more
naturally inclined to risk a loss than to pay even the
expected value of avoiding it.
(c) Stowe Shoemaker, Ph.D
Losses
Gains
Positive Value
Negative Value
Reference Point
(state of well being)
Value Function
(c) Stowe Shoemaker, Ph.D
Economic Theory versus Prospect
Theory
• Economic Theory
– Gains and losses of equal
size treated the same (e.g.,
£100 gain = to £100 loss)
• Prospect Theory
– loss judged more painful
than a gain of equal value
(e.g., loss of £100 more
painful than a gain of
£100)
(c) Stowe Shoemaker, Ph.D
Economic Theory versus Prospect
Theory
• Economic Theory
– People are consistent in
their decision making

• Prospect Theory
• If people perceive they are
in the gain domain, they
will act conservatively
• If people are in the loss
domain, they will tend to
take more risks

(c) Stowe Shoemaker, Ph.D
Economic Theory versus Prospect
Theory
• Economic
– Expected utility of
uncertain outcome is
weighted by its
probability
• Prospect
– Expected utility of uncertain
outcome is multiplied by a
decision weight (p) where
:
– 1. Impossible events are
discarded (0)=0
– 2. Low probabilities are
over weighted while
moderate and high
probabilities are under
weighted (e.g., odds of being
involved in an airline crash
versus car accident)
(c) Stowe Shoemaker, Ph.D
Prospect Theory – Implications
• Increasingly larger gains are incrementally less pleasurable (10
to 20 great; 110 to 120 not as great)

• Increasingly larger losses are incrementally less painful (and
smaller losses are almost as painful as slightly larger losses)

• The displeasure associated with losing a certain amount (e.g.,
of money) is generally greater than the pleasure associated
with winning the same amount (e.g., of money)






(c) Stowe Shoemaker, Ph.D
Implications
• Once consumers have agreed to spend a certain
amount of money, getting to pay more is easier
than one would think
• Goal for is to move the reference point beyond
“price” to something that can gain a competitive
advantage – e.g., brand, type of ingredients,
service, etc.


(c) Stowe Shoemaker, Ph.D
Losses
Gains
Positive Value
Negative Value
Reference Point
(state of well being)
Value Function
(c) Stowe Shoemaker, Ph.D
Prospect Theory Leads to Framing
(c) Stowe Shoemaker, Ph.D
Framing
Buyers frequently form frames of reference
when making buying decisions, and these
frames of reference in turn influence how
buyers respond to price and product
information.
(c) Stowe Shoemaker, Ph.D
Goal of Understanding
Frames of Reference
1. Change the relationship between what
customers perceive they pay and what
they perceive they get in return.
And manage this relationship
(c) Stowe Shoemaker, Ph.D
Example -1
Change the relationship between what customers perceive they pay and what they
perceive they get in return.
• Option 1: Oliva Cameroon Cigar for $15
• Option 2: Oliva Cameroon (Figurado, 6 ½ inch x 60
ring); made by Oliva Cigar Co. – Nicaragua
The Authentic Cameroon Wrapper gives this boxed
pressed figurado a pronounced aroma of nuts, with hints of
cocoa and coffee.
It is medium-bodied, but not exceedingly strong. $15
(c) Stowe Shoemaker, Ph.D
Example-2
Change the relationship between what customers perceive they pay and what they
perceive they get in return.
• Option 1: Selection of teas from wooden box $1.95
• Option 2: Fresh pot of Lapsang Souchong black-
smoked tea:
From the Fujian province of China, this black tea is full
ancient history and flavor! Smoky smooth character is
achieved through the smoking process over pine and oak fires.
$3.95
(c) Stowe Shoemaker, Ph.D
Example-3
Change the relationship between what customers perceive they pay and what they
perceive they get in return.
• Option 1: Our standard room for $240
• Option 2: Or, an upgrade to superior from
for only $15 more.

How is a better way to write this?
(c) Stowe Shoemaker, Ph.D
Example-4
Change the relationship between what customers perceive they pay and what
they perceive they get in return.
• Research shows that a significant number of
consumers DO place a value on the X brand; e.g.,
for a £10 premium 56% of business travelers and
38% leisure travelers are very likely to choose Brand
A
• Goal is to concentrate not on the price, but the
components of the brand that consumers desire
• Give customer choice
(c) Stowe Shoemaker, Ph.D
Example-5
Change the relationship between what customers perceive they pay
and what they perceive they get in return.
• Focus on the features of the menu item that
are different from what consumer can buy at
home; e.g., Kobe beef

(c) Stowe Shoemaker, Ph.D
Ways To Frame Purchase Decisions

1. Structure transactions to reflect gains
and avoid losses
– Present price last after descriptions
– endow potential buyers

(c) Stowe Shoemaker, Ph.D
# 2 Change Way Frame Decisions
(c) Stowe Shoemaker, Ph.D
Example 1
Let customer know the cost of not booking
and paying now; that is, give the difference
between current booking class and the next
level up


(c) Stowe Shoemaker, Ph.D
Examine How We Quote Rates
• We always quote low to high, which sets
reference point low and the other prices a “loss”
• If we quote high price first, then other prices are
a “gain”
(c) Stowe Shoemaker, Ph.D
Example 2
Make it simple for customer to see options – and
trade-offs
(c) Stowe Shoemaker, Ph.D
This slide shows how prices change
depending upon day of flight; key
here is that customer sees the options
and can make choices
(c) Stowe Shoemaker, Ph.D
Figure 3
(c) Stowe Shoemaker, Ph.D
(c) Stowe Shoemaker, Ph.D
(c) Stowe Shoemaker, Ph.D
Note: departure and return
are bundled

Customers knows price but
has to buy prepackaged
schedule
(c) Stowe Shoemaker, Ph.D
Customer chooses by schedule
but does not know price
(c) Stowe Shoemaker, Ph.D
Customer can easily get both
price and schedule and therefore it
is easy to make choice
(c) Stowe Shoemaker, Ph.D
Example 3

Frame decision outcomes in terms of gains or
losses
– do not discuss benefits of buying the product, but
discuss the consequences of not buying the product


(c) Stowe Shoemaker, Ph.D
Example 4
Frame by Bundling Gains and Losses
– un-bundle gains
– bundle losses
(c) Stowe Shoemaker, Ph.D
Frame by Un-bundle Gains
• Packages such as “London for Free” – use of
free bundles gain; list all the components
separately
• Ability to purchase upgrades by segment (e.g.,
seat on UK to USA different utility than seat on
USA to UK)
• Check-in time; use of lounge

(c) Stowe Shoemaker, Ph.D
Frame by bundle losses
• Should we quote rates that include all taxes and
airport fees?
• What losses that can be bundled?
(c) Stowe Shoemaker, Ph.D
Hotel Examples?
(c) Stowe Shoemaker, Ph.D
Example of Research Study Undertaking
• Test Condition: Bundling Added:
1. Utilize proper opening dialogue
2. Listen to caller‟s requests
3. Ask repeat guest question and determine reason for stay
4. Provide normal sales strategy
5. At time of purchase, ask the following:
(c) Stowe Shoemaker, Ph.D
Example of Research Study Undertaking
• For an extra $15 we can offer an amenities package that includes:
• no phone access charge,
• 10 free local phone calls,
• free received faxes,
• free sent faxes,
• free internet access,
• one 3-minute call to call home (may call anywhere in the world).
(c) Stowe Shoemaker, Ph.D
Examples of current research
• Test Condition: Willingness to Pay for
Guaranteed Bed Type:
• At time of purchase, read the following:
As you are probably aware, hotels only guarantee a room, they never
guarantee what the bed type in the room will be. The reason for this
pertains to the fact that the bed inventory is limited and fixed. Since
guests arrive at different intervals, room assignments are made on a first
come first serve basis. This means that the bed type you would like to
have may not be available. For an extra $20 we can guarantee that no
matter what time you arrive, the bed type you requested will be
available.

(c) Stowe Shoemaker, Ph.D
Examples of current research
• Test Condition: Willingness to Pay for
Guaranteed Bed Type:
• Other test conditions:
• At what price would this guarantee service be so expensive that you
would not consider purchasing this service?
• At what price would this guarantee service be expensive, but you still
would consider purchasing this service?
• What price would you expect this hotel to charge for the guarantee of a
bed type?

(c) Stowe Shoemaker, Ph.D
Framing and Reference Price
Formation
(c) Stowe Shoemaker, Ph.D
Hotel Example: Would You Choose?
• Staying at the Venetian Hotel in Las Vegas for a
vacation; Staying two nights; 3036 rooms
• Which Would You Choose?
– A: Luxury suite room at $159 and then for an additional $30
you get guaranteed room on a high floor with a strip view
– B: Luxury suite room with guaranteed room on a high floor
for $189, or room for $30 less anywhere in the hotel

(c) Stowe Shoemaker, Ph.D
Hotel Example
• Venetian Hotel in Las Vegas
• Manipulation
– Quote $159 first (option A previous slide)
– Quote $189 first (option B previous slide)

• Two Teams
– Team 1: conversion 21.9%; calls 1813
– Team 2: conversion 21.2%; calls 1654

(c) Stowe Shoemaker, Ph.D
Hotel Example
• Upgrades:
– $159 quoted first: 13.59% upgraded (option
A)
– $189 quoted first: 20.55% upgraded (option
B)

– Translates $31,878 extra revenue for the
month to the bottom line

(c) Stowe Shoemaker, Ph.D
Restaurant Study
(c) Stowe Shoemaker, Ph.D
Study Design
• Eight different menus
– Type of description
• Modest/Detailed
– Number of items
• Three per category/Two per category
– Prices
• High prices/Low prices
2
3
(c) Stowe Shoemaker, Ph.D
Spinach and Feta Dip
• Modest Description:
• Spinach and Feta Cheese with Tomatoes and
Pinenuts
• Detailed Description:
• Organic Spinach Sautéed in Garlic and
Combined with Authentic Athenian Feta
Cheese, Sun Ripened Yellow Tomatoes and
Toasted Pinenuts
(c) Stowe Shoemaker, Ph.D

MenuOne: DetailedMenuDescriptions,HighPrice,3Choices
MenuTwo: DetailedMenuDescriptions,LowPrice,3Choices
MenuThree:DetailedMenuDescriptions,HighPrice,2Choices
MenuFour: DetailedMenuDescriptions,LowPrice,2Choices
MenuFive: ModestMenuDescription,HighPrice,3Choices
MenuSix: ModestMenuDescription,LowPrice,3Choices
MenuSeven:ModestMenuDescription,HighPrice,2Choices
MenuEight: ModestMenuDescription,LowPrice,2Choices
MENU DESIGN
(c) Stowe Shoemaker, Ph.D
Hypothesis Two Items
Each
Menu
Category
Ho
1
X
value (high price with detailed description)
= X
value (high price with modest description)

Mean

4.74 4.26
p=.083
Ho
2
: X
value (low price with detailed description)
= X
value (low price with modest description)

Mean 4.99 4.74
P=.369
Ho
3
: X
value (high price with detailed description)
= X
value (low price with detailed description)

Mean 4.74 4.99
P=.315
Ho
4
: X
value (high price with modest description)
= X
value (low price with modest description)

Mean 4.26 4.74
p=.113
Ho
5
: X
value (high price with detailed description)
≥ X
value (low price with modest description)

Mean 4.74 4.74
p=1.00
(c) Stowe Shoemaker, Ph.D
What Influence Buyers‟ Reference Prices
1. Current Price Influences
2. Past Price Influences
3. Purchase Context Influences
4. Prices of similar items
5. Price considering cost of making item yourself
(c) Stowe Shoemaker, Ph.D
1. Current Price Influences
• Product-Line Pricing
– Adding a premium product to the product line may
not necessarily result in overwhelming sales of the
premium product itself. It does, however, enhance
buyer’s perceptions of lower-priced products in the
product line and influences low-end buyers to trade up
to higher-priced items
(c) Stowe Shoemaker, Ph.D
Product Line Pricing Example: Wine
• $38
• $48
(c) Stowe Shoemaker, Ph.D
• $38
• $48
• $58
Product Line Pricing Example: Wine
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Anchoring
• The idea is that when a person must make a
judgment, he or she starts with an initial,
approximate judgment - an “anchor.” This
judgment gets the person „in the ball-park.”
Then, in view of other considerations, the
person arrives at a final judgment by adjusting
away from that initial assessment
(c) Stowe Shoemaker, Ph.D
Our top room is a Park Avenue Suite decorated with an elegant
European accent. This suite is 900 Sq. Ft. The suite is designed
with the business traveler in mind. Suites feature a separate parlor
with a wet bar and refreshment center, an oversized working desk,
2 multi-line speaker phones with call waiting, voicemail, data-port,
fax machines, Lodgenet Entertainment System with movies and
CD Library. These rooms overlook 56
th
street or the city view of
57
th
street. The bedroom can be closed off from the living room.
The king size bed includes five down pillows with satin-banded
Egyptian cotton Pillowcases. Suites sell for $995.00.

Position following second:
Our 2
nd
room type is the Metropolitan Suite. This suite is 700 Sq.
Ft.

Position following third:
Our 3
rd
room type is the Executive Suite. This suite is 600 Sq. Ft.

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Current Price Influences - continued
• Suggested Reference Prices
– State a price charged previously
– State a price charged by a competitor
– State suggested retail price
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Example of item being tested
• If consumers are always told the normal rate, and then
provided with a discount from that rate, they will
remember the normal rate, not the discount rate. In
addition, when the invoice is provided to the client at
check-out, the normal price will be printed. At the end
the discount will be subtracted. We should see a rise in
"overall price value" compared to when customer only
sees the price paid.

(c) Stowe Shoemaker, Ph.D
Current Price Influences - continued
• Consider the following airline prices seen on Internet for round-trip
London to Paris £ 310
Paris to Prague £ 288
Nice to Prague £ 289
London to Nice £ 310

Given above prices, answer following questions:
1. What price would you expect to pay to fly from London to Prague
_____
2. What is the most you would pay _____
3. What is a fair price _____







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2. Past Price Influences
• Past price paid has a particularly strong influence on the
reference price because it is more likely to be recalled as
a frame of reference than past prices that were
observed in advertising
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2. Past Price Influences - continued
• Implications of Previous Slide
– Numerous small price increases for frequently
purchased items more likely to be accepted
than are infrequent large increases
– Need to always state actual price and discount
from that; otherwise, low promotional prices
can establish low reference prices for judging
the value of later purchases
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3. Purchase Context Influences
• You are lying on the beach on a hot day. All you have to drink is
warm water. For the last hour you have been thinking about
how much you would enjoy a nice cold bottle of your favorite
imported beer. A companion gets up to make a phone call and
offers to bring back a beer. The only near by place where beer is
sold is a small, run-down grocery store. He asks what the
maximum price you are willing to pay. If the price is higher, he
will not buy it.
What price do you tell him? _____
(c) Stowe Shoemaker, Ph.D
3. Purchase Context Influences
• You are lying on the beach on a hot day. All you have to drink is
warm water. For the last hour you have been thinking about
how much you would enjoy a nice cold bottle of your favorite
imported beer. A companion gets up to make a phone call and
offers to bring back a beer. The only near by place where beer is
sold is a resort hotel. He asks what the maximum price you are
willing to pay. If the price is higher, he will not buy it.
What price do you tell him? _____
(c) Stowe Shoemaker, Ph.D
3. Purchase Context Influences continued
• Use context as a frame of reference that makes the
price seem fair or reasonable
e.g., 8 hours tossing and turning trying to get
comfortable, versus good night sleep
e.g., a day at the office
e.g., What is your time worth to drive versus
to fly to airport that is not convenient?
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4. Prices of similar items (e.g., if
consumers think there is no
difference, then there is a problem)

5. Price considering cost of
making it yourself
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• Scenario A: You are a purchasing agent for a large organization. You have
ordered for your own use a new electric typewriter with special features,
which will cost £1,000. A friend discovers that the identical typewriter is
available from another vendor for £ 600. Would you cancel the current
order and switch to the other vendor? (Assume that canceling the current
order and initiating a new one will take one of the purchasing clerks who
works for you about one-half day. Assume that there are no other costs
such as a loss of good will or delay in delivery.)

Would you cancel the current order and switch to the other vendor?
Yes _______ No _________
6. Price Differentials
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• Scenario B: You are a purchasing agent for a large organization. You have
ordered a new word processor with special features, which will cost £
20,000. Your purchasing department discovers that the identical word
processor is available from another vendor for £ 19,600. Would you
cancel the current order and switch to the other vendor? (Assume that
canceling the current order and initiating a new one will take one of the
purchasing clerks who works for you about one-half day. Assume that
there are no other costs such as a loss of good will or delay in delivery.)

Would you cancel the current order and switch to the other vendor?
Yes _______ No _________
(c) Stowe Shoemaker, Ph.D
• Scenario A the difference is 40%, whereas in
Scenario B the difference is 2%, even though the
absolute difference in both is £400
• Implications
– the perception of a price change depends on the
percentage, not on the absolute difference
– there is a threshold above and below a product‟s price at
which price changes are ignored

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• When quoting rates, quote price differences
instead of whole rate; e.g., $320 versus $290.
For $30 less get….

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7. Framing Price Differences
• Look at the two pairs of prices below and quickly
answer the question: For which pair of prices is the
lower price more of a bargain?
Higher Price Lower Price
First Pair $0.89 $0.75
Second Pair $0.93 $0.79

Your answer _____

(c) Stowe Shoemaker, Ph.D
• Perceptions of Odd Price Endings
– Buyers use left most digits in a price and round up to
form a quick reference point to evaluate the actual price
against.

– Previous example: second pair seems to have better
discount.
(first pair: 8-7 = 1; second pair 9-7 = 2; if figure same in
first column, then look at second column)

In reality, difference is a greater percentage of the price in
the first pair (18.6% vs. 17.7%)
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Objective of this section
• Understand steps to better pricing
• Understand Competitive Value Analysis
• Review basics of revenue management
• Understand price customization
• Understand Value

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