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Lecture 4

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Economics (Arts)
ECON 208
Paul Dickinson

Eco Lecture Customer-Based Pricing. There are many versions of customer-based pricing. (1) B2B: Salesforce allows purchasing agents to dictate their prices. • An aquarium cleaning product firm sold below their cost because they were scared of losing the custom of a big-box retailer. (2) B2C: Giving away a valuable product or add-on for free because the com­pany fears a customer revolt. • Flickr hosts 4 billion images (as of Oct 2009). However, the user base is so passionate that managers are reluctant to charge more. The problems with customer-based pricing are that: (1) Customers do not reveal how much they value the product • Radiohead launched a ‘pay what you want’ scheme for their album ‘In Rainbows’. 62 percent paid nothing. Average price of $2.26 an album. (2) Customers need to be educated about the value of the product • For example, it was hard for customers to understand what TiVo offered over a traditional VHS recorder. (3) When customers are used to being in control of a firm’s pricing, they revolt at price changes • Turbotax starting charging users $9.95 for each additional return they filed. Users revolted and gave them a 1.5 star rating on Amazon. The company retreated, reverted to charging nothing and refunded the money. • Resident Evil 5, a computer game, tried a different approach: ‘This is the part where I get to say ‘BS’,’ the vice president of Strategic Planning & Business Development wrote on the Capcom forums. ‘RE54 PRICING BEYOND THE 3 CS is well worth every penny of $60. A huge game, with tons of replay value, loads of unlockables, new weapons, co-op, mercenaries mode, etc. If any game warrants its price point, it’s RE5’ Instead of asking themselves what their customers would pay, firms should ask themselves what are the prices at which they can convince their customers are supported by their product’s value. How can they segment to reflect differences in customer valuation? Competition-Based Pricing. Competition-based pricing describes the situation
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