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Lecture 6

MGMA01H3 Lecture Notes - Lecture 6: Prospect Theory, Yield Management, Pricing Strategies

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Sam J Maglio

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Lecture 6:
- Price can be a variety of things: you pay less, you buy more; but what would a consumer
do in different pricing situations (e.g. pay what you want)
- Customer value is how much a customer would want to pay for a product/service
- Relationship between perceived value, price, cost:
o Perceived value is more than price which is more than cost (ideal situation)
o Price is more than perceived value which is more than cost (must adjust to fix
o Price is higher than cost which is higher than perceived value (failure to sell)
- Price elasticity (E) is the responsiveness to price, calculated by % change in quantity
demanded/% change in price
o |E| > 1, elastic demand; change in price results in greater change in demand
o |E| < 1, inelastic demand; change in price results in smaller change in demand
o |E| = 1, unitary elastic demand, change in price equals change in demand
- Factors that affect price elasticity:
o Availability of substitutes: are there many substitutes for this product?
o Uniqueness: how unique is a product?
o Difficulty of comparisons: can you compare the different products?
o Importance: which type of product would you stock up on?
- Survey based methods:
o Willingness to pay for branded versus generic: for different brands measure how
much more are you willing to pay for this versus a generic brand
o Dollarmetric method: take all the brands and chose two brands to face off and
ask people which they prefer and how much they will pay more for it
o Gabor-Grainger method: take a single product and ask people if they will pay for
the product at different price point and keep track how many people will say yes
to the price paid for a product (results in a demand curve)
o Brand Price Trade-Off (BPTO): get a selection of brands and their prices and the
prices that you would pay; once you choose one, the price will increase and force
you to choose to stay with the brand or switch; until you are price insensitive or
he ou o’t purhase aore
- Pricing objectives:
o Cost orientated approaches: only care about having a standard markup and
apply to all products; results in ignoring consumer and competition
o Profit orientated approaches: places emphasis on a target profit and would look
at costs and decide on price according to goal; would ignore customers and
o Competition orientated approaches: focuses on what other competitors are
doing and may either charge at par, above, below, and may even charge at a loss
to attract more people to buy things (loss leader), some may offer different
options; a problem is ignoring the customer
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