BUAD100 Lecture Notes - Lecture 2: Nordstrom, Variable Cost, Sunk Costs

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Published on 20 Apr 2019
Pricing video lecture #2
Customer Lifetime Value:
- Dependent On:
o Cost to acquire customer
o Annual profits customer generates for firm
Contribution Margin (revenue Variable cost)
o Number of years customer is likely to buy from the firm
- CLV = m*L AC
o M = contribution margin generated from customer in a year
o L = Expected purchasing life of a customer (years)
o AC = up-front cost of acquiring a customer
- Example: Macy spent $10 to attract Mary; Mary will bring $40 in revenue
o The products Mary buys will cost the store $20.
o Mary will be a customer for 5 years.
Psychological Pricing
- Considers the psychology of prices and not simply economics
- Consumers usually perceive higher-priced products as having higher quality
- Consumers use price less during product evaluation when they can judge the quality of a
product by examining it or recalling experiences.
- Psychologically, which do you prefer: benn and jerrys example
o Sale signs signal consumers that the item is a bargain
o Can increase catalog demand by more than 50%, even without varying the price
o No costs for the retailer, and usually no commitment to a particular level of price
- Reference Prices: prices buyers carry in their minds and refer to when evaluating a
o Example: Dakota’ Metallic Camo Slipper (women) (Nordstrom exclusive)
o Hayneedle
o Walmart
Odd-Even Pricing Strategy
- Practice that sets prices at fractional numbers instead of whole ones
o Price: $9.99 or $9.95
o Instead of: $10.00
- Examples: macys and J. Crew
Price Cues: End in 9
- When a price ends in 9, it denotes a bargain
- Very common that you’d think consumers would ignore this tactic. Think again
- Should consumers believe this signal?
o Many retailers use the 9 ending for ALL products
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