Pricing Strategies for New Products

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Questions and Answers

Which pricing method focuses primarily on the costs incurred in production plus a markup?

Target return pricing

Consumer-based pricing

Value-based pricing

Cost-plus pricing (correct)

What primarily influences the consumer's reservation price for new products?

Competing prices from existing products

Advertising expenses

Personal preferences only

Value of net benefits and production costs (correct)

What principle explains the perception of price unfairness among consumers?

Behavioral value determination

Value perception theory

Predictive pricing model

Coherent arbitrariness (correct)

What is a common reason why consumers may underbid in value elicitation tasks?

Can’t fully appreciate value Signup and view all the answers

In the context of psychological pricing, what type of product characteristics make pricing signals more effective?

Infrequently bought goods Signup and view all the answers

Which of the following inputs do consumers NOT consider when determining their willingness to pay?

Market demand forecasts Signup and view all the answers

Which method is used for value elicitation that specifically involves direct user feedback?

Surveys and focus groups Signup and view all the answers

What strategy can a company employ to foster perceptions of pricing fairness?

Make hidden production costs salient Signup and view all the answers

Which factor does NOT contribute to consumers overbidding in value elicitation tasks?

Clear understanding of product value Signup and view all the answers

What is termed as the practice of pricing based on perceived value to the consumer rather than on production cost?

Value-based pricing Signup and view all the answers

Which pricing strategy involves setting prices high initially and lowering them later?

Skimming strategy Signup and view all the answers

What impact can 'SALE & PROMO SIGNS' have on demand?

It can increase demand by up to 50% Signup and view all the answers

What is the main implication of pricing signals that end in 9?

They signal that the price is a best deal Signup and view all the answers

Which tactic helps control consumer attribution regarding lower prices?

Separating discounts from specific products Signup and view all the answers

The '30% rule' is associated with which pricing strategy?

Optimal discount percentage for sales Signup and view all the answers

What does 'introductory pricing' primarily aim to achieve?

Establish a large user base quickly Signup and view all the answers

Which heuristic suggests that higher prices imply higher quality?

Price-quality heuristic Signup and view all the answers

Which pricing strategy involves gradually increasing the price of a freemium service to convert users to paid options?

Free-to-fee model Signup and view all the answers

What does 'sharp numbers' in pricing imply?

Precision in pricing suggests a fair valuation Signup and view all the answers

Which study examined the effects of price matching on consumer perceptions?

Hess & Gerstner study Signup and view all the answers

Study Notes

Pricing new Products

Four pricing methods for new products include cost-plus pricing, target return pricing, value-based pricing, and consumer-based (psychological) pricing.
Consumers consider four factors when determining what they are willing to pay for a product: value of net benefits, production cost, cost of substitutes (opportunity cost), and cost of complements.
Prices are ambiguous due to the ambiguity of value.
Ariely's Tom Sawyer and wine/SS# studies demonstrate the principle of coherent arbitrariness, where consumers are influenced by arbitrary anchors in pricing decisions.

Price Fairness

Consumers are more likely to perceive prices as unfair rather than fair.
Research by Bolton, Warlop, and Alba (2003) and Carmon & Ariely (2000) highlights this tendency.
Promoting price fairness can be achieved by making hidden production costs salient and encouraging buyers to think like sellers.

Value Elicitation

Value elicitation aims to determine consumers' reservation price (maximum willingness to pay) for innovations.
Methods include surveys, focus groups, bidding tasks, and experiments.
Consumers may underbid in value elicitation tasks due to an inability to fully appreciate value, over-caution about future budgets, or buyer strategy to lower prices.
Overbidding can occur due to overestimating net benefits, forgetting to consider budget, or buyer strategy to ensure product availability.

Psychological Pricing

Consumers rely on cues to evaluate price appropriateness due to weak reference prices.
These pricing signals or heuristics have a significant impact on price perceptions, especially for new products and services due to their ambiguity.
Signals work best for infrequently bought goods, new or novice consumers, products with frequent design changes, and products with varying quality or sizes.

Common Heuristics Impacting Price Perceptions

Price-quality heuristic: Consumers associate higher prices with higher quality.
Compromise effect: Consumers are more likely to choose a mid-priced option compared to extreme options.

Effective Pricing Signals

Sale & Promo Signs: Can increase demand by 50%. The 30% rule suggests discounts should be at least 30% to be effective.
Introductory Pricing: Offers deep discounts at launch to build a large initial user base.
Prices Ending in 9: Prices like $39 are perceived as more attractive than $40.
Price Guarantees: Proactive or retroactive price matching can increase consumer confidence.
Sharp Numbers: Precise prices, like $19.99, signal precision in valuation and perceived fairness.

Pricing & Attribution Theory

Consumers automatically generate reasons for unexpected information or experiences.
Lower prices can trigger attributions like unpopularity, overestimated demand, bulk buys, faulty products, or being out of season.
Two pricing tactics: control attribution and separate discount from the specific product.