Innovation 2024 Class 8 PDF

Four Pricing Methods for New Products In the face of ambiguity, how do firms price new products? 1. Cost-plus pricing 2. Target return pricing 3. Value-based pricing 4. Consumer-based (Psychological) pricing Constructing Consumer Value When in doubt,...

Four Pricing Methods for New Products In the face of ambiguity, how do firms price new products? 1. Cost-plus pricing 2. Target return pricing 3. Value-based pricing 4. Consumer-based (Psychological) pricing Constructing Consumer Value When in doubt, consumers consider these four inputs in determining what they are willing to pay: 1. Value of net benefits 2. Production cost 3. Cost of substitutes (Opportunity Cost) 4. Cost of complements The challenge of pricing Prices are ambiguous because value is ambiguous Ariely’s Tom Sawyer study Ariely’s wine/SS# study The principle of coherent arbitrariness  money Price (Un)Fairness Consumers (buyers) are more likely to see prices as unfair rather than fair… Bolton, Warlop, and Alba (2003) Carmon & Ariely (2000) How do you promote perceptions of fairness? Make hidden production costs salient Make the buyer think like a seller Value elicitation The process of determining consumers’ reservation price (max WTP) for innovations Methods include: Surveys (Focus groups) Bidding tasks Experiments Value elicitation R≈p–b+s Reasons why consumers underbid in value elicitation tasks p: Can’t fully appreciate value b: Overly cautious about future budget s: Buyer strategy to lower price Reasons why consumers overbid in value elicitation tasks p: Overestimate net benefits (or over-promised) b: Forget to consider budget s: Buyer strategy to ensure that product is offered Psychological Pricing Because of weak reference prices, consumers use cues to evaluate the appropriateness of a price Signals (and heuristics)  Can signals lie? Shouldn’t consumers be able to see when the price signaled a high-quality product, but the product is low-quality? Pricing Signals Why are pricing signals especially impactful for new products and services? Innovations are often ambiguous. Signals work the best when… 1. Infrequently bought goods 2. New or novice consumers 3. Product designs change frequently over time 4. Product quality or sizes widely vary Common heuristics that impact price perceptions Price-quality heuristic Compromise effect  Pricing signals …in such cases, firms signal “good deal” to the consumer by using several common tactics #1: SALE & PROMO SIGNS Can increase demand by 50% Sale-Banners The 30% rule Introductory Pricing: A strategy to build a large initial user base by offering deep discounts at the launch Pricing signals #2: Prices that end in 9 $34 $39 Pricing signals #2: Prices that end in 9 $34 $39 Anderson & Simester (2003) HBR Pricing signals preimg home_lowprice_burst best_price_guarantee Price guarantees (Price matching) Proactive & retroactive Hess & Gerstner study Pricing signals “Sharp numbers” Precision in prices (an unrounded number) suggests precision in valuation. This signals a “fair” or “best” price. Pricing & Attribution Theory AT: People automatically generate reasons for unexpected information/experiences Lower price is unexpected Why is product on sale??? Unpopular, overestimate demand, bulk buy, faulty product, out of season Implication for pricing Two tactics Control attribution Separate discount from specific product  When should I use… Skimming strategies? Penetration strategies? Freemium or Free-to-fee models? Gu, Kannan, & Ma (2018): Selling the Premium in Freemium Kim, Nattar, & Spann (2009): Pay What You Want: A New Participative Pricing Model