Price Strategy - MIDTERM Reviewer PDF

Module 1: Introduction to Price and Why is Price Important? Pricing - Must be right and perfect so there is no massive impact on the company....

Module 1: Introduction to Price and Why is Price Important? Pricing - Must be right and perfect so there is no massive impact on the company. - Figure out how to come up with the middle ground. - Determine the willingness of the consumers to pay. Price is Cross-Functional - Getting the acceptable price range requires information from the Finance and Accounting, Sales and Marketing, and What is price? Operations departments - Is a value that the firm captures in a mutually beneficial exchange with its customers. - The reason for the firm’s existence is to produce value for the customers in exchange for a price. - Has a direct impact on the profit. For non-profit firms - Pricing directly affects the resources of the firm and its ability to serve its constituents. For Profit firm - Directly affects the profits of the firm, noting the ripple effect to the stakeholders. In Accounting, Contribution Margin is defined as revenues minus variable expense which reveals how much a company’s revenue will be contributing to the company’s fixed expenses and net income. Key Component in breakeven analysis. How to Set the Right Price 2. Cost + Pricing = teaches us that setting a markup from the cost incurred in developing - Setting the right price is both science and art. the product makes a profit. - It is a science because it uses quantitative 3. Customer Utility – “How much is the tools. acceptable markup?”. It has an equivalent willingness to pay. Module 2: Standard Profit Equation Revenue = Quantity x Price, also known as list price. Income - is the net of revenues and expenses or the amount left after deducting variable costs from the revenue. Fixed Cost – cost that does not change with an increase or decrease in the amount of - Communicate the value of their product goods or services produced or sold. - Sellers must price aggressively and grant Variable Cost - costs that change as the discounts reluctantly. quantity of the good or service that a - Reference price – consumers expect to pay business produces changes - Transaction Price – the actual price at which Average Cost - total cost divided by the a product or service is sold. number of units of a good produced. - Reference price greatly influences the trans Marginal Cost - aka the cost of producing price. one more unit of a good Profit - is important because it drives Art and Science of Pricing business growth. The amount that goes back It is an art because it anticipates customers’ to the firm after deducting fixed costs from perception of various elements surrounding the income. the purchase of a product and predicts the o Positive profit means that the value given to a product. revenue is greater than all the expenses incurred in producing the When setting the price, always remember: product. 1. Customers weigh prices based on perceived o Negative profit means value. financial losses that the exchange 2. Customers are heterogenous -- perceived failed to recover the costs and leave value, demand, and willingness to pay. the business with nothing to invest in 3. Humans are cognitive misers – store product innovation, new goods, and information based on anticipated benefits. expanded distribution. 4. Customer decisions are largely influenced by recent experiences. 5. Loss Aversion – losses are weighed greater than the gains. Paying is always painful and perceived as a loss. 6. Profitability for the firm. 7. Profitability for the entire industry. Therefore, in setting prices… 1. Break-even analysis tells that an incremental price increase or a unit of product sold on top of the break-even point generates profit. Standard Profit Equation SAMPLE QUESTION: EA2: QUESTION 9 Frosting Cafe is a popular snack place serving π = Q (P - V) – F cupcakes made from all-organic ingredients. It prides itself as a healthy alternative to more popular Given: international brands like Starbucks, yet the product and service experience is comparable. Jane Doe, the 500 units = Q or quantity sold owner of Frosting Cafe is presently enjoying weekly sales of 250 cupcakes at P75 apiece. Frosting Cafe $12.00 = P or price operates on a variable cost of P5.50 and a fixed cost $0.75 = V or variable cost of P10,000 Jane Doe wants to improve her profits by cutting on variable costs and fixed costs. $5,000 = F or fixed cost Compute for the following: Formula: 1. Generated weekly profit with the present π = Q (P - V) – F weekly sales. Sol’n: 2. Generated weekly profit should Jane Doe reduce her variable cost by 2.5% π = 500 (12.00 – 0.75) – 5,000 3. Generated weekly profit should Jane Doe reduce her fixed cost by 2.5% π = 500 (11.25) – 5,000 4. Which option makes Jane Doe better off: π = 5,625 – 5,000 improving price or increasing sales volume? π = $625 Given: Q = 250 P =75 V = 5.50 F = 10 000 1. Generated weekly profit with the present weekly sales. Π = 250 (75-5.50) – 10 000 = 7 375 2. Generated weekly profit should Jane Doe reduce her variable cost by 2.5% Interpretation: Adjusting each of the items in Reduced VC= 5.50 x 2.5% = 0.1375 the standard profit equation one at a time will improve the profit. If we increase our sales from 500 Reduced VC = 5.50 – 0.1375 units to 525, profit grows by as much as 45%. If we increase the price from 12.00 dollars to 12.60 Reduced VC = 5.3625 dollars, profit improves by as much as 48%. Cutting Π = 250 (75 – 5.3625) – 10 000 = 7,409.375 our variable cost from 0.75 dollars to 0.71 dollars rises profit by as much as 3%. If we reduce our fixed 3. Generated weekly profit should Jane cost from 5,000dollars to 4,750dollars profit Doe reduce her fixed cost by 2.5% expands by as much as 40%. Improvements in the Reduced FC = 10 000 – 2.5% = 250 variables contribute to the profit growth, but it is the improvement in price that generates the highest Reduced FC = 10 000 – 250 = 9 750 percent increase in profit. Reduced FC = 9, 750 Π = 250 (75-5.50) – 9 750 = 7 625  o More Insight and relevance than from pure Economic Price Module 3: Part-Worth and Optimization. Customer Utility with Conjoint - Conjoint is pricing according to customer Analysis perceived value. CONJOINT PART-WORTH UTILITY Definition of terms: FUNCTIONS Revenue – the amount generated by 1. Conjoint treats a product as a bundle multiplying the quantity sold by the price of of attributes, features, and benefits. the product. It is the sales generated 2. The resulting attribute to value expressed in monetary terms relationship is called a part-worth Util – the unit of measure to part-worth utility function. utility. 3. Can be useful in uncovering new Variable Costs – changing costs depending product compositions and potential on the company’s production volume. price points that customers would Typically, it increases when some output accept. increases during the peak months and 4. Can identify the willingness-to-pay decreases during the lean period. by consumers for products that don’t Customer Perception-Driven Pricing exist yet. 5. Researchers can explore alternative - Pricing as a scientific exercise requires variations of a product, even products marketers to gather information and conduct that do not yet exist, and identify the quantitative analysis to identify the range of value customers would place on a profit-yielding prices. product with the associated features. - However, even with empirical data, pricing 6. The sum of the part-worth utilities of uncertainties are always present. These a product is the consumer utility. difficulties occur because pricing structure, price point, and price discount vary Conjoint is a Market Research Based Tool depending on geography and customer As a market research technique, the situation, and the heterogeneity of the quantification of value comes from the consumers. These uncertainty-causing perspective of the customer, not the variables demand an understanding of how company. consumers value products. Has similar challenges to other market Satisfying consumer preferences creates research techniques. value - one simple way of understanding the value o Shows a snapshot of customer customers place on a product is by determining the wiliness to pay with limited ability part-worth utility or the value customers place on to demonstrate how product each product feature, attribute, and benefit. The valuations will evolve. collective part-worth utilities are called customer o Requires markets with many utilities. customers, not just a few. Why use Conjoint Analysis? CUSTOMER VALUATIONS VARY Conjoint Analysis provides much greater Conjoin analysis can reveal the dispersion of relevance and depth in price setting than value that different customers place on other methods. products or their features. o Discriminates between the benefits of o The dispersion can lead to a range of specific brands, product attributes, prices that appear to be acceptable to service levels, and market segments. the market for a product. o Narrower price brands than from o The acceptable price range to come Exchange Value Models. out of a conjoint analysis is much narrower than that from a raw exchange model, but broader than  that from economic price “Neutral” as a choice because “Neutral” may mean optimization. “No Choice” or “No Response.” Answer choices must Dispersion of valuation between consumers be written using simple sentences to avoid can be meaningfully used to enhance confusion. profitability through segmentation. Encircle the score that best represents your choice. o Customers will place different value (5 most likely and 1 least likely) on a product than the producing firm, both greater and lower valuation. Numerical Interpretation: o Greater valuations can derive from customers having alternative uses for 5- I will choose this 5 out of 5 times. a product than was originally 4- I will choose this 4 out of 5 times. intended by the producer, or from satisfying a need greater than was 3- I will choose this 3 out of 5 times. anticipated. 2- I will choose this 2 out of 5 times. o Lower valuations can derive from customers perceiving a wider variety 1- I will choose this 1 out of 5 times. of alternatives than originally 3. Part Worth Utility, Customer Utility, anticipated, or no longer needing a Ranking set of benefits delivered. After retrieving the accomplished o If consumer dispersion between questionnaires, tally the scores for each valuations of specific features can be number. aggregated into meaningfully Get the average score for each different groups, conjoint analysis number by adding all tallied scores and can form the basis of highly valuable dividing the total scores by the number of market segmentation. respondents. We have 14 items; we should STEPS IN CONDUCTING CONJOINT have 14 mean scores. ANALYSIS Since we have three questions for each product attribute, we will add up all the 1. Setting-Up the Table for Product means of the items about the product Features and Attributes attribute and divide each sum of means into three. The quotient of the sum of means is The first step is to set-up your table of product the part-worth utility. features and attributes. These are the attributes under consideration. We are choosing 4. Using Utils to determine Price between fresh milk and vanilla ice cream and Differential based on the market prices of fresh fruit blends range from P95 to P60. Other marketing decisions Now let us explore the monetary value of each of are affected by the kind of brand that we intend to the part-worth measured using the economic unit build for the product. Given these variables, we can util. Part Worth Utility is measured in Utils, an create eight possible combinations, see Table 1. economist metric of utility. Fresh Fruit Blends Fresh Fruit Blends Price is always one of the attributes measured in Fresh Milk Fresh Milk conjoint analysis. According to Smith (2012), “the Premium Brand Premium Brand ratio of price disparity in the study design to util P95 P60 disparity between the two price points found from Fresh Fruit Blends Fresh Fruit Blends the customer preferences reveals the dollar value per Fresh Milk Fresh Milk util.” (p.51) Niche Brand Niche Brand P95 P60 Step 1: Get the given: Prices range from P60 - P95 2. Preparing the Questionnaire Part-worth utilities are 4.0 utils and 3.2 utils In marketing, we commonly use the Likert Scale and Step 2: Set up the equation, always subtract assign a numerical interpretation that excludes the smaller number from the bigger number:  43.75/ Util= P95-P60/ 4.0-3.2 Module 4: Psychological Influences in Price Perception Using P43.75/util as our valuation, we can now - Consumers’ perceived value is dependent on determine the value of other attributes. For instance, their knowledge of the product and the the difference in the part-worth of the premium alternatives. Marketers do brand to reduce brand (3.7) and niche brand (3.2) is 0.5 util or consumer price sensitivity. The human brain P21.88. responds to heuristics or symbols produced by memory and consumers’ perception of Computations: value is influenced by heuristics generated by Premium brand 3.7 utils – Niche brand 3.2 behavioral effects that influence price utils = 0.5 utils sensitivity- true economic costs, perceptual challenges, prospect theory, and effects of 0.5 utils x P43.75/util = P21.88 prospect theory. Interpretation: Premium brand adds value to the product. In the case of fresh milk (4.2) and vanilla ice cream (3.6) is 0.6 util or P26.25. Fresh milk 4.2 utils – Vanilla ice cream 3.6 utils = 0.6 utils 0.6 utils x P43.75/util = P26.25 Interpretation: Fresh milk adds value to the product. 5. Potential Compelling Offer We get the product valuation by adding the difference of the part-worth utilities premium brand and niche brand (0.5utils), fresh milk and vanilla ice cream (0.6utils), giving you 1.1utils or in monetary value P48.13 (1.1 x P43.75). Add the price with the higher part-worth utility P60 and product valuation of P48.13, and you will get P108.13. Interpretation: This new variant can attract customers away from P60 if the new variant is priced at or lower than P108.13 (Smith, 2012). Behavioral Effects that Influence Price Application: If you want to rate your new fresh Sensitivity fruit blend with vanilla ice cream and remain True Economic Cost within customer preference you can price it at > Perceptual Challenges P60 or ≤ P108.13. Prospect Theory of Tversky Effects Related to Prospect Theory True Economic Cost - It focuses on taking into consideration the perceived value. - the perceived value varies due to the shared cost effect.  Shared Cost Effect - implies that consumers’ spend but lacks time to evaluate the price sensitivity eases when other people’s money is alternatives and so opt to pay a higher price. used to pay for a product. There are four - Low-income households prefer to buy in classifications of buying behavior distinguished smaller volumes like the sachet-packed according to whose money is spent (Smith, 2012). alternative because they are more price- This also known as The Four Funds of Money. sensitive with large-expenditure items. Business markets purchase in bulk orders 1. People are spending their own money because of the savings incentives from on themselves. There is high attention to volume discounts (Micu & Micu, 2007). high price gaining utility from the product and the sensitivity - Time and effort are important. money paid. Consumers choose well and - High-income earners that have less time to ensure the value of their money. buy don’t find alternatives, therefore, less 2. People are spending their own money price sensitivity. on someone else. Consumers seek utility Difficult Comparison Effect - is when for the receiver and the utility of giving for high price consumers encounter difficulty comparing prices sensitivity themselves. Just like buying a birthday cake and benefits which may be caused by limited for a friend, a customer is most likely more information, and limited knowledge on the points of than willing to trade off cake flavors and comparison just as in branded and variants. generic drugs. 3. People are spending someone else’s - Even size changes cause Difficult money for themselves. Consumers are Comparison Effects like a slice of an S&R more benefit-oriented but less price- low price priced at P99 and a whole box containing sensitive. An example is when a company sensitivity eight slices at P599. Consumers most likely buys an employee a car; an employee will have a relaxed price sensitivity on a box of most likely maximize the utility by choosing pizza because it appears cheaper than buying the best car brand that is viable with the on a per-slice basis. allocated budget. - Branded vs Generic 4. People are spending someone else’s - Difficulty in comparison of products. no effect money on someone else. Consumers are neither price nor benefit-sensitive. Perceptual Challenges Switching Cost - is a psychological cost associated - The social norms, cultural beliefs, and when changing brands occurring with products that traditions have psychological influences on require user knowledge. The greater the product- price sensitivity. specific investment in a product the higher the price Prices Ending in 9. - According to Smith (2012), sensitivity of the consumers (Micu & Micu, 2007). studies have shown that digits as 5 and 0 are easily stored and retrieved from memory due to - The cost that comes with changing usual familiarity. brands. - If you change brands, you have to invest in - Between P595 and P600, it is easier for time and getting to know the new product. consumers to choose between two prices - Adjustments in technology will cause price because both last digits are easily retrieved sensitivity. from memory when comparing alternatives. The ability to compare prices Expenditure Effect - refers to the tendency of increases the likelihood of price sensitivity. consumers to be more price-sensitive at higher prices, and so they are more than willing to invest in - Using the Difficult Comparison Effect, we evaluating the alternatives. chose an odd number like 9 and priced the product at P599 because consumers will - Other factors that comprise the idea of likely have a hard time recalling the price, economic incentives are time and effort in thus reducing price sensitivity. acquiring a product. For instance, the high- Fairness Effect - is the consumers’ idea of a “fair income segment may have the income to price” and uses this as the basis for an acceptable price. When assessing our price offers, think that customers consider the motive of the seller. If the The secondary effect of promotions on price purpose is perceived to be good, consumers sensitivity arises from the ability of advertising to are less price sensitive. increase the size of the addressable market. - Companies with good reputations work well - Advertising-sensitive consumers tend to be - Provide prices and intentions that are more price-sensitive. acceptable to the consumers. Prospect Theory of Tversky (1979) Overconfidence of Control over Future Behavior - refers to the tendency to overestimate - The premise of prospect theory is that people the ability to modify one's behavior such as in the base their choices on the perception of losses case of availing of a one-year magazine subscription. and gains. The three value functions of losses and gains are reference dependency, - Those who buy magazines on a per-copy diminishing sensitivity, and loss aversion. basis do so because of the editorial content. Subscribing to the magazine for a period is Reference Dependency. It is customary for purely a purchase decision motivated by the customers to compare choices using their point of discounted price. references like the current satisfaction level, most - It is the same with membership to a fitness recent prices seen i club instead of paying for its services on a - n the market, or the need for per-visit basis; some choose to avail a year of replacement arises. The point of reference is membership. Studies show that those who the point when customers will choose to pay on a per-visit basis went more than those remain with the current product (status quo) with paid membership. or replace it with replicas of the last item - “Losses are weighed more than gain.” purchased. The theory states that “Losses - People have poor predictions. away from the point of references will Small-Pie Bias - occurs when sellers and buyers be avoided. Gains above the point of negotiate a price. Both parties tend to underestimate references will be discounted.” the size of the bargaining zone and agree on a EX. Existing Product A is selling at P. New transaction price that fails to maximize the Product B is launched promising better product value/profit potential of the agreed price. To avoid attributes and more benefits, priced at small-pie bias do the following: P389. The promise of gain through better product attributes and additional benefits may - reservation price - the price consumers be discounted or may not be viewed as an are willing to buy the product given the set additional value because the current customers of benefits revealed to them. are satisfied with Product A, while the P110 - Price aggressively. Discount reluctantly price difference will be considered an (Smith, 2012) unnecessary loss by the customers. - Never use small-pie bias, since it creates lower value. Most likely, customers will remain with Product A and may find switching to Product B as risky. Promotional Influences - refer to the ability of marketing communications to reduce price Diminishing Sensitivity - occurs when the sensitivity by communicating the product attributes, gains and losses increase away from the point of benefits, and value aggressively. reference, e.g. growing number of choices or absolute magnitude of gains and losses - Price according to value; be aggressive. expressed in price differences. Price-oriented promotions – those who focus on the brand and consumer price Example: When we increase P5 to P10 sensitivity. customers may resist the 50 percent increase in Value-oriented promotions – tend to price as opposed to P490 to P495 customers lower the price sensitivity of the may be forgiving even if both prices increased consumers; and focus on the brand and by P5. From one-digit price to two-digit price. its benefits.  Loss Aversion. Customers are more conscious object once they possess it than they otherwise about the potential loss during transactions than would. the potential gain. - Paying for a product is always considered by clients as a loss. We can manage the perceived loss by promoting product attributes and benefits to create value positioning in the minds of our customers thereby reducing price sensitivity. - FOMO Integration; Conscious about the potential loss. - Devaluation happens. - Remove the pain points by remedying it with perks and benefits. Effects of Prospect Theory - These psychological influences have been 3. Anchoring. - The premise of anchoring is that codified long before Prospect Theory but consumer expectations are created with their only with the theory were these influences exposure to early information becoming the found its practical applications. These reference points. psychological forces are also the reasons why - Once consumers are exposed to particular setting prices are more than quantitative information, it is hard to change their exercise (Smith, 2012). expectations about the same information. In 1. Reference Price Effect. - Consumers pricing, when a seller makes an initial offer experience reference price effects whenever to a buyer, it becomes the reference price of their price expectation is affected by their the customer. exposure to the current price or the last price - Previous purchases are also high price points they saw. to anchor on. Anchoring may be used for the - When we move away from the reference expected high or low price and benefits and price, it increases the likelihood of price product attributes of a product. sensitivity. If the consumers are coming from 4. Comparison Set Effect. - The prices of the a recent sales promotion either the product comparable alternatives are also referenced or its alternative, their reference price is the prices. When the products of competing discounted price. alternatives are priced low, consumers expect similar products within the same price range. 2. Endowment Effect. - The endowment effect takes place when we allow our consumers to experience the products before actually buying 5. Framing Effect. - Consumers become like giving away sampling or trial products. The increasingly sensitive to price when they endowment effect is the value people place on an perceive the price as a loss rather than again.  - According to Kuhberger (2002) “…framing effect does not exist with complete information… But expected in the case of asymmetrical violation of complementarity, that is if the sure option is described partially and the risky option is described thoroughly.” 7. End-Benefit Effect - is the price sensitivity of the consumers with the purpose or end benefit derived from the purchased goods. Example: The price sensitivity over chocolates between a consumer who is on a weight loss program and someone who just buys regularly. - No variation on price; different perception. 6. Order Bias. - Consumers’ price sensitivity is The consumer who is on a weight loss also affected by the order prices are presented. program might be less price sensitive if the - This psychological effect takes on anchoring purchase of chocolate is a reward for a disciplined and loss aversion as such that if users are eating behavior for a week of treatment or offered prices from highest to lowest, otherwise if the consumer considers weight loss as consumers are less price-sensitive and a significant investment of money and commitment perceive the succeeding lower prices as to the program. discounted rates thereby increasing the gain and reducing loss. - If we reverse the order, customers’ reference points will come from the lower-priced well. Moving up the price range will cause the consumers to view the prices as increasing losses resulting in heightened price sensitivity. - Low sensitivity – high price. Order prices are presented. Price = Benefits. Pricing a product proportional to value is a fundamental principle in strategic pricing, however, value is a subjective matter Price cannot be quantitatively optimized in the absence of considering qualitative influences. There are numerous factors that influence how customers perceive value and price. Many of these factors arise from deeper, psychological influences, and perhaps even biologically evolutionary influences in their development and expression in human behavior Rather than taking an approach of  attempting to correct human behavior and Exchange Value - the price of the make people somehow more logical in our competing alternative adjusted for the purchase decision making, it is more usually differential value. Exchange Value = Price of efficient to – Understand decision biases in the comparable alternative + Differential purchasing behavior – Uncover approaches value. to reducing psychological dissonance, – Understand the limitations to pricing power. Consider us as COGNITIVE MISERS relying Why use the Exchange Value Model to price on HEURISTICS to make decisions faster. your products and services? Sales and marketing executives can use the The Exchange Value Model is a simple tool used effects to influence price acceptance and – most appropriate for new products or variants – improve profit capture– And thus facilitate when two products are being compared and the price customer decisions to purchase. models. This tool is also useful when computing the acceptable price range for the new product for knowing the boundaries of a good price narrows pricing discussions to a reasonable range of potential Module 5: Exchange Value Model points. Key and Concepts Extreme Boundaries Extreme Boundaries - define the range of - the price range for a product acceptable prices outside of which no includes customer utility and marginal cost. rational buyer or seller would ever transact. Range implies boundaries, higher and Narrow Boundaries - Define the range of lower. Generally, the highest possible price prices that are most likely to encourage we can sell a product should be equal to customer transactions and leave the firm customer utility and the lowest possible price most favorable position. These are lying is the marginal cost. within the extreme boundaries - If the range is too broad – we can end up Marginal Costs - Define the extreme lower pricing that customers are happy but is boundary Seller’s bottom line. Any price unable to capture most of the value. lower than the marginal price leaves the - Ensuring that we obtain both values to seller losing the business. Thus, marginal customers and value to the business, we costs are the extremely lower boundary of the narrow the price range using narrow “right” price. boundaries. Consumer Utility - Defines the extreme upper boundary. Buyer’ bottom line. Refers to the value a customer gains from having the product. The value that buyers place on a product is the utility that they derive from the product. Various utility includes Form Utility Place Utility Time Utility Ownership Utility. Consumer Surplus - The difference between the overall consumer utility and the transaction price. As long as consumer surplus is positive, customer will value the product. Differential Value - is the change in consumer utility that a product in comparison to its comparable alternative. It represents the potential incremental Narrow Boundaries satisfaction or profits the customer can expect from this product over those of the - is defined by the competing alternatives and differential value. reference product.  - When narrowing the boundaries, we can Hot Cup = Company B determine the exchange value of the new Selling Price = P 115 product by calculating the expected cost and differential value. Services = 85% Coffee = 15% Step 1: Calculate the Expected Cost Frequency = 60% When calculating the expected cost, the following Solution: are needed 1. The selling price for the comparable alternative, in this case, the alphabet book Price Breakdown of Hot Cup selling at $12 per copy. 115 x 85% = 97.75 –Value Added 2. The frequency of sales for the comparable 115 x 15% = 17.25 – Core value/ref price alternative, hypothetically let us peg the re- order rate of the alphabet book at 78%. EA#5 Estimated Cost The Brew and Hot Cup EC = 115 x (1) + 115 x (60%) + 0 The Brew is a new café that will be offering EC= 115 + 69 + 0 coffee mixes. Unsure of the price range, the owner EC = 184 decided to do a simple consumer response survey and found out that the customer utility is P125 per regular cup of brewed coffee. Learning about the Exchange Value preferred price, the owner went to spend additional point-of-sale display promoting the price and 184 = 97.75 + X (100%) + 97.75 + X (85%) + incurred a marginal cost of P7. 0 (15%) Across the street is another coffee shop called 184 = 97.75 + 1x + 83.09 + 0.85x Hot Cup, offering the same products and services. 184 = 180.94 + 1.85x Hot Cup’s regular brewed coffee is sold at P115. Wondering how Hot Cup can sell at P115, the owner 184 – 180.94 = 1.85x of The Brew went to observe for a week. Below are the observations: 3.16 = 1.85x 1. The selling price of P115 consisted of 85% 1.85 1.85 café services and 15% coffee EV = 1.71 2. For every 10 customers who came to buy brewed coffee, 6 (60%) will be back the Differential Value following day to order the same brewed coffee 17. 25 + DV = 1.71 The owner of The Brew knew well that his new café DV = 1.71 – 17.25 could achieve a re-visit rate of 85%. DV = -15.54 Given: Therefore, Brew is inferior to Hot Cup. Brew = Company A Customer Utility = P 125 Marginal Cost = p 7 Negative = Company A is inferior to Company B Re-visit = 85% Positive = Company A is superior to Company B