Lecture 1: Introduction

AEM 4160: Strategic PricingProf. Jura Liaukonyte

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Strategic Pricing: AEM 4160

All Course materials can be found here:

http://faculty.cit.cornell.edu/jl2545/teaching.htm

Bundling

Time-Warner Cable NY offers many packages of its services.

Microsoft bundles MS Word and MS Excel into a package MS Office.

Theaters bundle single tickets with seasonal packages.

Why don’t they just offer a smorgasbord of services/products, each at a price, and let you buy the ones you want?

Two-part tariff

"membership discount retailers" such as shopping clubs

cover charge for bars combined with per drink fees

telephones where there is a fee to use the service ('line rental') and also a fee per call.

personal seat licenses in professional sports, in which fans of a team pay an up-front lump sum fee for the right to purchase tickets at face value

Menu of two part tariffs or menu of price-quantity bundles (e.g. cell phone plans) – which is more profitable?

Versioning Turbotax, offers:

TurboTax for US$29.95 and TurboTax Deluxe, which includes additional features

including "more money saving advice" and Internal Revenue Service publications for $39.95.

Crimped or damaged good pricing

Companies with market power occasionally engage in intentional quality reduction for one version of the product. Why?

Price Matching Guarantee

A price-matching policy seems the epitome of cutthroat competition

What could be more competitive than seller’s guarantee of lowest price?

However…

Under the cover of a matching offer, firm can price-discriminate poorly informed buyers.

Several studies, have argued and shown that some sellers use PMGs as a device for facilitating tacit collusion.

Psychological pricing

~ 60% of prices in advertising material end in the digit 9,

30% end in the digit 5,

7% end in the digit 0

the remaining seven digits combined accounted for only ~ 3% of prices.

Why? Many Theories… Consumers subconsciously ignore the least significant digits

rather than do the proper rounding.

Digital Goods Pricing

Marginal cost of production ~= 0

How does it change the traditional pricing landscape?

What is the lifetime value of a customer acquisition?

Freemium pricing of Dropbox

Netflix pricing scandal of 2011

How to price

So many pricing strategies exist!

How to figure out how to segment the individuals?

How to ensure that consumers self select (in terms of menu offered prices) in the most profitable way?

Is one pricing strategy more profitable than another?

Common Mistakes in Pricing

Cost-Plus approach

Charging the same price for everyone

Undercut Competitors’ price

And many more…