Chapter 7&8

Question 1

is a pricing strategy characterized by charging different prices to different
customers is (perhaps) a way to extract more surplus and increase profit.

Answer 1

Price customization

Question 2

is simply charging different prices to different people for the same or similar product
or service.

Answer 2

Price segmentation

Question 3

Examples of price segmentation

Answer 3

*student prices at movie theaters, *senior
prices for coffee at McDonald’s
*people who use coupons
*airlines

Question 4

Price segmentation Pros

Answer 4

*aimed at getting the most profit possible
*optimizes revenue and profits

Question 5

Price segmentation Cons

Answer 5

*price discrimination
*Premium customers may get upset if they are aware
others are getting the same or similar products or services at lower prices.

Question 6

7 Examples of Price Segmentation

Answer 6

1. Channel purchase
2. Time used
3. Time of purchase
4. Location
5. Volume
6. Attribute
7. Service offering

Question 7

For example, online vs. in-store purchase. Customers who purchase online can be offered a lower price because the cost to serve this purchase is lower.

Answer 7

Channel purchase

Question 8

For example, many resorts charge more for their vacation packages depending on the time of year. Frugal travelers will travel to sunny destinations in late March for better deals
while other travelers will pay more to get away from the January deep freeze.

Answer 8

Time used

Question 9

For example, many items are priced higher before the holidays and drop in price after. In the fashion industry, fashionistas will pay a premium to wear the latest styles while those on a budget will wait for the end of season clearances.

Answer 9

Time of purchase

Question 10

For example, theaters and concert venues charge based on how close you are to the
stage.

Answer 10

Location

Question 11

This one is very common, the larger the volume you order, the lower the price per
unit.

Answer 11

Volume

Question 12

For example, first class vs coach or hardwood vs laminate.

Answer 12

Attribute

Question 13

For example, a plane ticket that is non-refundable is usually less expensive than one that is fully refundable

Answer 13

Service offering

Question 14

refers to the manner by which businesses establish the prices of their goods and services offered to other businesses

Answer 14

B2B pricing model

Question 15

When building a pricing strategy, there are three components to consider:

Answer 15

1. pricing model
2. pricing approach
3. psychological pricing tactics

Question 16

The FOUNDATION of a pricing strategy that you will use

Ex:
usage-based pricing
tiered pricing

Answer 16

Pricing model

Question 17

Once you have decided on a pricing model, you need to select a ….

Ex
cost-plus pricing
value-based pricing

Answer 17

Pricing approach

Question 18

Finally, you should consider which psychological you will employ to
fine-tune your price points

Ex:
odd pricing
charm pricing

Answer 18

Pricing tactics

Question 19

When picking a pricing model, you need to consider a few different questions.

Answer 19

1. Are we going to offer one price point or many?
2. Which value metric are we going to use? In other words, what and how are we going to charge for our solution?

Question 20

is easy for customers to understand but leads to lower revenue.

Answer 20

Single price point

Question 21

often the BEST APPROACH,
especially if a company has complex solution.

Answer 21

Multiple price points

Question 22

There are several different value metrics to consider:

Answer 22

• Users
• Active users
• Feature usage
• Activity

Question 23

customers pay more as the number of individuals who can access the
product increases

Answer 23

Users

Question 24

customers pay more as the number of people using the product
increases.
*Keep on using the product

Answer 24

Active users

Question 25

customers pay more as the number of features they use increases, regardless of the number of users

Answer 25

Feature usage

Question 26

customers pay for each activity conducted. For example, email marketing platform users could pay per email sent

Answer 26

Activity

Question 27

B2B Pricing Models:

Answer 27

1. Flat-rate Pricing 2. Tiered pricing 3. Usage-based pricing 4. Per-user pricing

Question 28

means offering one product, with the same set of features, for one price.

Answer 28

Flat-rate Pricing

Question 29

Most companies with tiered pricing models offer 3-6 tiers or packages. The most COMMON MODEL IS LINEAR. The lowest-priced tier has the fewest features, and each subsequent level adds new features for a higher price.

Answer 29

Tiered Pricing

Question 29

Most companies with tiered pricing models offer 3-6 tiers or packages. The most common model is linear. The lowest-priced tier has the fewest features, and each subsequent level adds new features for a higher price. .

Answer 29

Tiered Pricing

Question 30

means the more you use a service, the more you pay.

Answer 30

Usage-based pricing

Question 31

the purchasing company pays for each individual who can access a product or service. The more users, the higher the price.

Answer 31

Per-user pricing

Question 32

B2B pricing approaches

Answer 32

inward-looking outward-looking driven by strategy

Question 33

you develop pricing based on how much a product or service costs you to produce.

Answer 33

Inward-looking

Question 34

price is determined by what your customers are willing to pay given the product value or the current competitive landscape.

Answer 34

Outward-looking

Question 35

you start by considering what the company is trying to achieve, e.g., maximizing market share.

Answer 35

Driven by strategy

Question 36

B2B Approaches

Answer 36

1. Cost-plus pricing 2. Marginal cost pricing 3. Value pricing 4. Product-line enhancement 5. Dynamic or tailored pricing 6. Market penetration 7. Market skimming

Question 37

One of the MOST STRAIGHTFORWARD APPROACHES to pricing. You calculate how much a product or service costs your business to make, add a fixed profit margin, and set that as your price. This approach is very INWARD-LOOKING.

Answer 37

Cost-plus pricing

Question 38

takes a similar approach to cost-plus pricing. The critical difference is that, when calculating costs, you ignore the ‘sunk’ or ‘fixed’ costs that are inherent in the development of the product or service. Like cost-plus pricing, marginal cost pricing is an INWARD-LOOKING APPROACH but a useful starting point.

Answer 38

Marginal cost pricing

Question 39

ignores how much a product costs to make and focuses on a product’s perceived value. Typically, companies doing value pricing are looking to charge a premium for their product.

Answer 39

Value pricing

Question 40

If you are releasing a product comparable to existing products, your pricing options can be limited. If the price of the new product is set too low, you will undermine the existing products. If it is too high, buyers are likely to stick with the status quo. This approach is OUTWARD-LOOKING

Answer 40

Product-line enhancement

Question 41

Each buyers’ willingness to pay is different. In an ideal world, each individual would have to pay the highest price they’re willing to consider for a product. In reality, tailoring pricing to each individual isn’t possible. However, it is possible to tailor pricing to some degree. Some companies do this by setting different prices at different levels depending on a customer’s location or size Ex. prices are set lower in countries that are more price sensitive.

Answer 41

Dynamic/ tailored pricing

Question 42

If you want to maximize your market share, you should set a lower price than competitors. Often, this can mean setting prices at levels that are unsustainable in the long-term.

Answer 42

Market penetration

Question 43

like market penetration, is a pricing approach driven by a specific strategic objective. In this case, the focus is on profitability over market share.

Answer 43

Market skimming

Question 44

Market skimming has two critical steps:

Answer 44

a. The company sets a high introductory price to attract a market segment that wants the product and is less price-sensitive; b. Over time, the company lowers the price to appeal to different segments who are more price-sensitive

Question 45

B2B pricing tactics

Answer 45

1. Anchoring + decoys 2. Charm prices + odd prices 3. Prestige pricing 4. Trial pricing 5. Bundling 6. The Goldilocks effect

Question 46

that tactic assumes that the buyer will purchase, or intends to buy, the more expensive package.

Answer 46

Anchoring

Question 47

you can nudge buyers to select a specific choice by offering a product that is a bad deal by comparison. The decoy’s goal is to make the existing product look more attractive by comparison, increasing willingness to pay.

Answer 47

Decoy pricing

Question 48

the practice of ending a price with a nine. Standard that psychologists believe that our brains are starting to factor it into decisions. Some believe that these are now subconsciously associated with good value, meaning that a price ending in 9 gets an extra boost. Others believe that this is so common that people are now correctly associating $499 prices with a $500 reference point.

Answer 48

Charm pricing

Question 49

uses the same principle as ‘charm pricing,’ except the price ends with a number other than nine. For example, in the example above, we would charge $497. Of course, it has additional benefit of allowing your product to stand out through its novelty. However, in doing so, it could make the buyer more conscious of the price and mitigate the left digit effect.

Answer 49

Odd pricing

Question 50

people intuitively link price and quality. They assume that low price goods are of low quality. Some businesses can take advantage of this perceived link. By charging a high price, they encourage the belief that the product is of high quality.

Answer 50

Prestige pricing

Question 51

Multiple studies have demonstrated the ‘power of free,’ the extent to which a price of zero can drive an increase in purchases.

Answer 51

Trial pricing

Question 52

is a tactic that takes advantage of the power of free/discounts. A company offers its solution for free, or at a reduced price, for a limited time. This tactic gets more customers to try the product than would have at a regular price. And if you’re able to demonstrate how useful the product is during the trial, they’ll be happy to pay a full rate once the trial ends.

Answer 52

Trial pricing

Question 53

Companies offer their customers multiple products or features, some of which may not be required or desired. They often ‘bundle’ these individual components together into one package. This package is likely to have a lower price than if all of its features were purchased individually. However, it may have a higher price than if the buyer purchased all the features it wanted independently. The buyer is happy because they are getting discounts, even if some discounts are on products they don’t want or need.

Answer 53

Bundling

Question 54

When people are presented with multiple options, they tend to select the ‘middle’ option. Or the center-stage effect. If there are three pricing levels, they are more likely to select the middle price. That’s because it is probably a safer choice than the lower price (which may be linked to an inferior quality product) and the high price (which may be a w aste of money).

Answer 54

The Goldilocks effect