Chapter 16 – Developing Pricing Strategies and Programs Understanding Pricing

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Module 5 Notes

Chapter 16 – Developing Pricing Strategies and Programs

Understanding Pricing

Pricing in the digital world

For some years now, the Internet has been changing the way buyers and sellers interact. On this slide is a short list of how the Internet allows sellers to discriminate between buyers and buyers to discriminate between sellers.

A changing pricing environment

  • Sharing economy

  • Bartering

  • Renting

Pricing practices have changed significantly, thanks in part to a severe recession in 2008–2009, a slow recovery, and rapid technological advances. But the new millennial generation also brings new attitudes and values to consumption. Renting, borrowing, and sharing are valid options to many.
Some say these new behaviors are creating a sharing economy in which consumers share bikes, cars, clothes, couches, apartments, tools, and skills and extracting more value from what they already own.
Bartering, one of the oldest ways of acquiring goods, is making a comeback through transactions estimated to total $12 billion annually in the United States. Trade exchange companies like Florida Barter and Web sites like connect people and businesses seeking win-win solutions. The sector of the new sharing economy that is really exploding is rentals.

Consumer Psychology and Pricing

  • Reference prices

  • Price-quality inferences

  • Price endings – price end in odd number ($299)

  • Price cues – es: sales signs

Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be—not on the marketer’s stated price. Customers may have a lower price threshold, below which prices signal inferior or unacceptable quality, and an upper price threshold, above which prices are prohibitive and the product appears not worth the money. Different people interpret prices in different ways.
Reference Prices Although consumers may have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices. When examining products, however, they often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price.” When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price.
Price-Quality Inferences Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing.
Price Endings Many sellers believe prices should end in an odd number. Customers perceive an item priced at $299 to be in the $200 rather than the $300 range; they tend to process prices “left to right” rather than by rounding.24 Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic.

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