Smart Pricing by Jagmohan Raju, Z. John Zhang

 2015 by Pearson Education

How to set prices?

• Different Pricing Methods

• Cost-Plus

• Competition-based

• Consumer-Based

Impact of Profit Levels in U.S. 2004

• Price, + 10%

• Variable Cost, +6%

• Sales Quantity, +3%

• Fixed Cost, 2%

Examples of Pricing Methods

	How it works?	Examples	When it works
Pay as you wish	People value goods/services differently - no need to set price (save labor)	Denotation Music download Theaters Gift	-cross-selling (music download->ticket) -low marginal cost -fair-minded customer  *loyalty fans -wide price range -strong relationship between buyer and seller -competitive marketplace
Free	-risk free 0 >> 1 cent -mass audience -cross-selling (no free launch) - hard to beat	Google services (e.g., search, gmail) Wikipedia -crowd sourcing -news	-low marginal cost
Price Wars	Breakeven sales increase in percentage (reduction in marginal cost) -increase sales/market share -decrease variable cost	Color TVs Microwave Oven	-good timing (inventory) -competitors were unprepared -contribution margin -easy substitution
Thank Small	-reframing the money by “per day” -people will eat more/buy more if the offer is a single larger box	0.99 (+5% sales) Larger Package Interest per day/month Supersize Casinos-1 cent machine Rent ratio Virtual Money Fractional ownership/time-sharing Stock units
Pay more	Status effect Reassurance High-price -> high quality	Tesla Membership fee Black card iPhone Hedge fund Special Neighbors Labor market Luxury goods	Be careful about discount (offer more value for the same price instead of discounting)
Automatic Mark down	-slow-motion Dutch auction -price sensitive vs. time sensitive -add time pressure	Red-White-Blue	Limit supply (scarcity) -Fashion product (time value) High retail traffic  -People aware the change
Name you own price	Price discrimination Target pricing	Priceline
Subscribe Fee	-Marketing Profitability (user oriented) vs. account Profitability (product oriented)	Super-market Disney park Costco
Pay by Performance	Win-win (maximize the pie) Lower-risk Focus on value-reduce price competition	Realtor agent Lawyer Medical treatment	Outcome can be verifiable Outcome is valuable to both Who verify the result?