Summary Pricing and Revenue Analytics lecture notes, articles, webclips and tutorial readings
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Course
Pricing and Revenue Analytics
Institution
Tilburg University (UVT)
Summary: Pricing And Revenue Analytics at Tilburg University for Marketing Analytics - December 2022.
In this document I summarized all lectures, including the webclips, the compulsory readings and the readings for the tuorials of the course Pricing and Revenue Analytics. It also contains several ...
,Week 1
Lecture
Firms need to make strategical decisions when putting out a new product on the market:
- F.e. Corona Vaccines:
o Strategy 1: price highly, because they’re valuable and profit from fewer
individuals who can afford to pay the high price
o Strategy 2: low price, we want everyone to afford them and stop the
pandemic
- F.e. Gaming: games are free, but make money by advertising and extensions
- WhatsApp: free because they collect data
- ZipCar: customers pay a membership + each time they use a car
Pricing isn’t about fixing a price according to the cost or value of a product, but
about making strategic decisions
There’s a variety of pricing strategies
2 competing firms can have very different pricing strategies
Introduction & examples
Example 1: hospitals & MRI:
- It takes long to get an MRI appointment, hospitals charge more for an early
appointment
- Philips introduced an option to have service contracts: hospitals don’t buy the MRI,
but pay per use
- Beneficial for all parties
o Hospitals: can have more than 1 scanner
o Individuals: will get scans on time
o Philips: have a continuous, stable, revenue stream, instead of one-time big
payments
Example 2: playgrounds: different pricing schemes
- Pay a fee per child, but parents for free
o Make money from fees for children, and consumption of parents (drinks)
- Kids enter for free, parents pay
o Disneyland: adults pay for booking a hotel, kids are for free
Example 3: Netflix: not 1 fixed price, but several pricing options with different features
added
Why is pricing so hard?
Pricing in itself is very complex:
- Promotions: 1 in 5 consumer products is
sold at a reduce price (online it’s even
higher)
- Competitive reaction: you have a product
– you set a price – competitor has the
same product and sets a lower price:
(how) do you react?
- Psychological pricing: effects of 9 or 0.99 pricing (see the paper)
Who is responsible for pricing in a firm?
Pricing isn’t a decision in the area of 1 department, but multiple:
- Sales: conducts customer / account negotiations (especially in B2B they need
authority over the pricing to be able to negotiate)
- Marketing: sets list prices, brand considerations (consider brand & added value of
products)
- Finance: sets payment terms
- Accounting: creates invoices and assigns discounts
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Pricing and revenue analytics - 2022
, In the end nobody is responsible Chief Pricing Officer
- CPO: to avoid that some departments undermine prices
- Pricing is a dispersed decision: lack of good control
- Price should fit overall firm strategy
What factors enter the pricing decision?
Pricing decision = reasoned choice from a set of alternative prices to achieve a certain
objective within a planning period.
Factors entering the pricing decisions: these factors impact the price
Internal factors External factors
Marketing objectives, including: Nature market, including:
- Maximize product profit - Perishable products
- Maximize product line profit - Consumer price elasticity
- Maximize category profit
- Maximize sales / market share
- Improve brand image
Marketing mix strategy (= consistency Competition, including:
between all marketing activities for the - Number of competitors
brand; i.e. high quality-high priced brand) - Substitutability
- Promotional activities
Costs, including: Environment:, including:
- Variable and fixed costs - Economic conditions (recession)
- Experience or learning curve - Government
- Retailers
Pricing is more an ‘art’ than a science
Common pricing ‘myths’ (weblecture)
There’s no ‘right’ price, so we often rely on principles that often aren’t right: price setting
is driven by myths = widely held and unquestioned beliefs that lack scientific basis.
- Due to management misconceptions: decision makers associate actions with
desired outcome, and infer a causal relation without any formal evaluation of
alternative actions
- We should learn what not should be done, because a lot of firms still rely on these
myths, that can result to costly mistakes
- Executives hold on to these weakly held assumptions about pricing that ultimately
are self-defeating
o They do this because underlying these myths is the assumption that any
longstanding practice must have value, otherwise it would disappear. So
just because they persisted over time. But this isn’t true, bad practices
persist for centuries (slavery).
- Solutions: make you aware of these misconceptions, study principles to guide
pricing decisions, research and experimentation with prices
o Managers should experiment with prices and see how customers react, and
regularly change prices. It’s a dynamic process: continuously change
certain aspects about prices and see how customers respond
6 myths:
Myth Truth Key learning
Costs are the basis Pricing has to be based on customer value Strive to understand and create
for pricing customer value as basis for pricing
Small price changes Small price changes have an extremely Fight for pennies: successful pricing
have little impact significant effect on company profitability means getting many small details on
many small transactions right
Customers are Customers are often unaware of prices Segment customers based on their
highly price paid in business markets, customers are needs
sensitive more sensitive to total costs of ownership
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Pricing and revenue analytics - 2022
, than to price
Products are Even commodities can be differentiated Treating products as a commodity is a
difficult to self-fulfilling prophecy
differentiate
High market share Market share and profitability aren’t Strive for leadership in customer
= high profits correlated insight, not leadership in market share
Managing price Managing price includes: improving Managing prices is more complex, but
means changing systems, processes, skills, and also simpler than changing prices and
prices communicate customer value. This can be requires a true organizational
done without changing prices transformation
Myth 1: costs are the basis for pricing
- Origin: before cost accounting and activity-based costing almost no one knew
anything about their real costs, but now it’s a liability. Decision makers don’t
explore alternatives, they just repeat past actions, without attempting to
understand causal relationship, nor attempt to examine if alternative actions
produce superior outcomes
- Truth: pricing has to be based on customer value
- Key learning: strive to understand and create customer value which then serves as
main basis for pricing
- Most commonly used in practice: 80% of firms rely on costs to set prices (f.e. cost
plus pricing, target pricing)
o In retail, they have so many different products that need a price, that they
just take wholesale prices and add a profit margin on top of it
- Based on economic principle of fully efficient markets: it’s used because then
products will be priced at the marginal cost, and we can’t price underneath that,
because otherwise firms go bankrupt
- But, consumer’s Willingness To Pay is unrelated to cost, it depends only on
customer perceptions of value: There’s no relationship between consumer WTP
and actual costs
o See cost-based pricing in lecture 2
- Understanding WTP allows companies to charge prices that by far exceed costs,
while keeping customers satisfied: creating high customer value allows high prices
- Costs provide the lower boundary for prices, but only understanding customer
WTP (total value created for customers) can guide the upper boundary of prices
- Value is subjective: less precise, but it’s the only relevant basis for prices
- Cost-based brings short-term security, but kills profits in the end (value-based is
the only one positively linked to profitability, competition-based also leads to lower
profitability)
Myth 2: small price changes have little impact
- Origin: comes from ignorance: studies show small price changes have a bigger
impact on profitability than similar changes in other marketing elements, but
managers ignore it
- Truth: small price changes have an extremely significant effect on company
profitability
- Key learning: fight for pennies
o Successful pricing means getting many small details on many small
transactions rather than aiming for 1 big improvement in 1 big product
- 2 observations:
o A 1% change in price will increase (decrease) profits by 11% on average;
and a 10% price cut to customers means taking a 50% or more cut in
profits
1% price increase, increases profitability from 5-20%
For companies with low level profitability, the effect is even larger:
1% price increase increased profitability by 28.5%
o Large sales boosts from using 99-pricing: taking 1 cent can lead to many
more sales
- Every reduction in price is directly taken from your profit, in a disproportional way
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Pricing and revenue analytics - 2022
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