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Summary Pricing And Monetization Strategies
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Summary Pricing and monetarization1.1 Note on Marketing strategy
Any business has two functions: Marketing and innovation. The central role of marketing in the
enterprise stems from the fact that marketing is the process via which a firm creates value for its
customer.
Marketing strategy involves:
1. Selecting target market and determining the desired positioning of the product in target
customer’s minds
2. Specifying the plan for the marketing activities to achieve the desired positioning
Marketing form the perspective of the consumer:
1. A way to make products and services conveniently available-> Marketing is about the distribution
of goods and information; it creates customers by linking firms or products to customers;
2. A method to change preference and willingness- to- pay -> Firms would take a long time
between having an idea and actually getting the product to market (development cycle of 7-10
years); the idea that you start with and correctly represent consumer demand at the time might
has to be shifter by the time the products get on the market because consumer’s needs change
Marketing is the new Finance- Hal Varian
- Digitalization of transaction has a consequence -> Getting data from consumers, It allows to say
more about what consumers do before doing transaction
- Getting all these data, makes marketing to become a lot more quantitative as a discipline
- The quants in marketing are going to rise in prominence because of this enormous supply of data
-> Decisions about pricing and other marketing aspects are very much impacted about data
Target marketing selection: Marketing strategy development begins with the consumer: Two key
questions:
1. Which potential buyers should the firm attempt to serve?
2. How much customization should the firm offer? (Mass customization/ Market segment/Market
Niche/ Individuals)
The Marketing mix: 4 p’s (Price, product, promotion, place):
a) Product: The product is not only about the thing itself, but rather about the whole package of
benefits obtaining by the customer. The product is how you give value to a customer
b) Place: Marketing channels. The marketing channels is the set of mechanisms of network via
which a firm goes to market, i.e. is in touch with its customer for a variety of tasks ranging from
demand generation to physical delivery of goods. (Channel design and Channel management)
c) Promotion: Marketing communication. Deciding the appropriate strategy to communicate to the
customers to foster their awareness of the product, knowledge about its features, interest in
purchasing and likelihood to repurchase. Effective marketing requires and integrated
communication plan combining both personal selling efforts and non-personal ones such as
advertising, sales promotion, and public relations.
,Place and promotion reflect to what extent the market and consumers know about your product
d) Pricing: the combination of the 3 c’s determines the target customers’ perception of the value of
the firm’s product in a given competitive context. The perceived value represents the maximum
price which the customer is willingness to pay.
Price is how you capture value from the customer and ultimately the surplus consumers get from you
You can change the price very easily, but changing the products takes a lot more time and the response
of customers to changing products is also very slow.
Pricing strategies:
1. Cost-based pricing (company)- (used a lot)
2. Value based pricing (customer)- Willingness to pay for customers
3. Competitive pricing – There is not much room to charge over the competition, when products
are almost the same
Pricing and sharing Value
When thinking about price. Most companies choose a value between two extremes:
- Lowest price companies are willing to charge to a customer is the Marginal costs (the floor)
- Highest price is consumer’s willingness to pay (the ceiling)
- Price divides this surplus between customers and companies, it is the value the company
generates= Consumer’s WTP- all the value is kept by the company.
- Surplus= WTP-Price
- Margin= Price-cost
1.2 Hoffman, et al (1996), On expectation and monetary
stakes in Ultimatum games
In the ultimatum game, Player 1 makes offer of $X from a total of $M to player2. If player 2
accepts the offer, then player 1 is paid $(M-X) and player 2 is paid X. If player 2 rejects the
offer, each gets zero. Suppose the payoffs and individual rationality of the player are
common knowledge. Then the unique strict sub-game perfect equilibrium of the ultimatum
game is X= $1 is the minimum unit of account, i.e. if M consists of ten one-dollar bills to be
allocated between the two players. However in research the mean offer is far above 1
dollar.
Previous research: 1a is fully random, This result is altered if two changes are made in the
conditions of bargaining (1b): (1) the highest scoring platers of a general knowledge quiz
become plater 1 and (2) plater 1’s are described as seller.
In the discussion of the failure of the perfect equilibrium model to predict ultimatum game
behaviour is often argued that the strongly falsifying results are an artifact of the low stakes
,(M=10). Although subjects, as observed, may reject sum of $1 or $2, who rationally, would
reject $10 or $20? It is all about Fairness, equality and revenge. The predictive hypothesis
for M= $100 are: (1) First movers offers will decrease significantly and (2) the rejection rate
will decrease.
Conclusion: There is no significant difference when the stakes are $10 dollar or $100 dollar.
However, the amounts are significantly decreased when we go from an ambiguous property
right (divide $M) treatment, to one in which the bargaining power is formulated as
buyer/seller exchange, and the seller’s mover position to earned by scoring high in a general
knowledge quiz. Thus, the subject is offering substantially less to the other plater when they
feel that their role as first moves is justifies and legitimate, and this is independent of
whether M is $10 or $100.
Issues in measuring consumer preference
Good measure of preference:
1. Willingness to pay- Indicated to what extent the preference is high or low
2. Trade-offers- products have benefits and costs and companies can express the
product accordingly
3. Price-sensitivity- depends on goods
4. Repeated purchase
5. Risk aversion
6. Brand attitude/ equity
7. Rating/Ranking
8. Market share
9. Talk to sales reps.
Intention to buy- asking too hard question -> by asking 10 question with a confidence
interval of 95%, normally you would get 3 answers wrong- if its more than that, It means
your confident levels are too tight (Overconfidence), and the truth lies outside your
confidence area -> which is bases of stated vs. revealed preference; thus, ask consumers
questions that they can actually answer (this or that)
Trade-offs- advantages of forcing consumers to make choices when more benefits come at
the cost of more money/time invested.
Stated intention- to buy- measures
- Ask a consumer if they intend to buy a product in the following 6 months, you will
get the green curve (definitely yes), but only 11% of the individuals actually bought
the product
, Conjoint analysis
- Giving a trade-offs vs. allowing consumers to have everything adds value to the analysis
- Balancing costs and benefits than stating ideal points is easier for consumers
- Ideal points are generally not feasible
1. Select attribute
- Don’t use too much attribute
- Focus on attributes upon which managerial decision need to be made
- Don’t use subjective attribute and do not use ambiguous level descriptors
2. Select levels for these attributes
- Keep numbers similar
- Do not use highly unrealistic levels
- Don’t use confounded levels
- Use mutually exclusive levels
- Compare apples to apples (don’t compare 10 dollar a month to 80 dollar a year)
3. Create product profiles
4. Collect data
5. Estimate partworhts
6. Derive insight and make predictions
Conjoint in 15 Minutes
Conjoint analysis
= a popular marketing research tool to determine what features a new product should
have and how it should be priced
= a survey-based research technique designed to force customers to make a trade-offs,
thereby revealing their true preference.
- In conjoint, products and services are treated as combinations of features;
- Conjoint derives a mathematical model of each customer’s value system
It aims to do two things well:
- Willingness to pay: measures what individuals are willing to give up to obtain
certain product benefits
- Distribution of willingness to pay: Measure how consumers differ in their
willingness to pay
*Important because you find out how many consumers you would reach at a
certain level of price
* Knowing segment structure and how people have different WTP, it allows you
to position your products away from your competition =>Become a unique
product to a smaller number of people (trade-off between volume and margins
=> But you get stronger margins)
It is mostly done by Design and testing stage:
1. What do customers want?
2. How do we position this product?
3. Which segments should we cater to?
4. Given product design, what will the market share be?
5. How should we allocate the marketing mix?
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