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WEEK 1 – LECTURE: INTRODUCTION TO MODERN PRICING STRATEGIES (25/10) ............................................. 3
Hinterhuber, A. (2016). The six pricing myths that kill profits. Business Horizons, 59(1), 71-83. ....................... 3
Web lecture: Pricing Myths (19:17) .................................................................................................................... 5
Lecture Notes ...................................................................................................................................................... 6
1. Introduction and Examples ........................................................................................................................ 6
3. Foundations of Profitable Pricing .............................................................................................................. 7
WEEK 1 – TUTORIAL: MEASURING PRICE SENSITIVITY BY MEANS OF PRICE ELASTICITY (26/10) ...................... 8
Reading: Measuring price sensitivity by means of price elasticity. ..................................................................... 8
Lecture Notes ...................................................................................................................................................... 9
Kim, J-Y., Natter, M., & Spann, M. (2009) Pay what you Want: A New Participative Pricing Mechanism.
Journal of Marketing, 73(1), 44-58. .................................................................................................................. 11
Web lecture: Unique Pricing Approaches (15:20) ............................................................................................. 12
Lecture Notes .................................................................................................................................................... 13
1. Basic Pricing Approaches ......................................................................................................................... 13
2. Participative Pricing Approaches ............................................................................................................. 15
WEEK 2 – TUTORIAL: EXPLORE THE DATASET BY USING R (02/11) ................................................................. 18
Video: R Tutorial (25:56). .................................................................................................................................. 18
Lecture Notes .................................................................................................................................................... 18
Fearnley, N., Currie, G., Flügel, S., Gregersen, F.A., Killi, M., Toner, J., & Wardman, M. (2018). Competition
and substitution between public transport modes. Research in Transportation Economics, 69, 51-58. .......... 21
Lecture Notes .................................................................................................................................................... 22
1. Demand Interdependencies – The Basics ................................................................................................ 22
2. Pricing Substitute Products ...................................................................................................................... 23
3. Pricing Complementary Products ............................................................................................................ 24
WEEK 3 – TUTORIAL: DERIVING THE PRICE ELASTICITY USING REGRESSION ANALYSIS (09/11) ...................... 26
Reading: Deriving the own price elasticity using regression analysis ............................................................... 26
Video: Linear and multiplicative model in R (9:42) ........................................................................................... 27
Lecture Notes .................................................................................................................................................... 27
WEEK 4 – LECTURE: PSYCHOLOGICAL PRICING (14/11) .................................................................................. 30
Hinterhuber, A. (2015). Violations of rational choice principles in pricing decisions. Industrial Marketing
Management, 47, 65-74. .................................................................................................................................. 30
Web clip 1: Rational decisions and prices (11:58)............................................................................................. 35
Web clip 2: Violations of rational choice by consumers, part 1 (23:49)............................................................ 36
Web clip 3: Violations of rational choice by consumers, part 2 (25:28)............................................................ 38
Web clip 4: Violations of rational decision making by managers (11:50)......................................................... 39
WEEK 4 – TUTORIAL: DERIVING CROSS-PRICE ELASTICITIES USING REGRESSION ANALYSIS (16/11) ............... 41
Reading: Deriving cross-price elasticities using regression analysis ................................................................. 41
, Lecture Notes .................................................................................................................................................... 41
WEEK 5 – LECTURE: PRICE PROMOTIONS (22/11) .......................................................................................... 45
Grewal, D., Ailawadi, K.L., Gauri, D., Hall, K., Kopalle, P. & Robertson, J.R. (2011). Innovations in Retail Pricing
and Promotions. Journal of Retailing, 87(1), S43-S52....................................................................................... 45
Lecture Notes .................................................................................................................................................... 47
1. Formats and Classification ....................................................................................................................... 47
2. Measuring Promotion Effectiveness ........................................................................................................ 48
3. Promotion Innovations ............................................................................................................................ 50
WEEK 5 – TUTORIAL: SCAN*PRO MODEL (23/11) .......................................................................................... 51
Web lecture: SCAN*PRO model (30:17) ............................................................................................................ 51
Reading: Measuring promotion effectiveness with the SCAN*PRO model ....................................................... 52
Lecture Notes .................................................................................................................................................... 53
WEEK 6 – LECTURE: PRICE COMPETITION (28/11) ......................................................................................... 55
Heil, O.P., & Helsen, K. (2001). Toward an understanding of price wars: Their nature and how they erupt.
International Journal of Research in Marketing, 18(1-2), 83-98....................................................................... 55
Web Lecture: Competitive Scenarios (10:07) .................................................................................................... 56
Lecture Notes .................................................................................................................................................... 57
1. Competitive Price Reactions .................................................................................................................... 57
2. Price Transparency................................................................................................................................... 59
3. Price Wars ................................................................................................................................................ 59
WEEK 6 – TUTORIAL: MEASURING COMPETITIVE REACTIONS (30/11) ........................................................... 61
Reading: Measuring Competitive Reactions ..................................................................................................... 61
Lecture Notes .................................................................................................................................................... 62
WEEK 7 – LECTURE 1: SPECIAL PRICE SETTINGS (05/12) ................................................................................. 65
Lambrecht, A., Goldfarb, A., Bonatti, A., Ghose, A., Goldstein, D.G., Lewis, R., Rao, A., Sahni, N., & Yao, S.
(2014). How do firms make money selling digital goods online? Marketing Letters, 25, 331-341. .................. 65
Lecture Notes .................................................................................................................................................... 66
1. Retail Price Strategies .............................................................................................................................. 66
2. Pricing Digital Goods ................................................................................................................................ 67
3. Pricing Luxury Goods ............................................................................................................................... 68
,WEEK 1 – LECTURE: INTRODUCTION TO MODERN PRICING STRATEGIES (25/10)
Literature
Hinterhuber, A. (2016). The six pricing myths that kill profits. Business Horizons, 59(1), 71-83.
Web lecture: Pricing Myths (19:17)
Lecture notes.
Hinterhuber, A. (2016). The six pricing myths that kill profits. Business
Horizons, 59(1), 71-83.
Abstract
Pricing is the most important driver of profits. Pricing is also, surprisingly, the area most executives
overlook when implementing initiatives to increase profits. There is a reason: Research presented in
this article suggests that most executives implicitly hold on to a series of weakly held assumptions about
pricing that ultimately are self-defeating. These pricing myths are that (1) costs are the basis for price
setting, (2) small price changes have little impact on profits, (3) customers are highly price sensitive, (4)
products are difficult to differentiate, (5) high market share leads to high profits, and (6) managing price
means changing prices. This research shows how executives can overcome these misconceptions and
thus implement sustainable profit improvements via pricing.
The six pricing myths
Myth 1: Costs are the basis for pricing. Truth: Pricing has to be based on customer value.
Key Learning: Strive to understand and create customer value, which then serves as the main basis for
pricing.
The fundamental principle of pricing is this: There is no relationship between customer willingness to pay
(WTP) and actual company costs. An understanding of WTP allows companies to charge prices that by
far exceed costs but that nonetheless keep customers satisfied. Instead of focusing on costs,
executives should focus on understanding and increasing customer WTP. Costs are not as relevant for
pricing purposes as most managers think. Costs provide the lower boundary for prices, and therefore
should be calculated. But only an understanding of customer WTP – that is, an understanding of the
total value created for customers – can provide guidance on the upper boundary of prices.
Myth 2: Small price changes have little impact. Truth: Small price changes have an extremely significant
effect on company profitability.
Key Learning: Fight for pennies! Successful pricing means getting many small details on many small
transactions right rather than aiming for the one big improvement in one big product or account.
Small changes in price, most executives seem to believe, do little to improve the bottom line. Nothing
could be further from the truth. Current empirical research suggests that a 1% improvement in net
selling prices increases profitability anywhere from 5% to 20% or more.
Myth 3: Customers are highly price sensitive. Truth: Customers are frequently unaware of prices paid. In
business markets, customers are more sensitive to the total costs of ownership than to price.
Key Learning: Segment customers based on their needs, and address the price-sensitive market segment with
a different value proposition than other, benefit-sensitive markets.
When asked directly about their own decision criteria, many customers list price as a very important, if
not the most important, purchase factor. This is the first paradox of price sensitivity: In theory, when
asked, customers are highly price sensitive; in practice, when observed, they are not. The second
paradox of price sensitivity is that mangers think customer price sensitivity is high, whereas in practice
customer price sensitivity is low. Numerous studies document that executives perceive customers as
increasingly price sensitive, deal prone, and willing to switch to lower price offers as soon as the
opportunity arises. In reality, customers are habitual creatures, often exhibiting behavioral patterns
with a generally much lower price sensitivity and price awareness than they themselves like to admit.
Myth 4: Products are difficult to differentiate. Truth: Even commodities can be differentiated.
Key Learning: Treating products as a commodity is a self-fulfilling prophecy.
, Once CEOs, marketing managers, designers, and sales executives start treating a product like a
commodity, the product in fact quickly becomes just that: a commodity. Leading companies recognize
that a commodity is, first of all, a state of mind; there is no product that cannot be differentiated.
The paper mentions by example how Shell differentiated their V-Power, high octane fuel. The key
insight of this case study is that even irrelevant differentiation creates customer value and increases
customer WTP. All differentiation is based on perceptions. If customers perceive a product to be
differentiated, it is differentiated – even though, on a technical basis, the actual differentiation may be
minimal. This case also shows that differentiation is indeed possible and profitable for products that
could be perceived as commodities.
Myth 5: High market share equals high profits. Truth: Market share and profitability are not correlated.
Key Learning: Strive for leadership in customer insight, not leadership in market share.
Why is the pursuit of market share a killer of profits? An aggressive push for market share encourages
discounting, which is detrimental to profitability. Market share goals encourage CEOs to pay too much
attention to competitors, thus distracting them from the only constituency that truly matters:
customers. Rather than being masters of their own destinies, companies that blindly pursue market
share goals risk becoming slaves to the competitors’ whims. As a result, customers are neglected and
profits plunge.
Market share is frequently seen as a proxy for pricing power. This may explain why chief executives
cover market power. Pricing power stems from the ability to create products or services that address
customers’ latent needs by understanding customer needs better than customers themselves understand
their own fleeting desires. Superior abilities to create customer value sometimes translates into
superior market share, but not the other way around. Profits follow leadership in customer insight, not
leadership in market share. Leadership in customer insight enables innovation, which in turn leads to
pricing power.
Myth 6: Managing price means changing prices. Truth: Managing price includes improving systems,
processes, skills, and the ability of the salesforce to communicate customer value. In many cases, this can be
done without changing prices.
Key Learning: Managing price is far more complex, and at the same time simpler, than changing prices and
requires a true organizational transformation.
Managing price is possible without changing prices. Quantifying value to customers and communicating
value to customers both increase customer WTP and reduce the need to discount, thus improving
profitability. Of course, an analysis of customer perceived value will, in many cases, reveal instances
where prices are misaligned with customer value. If the perceived customer value is substantially
greater than current
prices, there is indeed an
opportunity to increase
price without losing
customers.
Why executives cling to
destructive myths
Executives have clung to
these pricing myths
simply because they have
persisted over time.
Summary
The image on the right
highlights the six pricing
myths, their truths, and
their key learnings.
