This summary is written for the course “Pricing & Revenue Analytics” during the semester Fall-2022 and is part of the master Marketing Analytics. The input for this summary consists of all the course material including lectures, weblectures, articles and tutorials.
Demi van de Pol | Summary | Pricing & Revenue Analytics | TISEM | Tilburg University | Fall-2022
SUMMARY PRICING &
REVENUE ANALYTICS
Demi van de Pol || Master Marketing Analytics || Tilburg University || 2022
1
, Demi van de Pol | Summary | Pricing & Revenue Analytics | TISEM | Tilburg University | Fall-2022
CONTENT
This summary is written for the course “Pricing & Revenue Analytics” during the semester Fall-2022
and is part of the master Marketing Analytics. The input for this summary consists of all the course
material including lectures, weblectures, articles and tutorials.
LECTURE 1
WEBLECTURE 1: Common pricing “myths”
PRICING: GUIDED BY PRINCIPLES OR DRIVEN BY MYTHS?
Managers very often rely on basic principles to determine price. However, not all pricing principles
work as intended (referred to as pricing myths). Thus, pricing setting is often driven by myths which
are widely held and unquestioned beliefs that lack scientific basis.
There are six pricing myths to be distinguish from one another:
1. Costs are the basis for pricing
2. Small price changes have little impact
3. Consumers are highly price sensitive
4. Products are difficult to differentiate
5. High market share is automatically equal to high profits
6. Managing price means changing prices
PRICING MYTH 1: COSTS ARE THE BASIS FOR PRICING
The most important misconception is based on the idea that costs are an important component in
determining the price of a product. However, this is still a commonly used pricing principle in practice
as 80% of the firms relies on costs to set their prices.
Example: cost plus pricing (e.g. wholesale price + 20%), target pricing
This pricing principle is based on the economic principle of fully efficient markets:
→ A firm goes bankrupt if it sells below cost
→ Price products at marginal cost
Advantages Disadvantages
Simple method Not very profitable
(variable) costs are known by firms Ignores brand positioning
Stable prices Ignores competitors’ prices
Perceived ‘fairness’ for customers Allocation of fixed cost not trivial
Easy to justify Expected demand is dependent on the price
It is important to keep in mind that consumers’ willingness to pay is in many cases unrelated to cost.
Consumers’ willingness to pay is more related to the benefits and value consumers attribute to a
specific product.
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, Demi van de Pol | Summary | Pricing & Revenue Analytics | TISEM | Tilburg University | Fall-2022
PRICING MYTH 2: SMALL PRICE CHANGES HAVE LITTLE IMPACT
This misconception is based on the belief that small price changes will have only little impact on the
firm profitability. However, research has shown that even small price reductions can have huge profit
implications (i.e. every reduction in price is directly taken from your profit).
There are two solutions to deal with this misconception:
● Limit price negotiation authority of salesforce and marketers
● Artificially inflate list price to make room for negotiation (cf. reference prices)
PRICING MYTH 3: CONSUMERS ARE HIGHLY PRICE SENSITIVE
This myth is based on the idea that consumers are highly price sensitive. Consumers claim they
choose a product on the most favourable price (i.e. value price most). However, in practice we see
that price is not the biggest driver of purchase decisions. This results in firm price setters
overestimating consumers’ price knowledge and awareness and with that their price sensitivity.
Theoretical findings:
● 50% of the shoppers could not name the price of the item placed in their shopping cart.
● Less than 1 in 2 shoppers was aware the product they purchased was on promotion.
● Small price changes of less than 2% tend to go unnoticed.
● Less than 2% of the shoppers can be labelled as cherry-pickers who ‘hunt’ for the lowest prices.
● Only 30% of the shoppers is truly price sensitive, the remaining 70% base their choice on other
benefits.
Business opportunities related to discharge this misconception are:
→ Customer segmentation
→ Deal signalling
→ Industrial markets value benefits other than price (i.e. price is the least important benefit in these
markets)
PRICING MYTH 4: PRODUCTS ARE DIFFICULT TO DIFFERENTIATE
The fourth myth is based on the idea that (some) products are difficult to differentiate. However,
there is no product that cannot be differentiated (i.e. perfect competition does not exist).
Example: Water can be differentiated by logo, size of the bottle, etc.
PRICING MYTH 5: HIGH MARKET SHARE = HIGH PROFITS
The fifth misconception is based on the idea that if you are able to acquire a high market share that
you automatically have the highest profit. However, market leadership in itself is not worth a cent.
For example in 2008, Apple was on the market for only one year with a small market share in
comparison to the market leader Nokia. Due to the fact that Apple could charge a price premium on
their products, Apple had the second highest profit in the market. This illustrates that a firm should
not focus on maximizing its market share as it will not automatically mean that you have high profits.
A firm should strive for leadership in price premium rather than in market share.
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, Demi van de Pol | Summary | Pricing & Revenue Analytics | TISEM | Tilburg University | Fall-2022
PRICING MYTH 6: MANAGING PRICE MEANS CHANGING PRICES
In managing prices communicating value is more effective than changing prices. There are several
ways to enhance product value without changing prices, for example:
● Emphasize unique features/ingredients
● Add product features
● Emphasize beneficial payment and delivery terms
● Emphasize quality over competing offerings
● Extend product warrantee
● Stress exclusivity
● Improve shopping environment/experience
● Etc.
ARTICLE 1: Hinterhuber (2016). “The six pricing myths that kill
profits”
THE 6 PRICING MYTHS
Pricing is the most important driver of profitability. Pricing is also the area most executives overlook
when implementing initiatives to increase profits. Reason for this is a series of weakly held
assumptions about pricing that ultimately are self-defeating:
1. Costs are the basis for pricing
2. Small price changes have little impact on profits
3. Consumers are highly price sensitive
4. Products are difficult to differentiate
5. High market share automatically leads to high profits
6. Managing price means changing prices
The fundamental problem of misconceptions is that decision makers associate actions with a desired
outcome and infer a causal relationship without attempting to understand whether alternative
actions produce a superior outcome.
These misconceptions produce results, but vastly inferior results than actions guided by scientific
principles. For pricing to act as a driver of superior performance, it has to be guided by scientific
principles as opposed to being driven by myths.
PRICING MYTH 1: COSTS ARE THE BASIS FOR PRICING
Truth: Pricing has to be based on consumer value.
Key learning: Strive to understand and create consumer value as basis for pricing.
● The vast majority of companies still use cost- or competition-based pricing.
● Companies simply charge a margin over the cost of manufacture.
● Research suggests that value-based pricing is the only pricing approach positively linked to
profitability: Cost- or competition-based pricing lead to lower profitability.
● Consumers’ willingness to pay (WTP) is unrelated to (production) costs and depends only on
consumers’ perceptions of value.
● Costs provide the lower boundary for prices, and therefore should be calculated. But only an
understanding of customers’ willingness to pay – that is, an understanding of the total value
created for customers – can provide guidance on the upper boundary of prices.
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