(KMBN MK02) Unit 2: Pricing Analytics

Pricing Analytics

Pricing analytics involves analyzing data to help businesses decide the best prices for their products or services. It’s about using data—like how much people are willing to pay, what competitors charge, and production costs—to set prices that attract customers and boost profits.

Example: Imagine a company selling sports shoes. Using pricing analytics, they study:

• Customer Demand: They see if people would still buy the shoes if they were slightly more expensive or if a discount would make more people buy them.
• Competitor Prices: They check what other brands charge for similar shoes and decide whether to match, lower, or slightly increase their price based on brand value.
• Costs: They consider production costs to ensure that, after covering costs, there’s a decent profit margin.

So, if pricing analytics shows that customers will pay more for shoes with extra comfort features, the company might price those models higher. This way, pricing analytics helps businesses understand how to price their products to attract customers while making a profit.

Pricing Policy

A pricing policy is a set of guidelines a company follows to decide the prices of its products or services. It’s like a plan that helps a business choose prices that match its goals—whether that’s to make high profits, attract lots of customers, or stay competitive in the market.

Example: Suppose a new restaurant opens up and wants to attract customers quickly. They could adopt a low-pricing policy, offering meals at lower prices than competitors. This makes their food more affordable and encourages more people to try the restaurant.

Alternatively, a luxury brand selling high-end watches might have a premium pricing policy. They set higher prices to create an image of exclusivity and quality, appealing to customers who associate higher prices with higher value.

So, a pricing policy helps businesses stay consistent with their pricing goals and build the right image in the minds of customers.

Objectives of Pricing Policy

The objectives of a pricing policy are the specific goals a business aims to achieve through its pricing strategies. Here are some common objectives, explained in simple terms:

• Maximize Profit: The main goal is to set prices that help the business earn as much money as possible. Example: A smartphone company prices its latest model higher than previous models because it believes customers will pay more for the new features.
• Attract Customers: Sometimes, businesses set lower prices to bring in more customers, especially when starting or trying to enter a new market. Example: A new coffee shop opens and offers coffee at half the price of nearby cafes to attract customers quickly.
• Build Market Share: Companies may aim to sell a large volume of products, even at lower prices, to capture more of the market. Example: A fast-food chain lowers prices on popular items to attract more customers from competitors and increase its market share.
• Create Product Perception: Businesses may use pricing to influence how customers perceive their products. Example: A luxury brand sets high prices to create an image of exclusivity and quality, making customers believe the products are premium.

Objectives of Price Analytics

Price analytics helps businesses make informed pricing decisions based on data. The objectives of price analytics include:

• Understand Customer Behavior: Analyzing data to see how customers respond to different prices. Example: A clothing retailer uses sales data to find out that customers buy more during sales events and adjusts future pricing accordingly.
• Optimize Pricing: Using data to find the best prices that maximize revenue while attracting customers. Example: An airline analyzes ticket prices during different seasons and adjusts prices based on demand to fill more seats.
• Monitor Competition: Keeping an eye on competitors’ prices to remain competitive in the market. Example: An online retailer regularly checks competitors’ prices and adjusts their own prices to match or offer better deals.
• Forecast Trends: Predicting future pricing trends based on historical data and market conditions. Example: A software company uses pricing analytics to forecast that demand for its product will increase in the upcoming months and prepares to raise prices slightly.

Estimating Demand

Estimating demand is the process of predicting how much of a product or service customers will want to buy over a certain period. It helps businesses understand what to produce and how to price their products.

• Understanding Past Sales: Businesses look at how much they sold in the past to get an idea of future demand. Example: A toy company reviews its sales data from the previous holiday season to see how many toys were sold. If they sold 1,000 units of a popular toy last year, they might expect to sell a similar amount this year.
• Market Trends: Businesses consider changes in the market, such as new trends, seasonality, or economic conditions. Example: If a new superhero movie is coming out, a toy company might expect a higher demand for toys related to that superhero, so they prepare to produce more.
• Surveys and Feedback: Companies might ask customers about their preferences and intentions to buy. Example: A coffee shop may send out surveys asking customers how often they visit and if they plan to try new menu items. This helps them estimate future demand for those items.
• Competitor Analysis: Looking at what similar businesses are doing can also help estimate demand. Example: If a new café opens nearby and attracts a lot of customers, an existing café might expect to see a dip in its sales and adjust its offerings accordingly.

Example in Action:

Imagine a local bakery that wants to estimate demand for a new chocolate cake:

• Past Sales: They check that they sold about 50 cakes each week last month.
• Market Trends: They notice that chocolate desserts are very popular during the upcoming holiday season.
• Surveys: They ask customers if they would buy more chocolate cake if they had different sizes or flavors, and many say yes.
• Competitors: They see that another bakery in town just started selling chocolate cake and has had a good response.

Based on this information, the bakery estimates that it can sell around 80 chocolate cakes per week during the holiday season, so it decides to bake accordingly.

In short, estimating demand helps businesses make informed decisions about production and sales, ensuring they can meet customer needs without overproducing or underproducing.

Price Elasticity

Price elasticity is a concept that measures how sensitive the demand for a product is to changes in its price. In simpler terms, it helps us understand how much the quantity of a product people want to buy will change if the price goes up or down. 

Price elasticity helps businesses and economists understand consumer behavior. If a company knows that the demand for its product is elastic, it may avoid raising prices too much, fearing a significant drop in sales. Conversely, if demand is inelastic, the company might feel more comfortable increasing prices without losing many customers.

• Elastic Demand: If a small change in price leads to a large change in the quantity demanded, the product is considered to have elastic demand. Example: Imagine a favorite snack that costs $2. If the price rises to $3, many people might choose not to buy it anymore, and sales could drop significantly. Here, the demand is elastic because consumers are sensitive to price changes.
• Inelastic Demand: If a change in price leads to a small change in the quantity demanded, the product has inelastic demand. Example: Think of a necessity like medicine. If a medicine that costs $10 increases to $12, most people still buy it because they need it. Here, the demand is inelastic because people will continue to purchase it even with a price increase.
• Unitary Elastic Demand: This is when the change in price results in a proportional change in demand. Example: If a movie ticket price goes from $10 to $12, and as a result, the number of tickets sold drops from 100 to 83, the demand is unitary elastic. The percentage change in price matches the percentage change in quantity demanded.
• Relatively Elastic Deman: Demand is considered relatively elastic when a small change in price leads to a larger percentage change in the quantity demanded. Consumers are sensitive to price changes for these goods. Example: Luxury items like designer handbags or entertainment options (like movie tickets) often have relatively elastic demand. If the price of a designer handbag increases, many consumers may choose to delay their purchase or look for alternatives.
• Relatively Inelastic Demand: Demand is considered relatively inelastic when a change in price leads to a smaller percentage change in the quantity demanded. Consumers are less sensitive to price changes for these goods. Example: Necessities like salt, basic groceries, or essential medicines typically have relatively inelastic demand. If the price of a life-saving medication rises, most people will still buy it regardless of the price increase because they need it.

In short, price elasticity measures how much demand changes when prices change, helping businesses make better pricing decisions based on consumer sensitivity.

Estimating Linear and Power Demand Curves

Estimating demand curves helps businesses understand how much of a product consumers are willing to buy at different prices. Two common types of demand curves are linear demand curves and power demand curves. Here’s a simple explanation of each:

1. Linear Demand Curves

A linear demand curve shows a straight-line relationship between price and quantity demanded. This means that as the price goes up or down, the quantity demanded changes at a constant rate.

Linear Demand Curves: Straight-line relationship between price and demand..
D = a-bp
D: units of product demanded by customers
p: per-unit price
a and b: adjust the curve to fit the product's price elasticity

2. Power Demand Curves

A power demand curve reflects a non-linear relationship between price and quantity demanded. This means the quantity demanded changes at varying rates as the price changes.

Arc that shows the relationship between price and demand, when
product's price elasticity isn't affected by the product's price
D = apb

D: units of product demanded by customers
p: per-unit price
a and b: adjust the curve to fit the product's price elasticity
b is the additive inverse of price elasticity (ex: b = -2 if elasticity = 2)

In Short, 

• Linear Demand Curves: Show a constant rate of change; demand decreases steadily as price increases.
• Power Demand Curves: Show a varying rate of change; demand decreases at an increasing rate as price increases.

Understanding these curves helps businesses predict how changes in price will affect sales, allowing them to set prices more effectively

Optimize Pricing

Optimize Pricing refers to the strategy of setting prices for products or services in a way that maximizes profits while remaining attractive to customers. The goal is to find the best price that balances what customers are willing to pay and what the company needs to earn.

It works on,

• Understanding Costs: First, a business needs to know how much it costs to produce its product or provide its service. This includes raw materials, labor, and overhead costs.
• Analyzing the Market: Next, the business looks at competitors' prices and what customers in the market are willing to pay. This can involve researching customer preferences, market trends, and competitor pricing strategies.
• Setting the Price: Based on the cost analysis and market research, the business sets a price that ideally covers costs and maximizes profit. This could mean pricing higher if customers perceive the product as high quality or lowering the price to attract more buyers.
• Testing and Adjusting: Finally, businesses often test different prices to see how they affect sales. If sales drop at a certain price, they might adjust it to find a better balance.

Example - Imagine a coffee shop:

• Costs: It costs the shop $1 to make a cup of coffee (beans, labor, overhead).
• Market Research: They find that similar coffee shops sell their coffee for $3 to $5.
• Price Setting: The coffee shop decides to sell their coffee for $4, which covers their costs and allows for profit.
• Testing: After a month, they notice that sales are lower than expected. They decide to run a promotion and temporarily lower the price to $3.50. They see an increase in sales, so they adjust their regular price to $3.75 to encourage more customers while still making a profit.

In short, optimizing pricing is about finding the sweet spot where the price is high enough to cover costs and generate profit, but low enough to attract customers.

Incorporating Complementary Products

Incorporating Complementary Products means adding products or services that go well together, encouraging customers to buy more. This strategy helps increase sales and enhances the overall customer experience.

It works on,

• Identifying Complements: First, a business identifies products that complement each other. These are items that customers often buy together because they enhance each other's use.
• Bundling or Suggesting: The business can either bundle these complementary products together at a discounted price or suggest them during the purchase process. This makes it easier for customers to see the value in buying both.
• Creating Value: By offering complementary products, the business adds value to the customer's purchase, making it more appealing.

Example - Imagine a smartphone store:

• Complementary Products: The store sells smartphones, phone cases, and screen protectors.
• Bundling: They create a package deal where customers can buy a smartphone, a case, and a screen protector together for a lower price than if they bought each item separately. For example, instead of $600 for the phone, $30 for the case, and $20 for the protector, they might offer the bundle for $600 total.
• Suggesting Add-Ons: If a customer is buying just a smartphone, the cashier can suggest, "Would you like to add a case and screen protector to keep your new phone safe?"

In this case, the store encourages customers to buy complementary products, enhancing their purchase experience and increasing overall sales. By incorporating complementary products, businesses can make it easier and more appealing for customers to get everything they need in one place.

Pricing using the Subjective Demand Curve

Pricing using the Subjective Demand Curve refers to setting prices based on how customers perceive the value of a product or service rather than just its actual cost or the prices of similar products. This approach considers customers' individual preferences, emotions, and willingness to pay.

It Works on, 

• Understanding Perceived Value: The first step is to understand how much value customers place on a product. This can be influenced by factors like brand reputation, quality, and personal experience.
• Creating a Demand Curve: A subjective demand curve is a graphical representation showing how much of a product customers are willing to buy at different prices. It reflects their preferences rather than just numbers.
• Setting Prices: Based on the subjective demand curve, a business can set a price that maximizes profits by taking advantage of customers' willingness to pay. If customers perceive high value, the business might price the product higher.

Example - Imagine a luxury perfume brand:

• Perceived Value: Customers view this perfume as a high-status item that enhances their image. They may believe it has superior quality and exclusivity compared to regular perfumes.
• Subjective Demand Curve: The brand conducts research and finds that at a price of $100, customers are willing to buy 500 bottles, but if they increase the price to $150, the demand might drop to 300 bottles. However, if they set the price at $120, they might sell 400 bottles.
• Setting Prices: The brand realizes that many customers perceive the perfume as worth $120. So, they decide to price it at $120, which allows them to sell a significant number of bottles while still taking advantage of customers' perceptions of value.

In this example, the perfume brand uses the subjective demand curve to understand how customers value their product. By setting the price based on perceived value rather than just costs or competitor prices, they can maximize sales and profits. This approach recognizes that pricing is not just about costs but also about how much customers are willing to pay based on their perceptions and desires.

Pricing Multiple Products

Pricing Multiple Products involves setting prices for a range of products offered by a business. This strategy takes into account the relationships between different products, customer preferences, and market competition to maximize sales and profits. There are a few common approaches to pricing multiple products, including product line pricing, bundling, and complementary pricing.

It Works on,

• Product Line Pricing: This involves setting different prices for products within the same category based on their features, quality, or brand. The idea is to create a range of options that cater to different customer needs and budgets.
• Bundling: This strategy combines multiple products into one package at a discounted price. This encourages customers to buy more than one product, increasing overall sales.
• Complementary Pricing: When products are used together, businesses might price them in a way that encourages customers to buy both. This can involve pricing one item lower to boost sales of a complementary product.

Example - Imagine a laptop company:

• Product Line Pricing: The company offers three models of laptops:
• Basic Model: $500 (suitable for everyday tasks)
• Mid-Range Model: $800 (better performance and features)
• High-End Model: $1,200 (advanced features for gamers and professionals)

Here, the different prices cater to various customer needs, from basic users to power users. Customers can choose based on their budget and requirements.

• Bundling: The company decides to offer a bundle deal:
• Bundle: Buy any laptop and get a mouse and laptop bag for an additional $50.
• This encourages customers to buy more items together, providing convenience and perceived value.
• Complementary Pricing: The company also sells software that works well with their laptops:

The laptop comes with a basic operating system included, but the premium version of the software is available for $150.

If a customer buys a high-end laptop, they can get the premium software for $100 (a discount).

In this case, the company effectively uses pricing strategies for multiple products to attract different customers, encourage additional purchases, and maximize overall sales. By offering a range of prices and bundles, they cater to varying customer preferences and needs.

Price Bundling & Nonlinear Pricing

Price Bundling

Price bundling is when a company sells a group of products or services together at a combined price that’s usually cheaper than buying each item separately. Think of it as a "combo deal" where you get more than one item together and save money.

Example: Imagine you’re at a fast-food restaurant, and they offer a meal combo that includes a burger, fries, and a drink. If you bought each item individually, it would cost you more than buying the meal combo. The restaurant bundles these items and gives you a slight discount for buying them together, which encourages you to choose the combo.

Nonlinear Pricing

Nonlinear pricing is a pricing strategy where the cost per unit changes based on how much you buy. In other words, the price isn’t the same for every single unit; it can decrease the more you buy or change in some way depending on quantity.

Example: If you’re buying internet data, a provider might offer 1GB for $10, but if you buy a package of 5GB, it costs $40 (instead of $50). This means each GB becomes cheaper as you buy more. It’s a way to encourage customers to purchase larger quantities by giving them a better deal on the extra units.

Pure Bundling & Mixed Bundling

Pure Bundling

Pure bundling is when a company only sells certain products or services together as a bundle, without giving you the option to buy each item separately. If you want one item in the bundle, you have to get the entire package.

Example: Think about cable TV packages. Many providers only let you buy channels in specific bundles—like a sports package or a family package—and you can’t buy just one channel on its own. If you want any channel in the bundle, you have to take the whole package.

Mixed Bundling

Mixed bundling is when a company gives you the option to buy products or services either as a bundle or separately. You can choose the bundle for a discounted price, or you can buy each item individually if you prefer.

Example: In a software package, you might be able to buy a bundle of Word, Excel, and PowerPoint together at a discounted price. However, if you only want Word, you have the option to buy it individually, though it may cost more per program than the bundled version. This way, you have the choice between the bundle or just what you need.

Determine Optimal Bundling Pricing

To determine the optimal bundling price, companies look for a price that makes the bundle appealing to the most people, so they’re more likely to buy it rather than choosing individual items. The goal is to set a price that maximizes profit by balancing the attractiveness of the bundle with the company’s costs and customer preferences.

How It Works with an Example:

Imagine a company sells two products—let’s say Product A (a movie streaming subscription) and Product B (a music streaming subscription). Individually, the movie subscription costs $12 per month, and the music subscription costs $8 per month.

To figure out an ideal bundling price:

• Estimate Customer Willingness to Pay: The company might find that most customers are willing to pay $10 for movies and $6 for music individually.
• Bundle Price Calculation: By bundling both together, they could offer the package at $15. This price is less than buying both individually ($20), but higher than either product alone, making it attractive to customers interested in both services.
• Optimize for Sales and Profit: At $15, customers who want both services get a discount and feel they’re getting a good deal. Meanwhile, the company might earn more overall from increased bundle sales than if they sold each service individually.

In summary, the optimal bundling price balances being attractive to customers while still generating strong revenue for the company.

Profit Maximizing Strategies Using Nonlinear Pricing Strategies

Nonlinear pricing strategies help companies maximize profits by charging different prices based on how much a customer buys, rather than a single fixed price for everyone. This approach tailors prices to encourage higher spending, attract different types of customers, and make the most out of what people are willing to pay.

Example of Nonlinear Pricing Strategies:

• Quantity Discounts: In this strategy, the more you buy, the cheaper each unit becomes. This encourages customers to buy in bulk, which can boost sales volume and profitability. Example: A grocery store sells one bottle of water for $2. However, if you buy a pack of six bottles, you only pay $10 instead of $12. This way, customers are encouraged to buy more at a time, increasing the store’s overall profit.
• Two-Part Pricing: Here, customers pay a fixed fee to get access, plus an additional cost for the actual amount they consume. This way, companies earn from both the access fee and per-unit pricing. Example: A gym might charge a $30 membership fee each month (fixed fee), plus $5 every time you attend a fitness class (per-use fee). This setup means the gym earns from both regular membership fees and class attendance fees, maximizing profits by charging for both access and usage.
• Versioning (Different Product Tiers): Companies offer multiple versions of a product at different price points, each with varying features or usage limits. This allows customers to pick the version that suits their needs and budget, maximizing revenue across different customer segments. Example: Think of streaming services that have Basic, Standard, and Premium plans. A Basic plan might cost $5 per month with ads, while Premium is $15 per month without ads and allows for HD streaming on multiple devices. Customers willing to pay more for better features will opt for higher tiers, which increases the company’s overall revenue.
• Block Pricing: This is when companies set a lower price per unit for a certain quantity but raise it after that. This structure encourages customers to stay within a certain usage range but allows the company to make more from heavy users. Example: A data plan could give you 5GB of data for $20. If you exceed that, you’re charged $5 per GB for extra data. The lower initial price draws customers in, while extra fees help increase profits when they go over their limit.

By using nonlinear pricing, companies can create more profit by charging people based on usage, needs, and willingness to pay, rather than a single price for everyone. This maximizes profit by attracting a wide range of customers and encouraging higher spending.

Price Skimming & Sales

Price Skimming

Price skimming is when a company sets a high price for a new product initially and then gradually lowers it over time. This approach helps the company make the most profit from early buyers who are willing to pay more to get the product first, like tech enthusiasts or trendsetters. As time goes on and demand from these buyers decreases, the company reduces the price to attract more price-sensitive customers.

Example: Think about a new smartphone launch. When it first comes out, the price is high because it has the latest features, and people who want the newest tech are willing to pay a premium. After a few months, the company drops the price to attract more buyers who were waiting for a more affordable option. Eventually, the price might be lowered again to reach even more customers, ensuring the company earns from both early adopters and budget-conscious buyers.

Sales (Discount Pricing)

Sales, or discount pricing, is when a company temporarily reduces the price of a product to encourage more customers to buy it. This strategy is often used to clear out excess inventory, attract new customers, or boost short-term sales. Sales events create urgency, making customers feel they’re getting a good deal if they buy during the discount period.

Example: Clothing stores often have end-of-season sales. For instance, after winter, a store might mark down winter coats by 50% to clear out remaining stock and make room for spring inventory. Customers looking for a good deal are motivated to buy during the sale, and the store benefits by selling off products that might otherwise go unsold.

In summary, price skimming is about maximizing profit by initially setting high prices, while sales use temporary discounts to boost sales quickly and clear inventory.

Revenue Management

Revenue management is a strategy that businesses use to maximize their income by adjusting prices based on demand, timing, and customer segments. It’s like a balancing act where companies decide the best price to charge for their products or services at different times to make the most money possible.

How It Works: Revenue management involves predicting customer behavior and adjusting prices to make sure that high demand periods yield higher prices, while lower demand periods still attract customers by offering discounts.

Example: Airlines are a classic example of revenue management in action. Let’s say a flight from New York to Los Angeles is scheduled in two months. The airline might start by offering a few seats at a lower price to attract early customers. As the departure date gets closer, and as seats start filling up, the airline raises the ticket prices since demand is higher. On the other hand, if a lot of seats are still available right before the flight, they might offer last-minute discounts to fill them up. This way, the airline maximizes revenue by charging higher prices when demand is strong and offering lower prices when demand is weak.

Another Example: Hotels also use revenue management. They may charge higher prices for rooms during peak travel seasons or special events (like festivals or holidays) because they know demand will be high. However, during off-season periods, hotels often lower prices to attract more guests, even though fewer people are traveling.

In short, revenue management helps businesses make the most money by pricing strategically based on when, how, and why people are buying.

Markdown Pricing and Handling Uncertainty 

Markdown Pricing

Markdown pricing is when a company reduces the price of a product to encourage sales, especially if the product isn’t selling well or if it’s seasonal. The goal is to clear out inventory by making the item more appealing to customers with a discount.

Example: Clothing stores use markdown pricing for out-of-season items. After winter, a store might put winter jackets on sale at 30-50% off to make room for spring clothes. This price drop encourages customers who might not have bought the jacket at full price to purchase it at a discount, helping the store get rid of inventory and make room for new products.

Handling Uncertainty

Handling uncertainty is about preparing for unpredictable changes that could affect business, like shifts in customer demand, economic conditions, or supply chain issues. Businesses use various strategies to stay flexible and reduce risks, so they can respond to these changes without losing revenue.

Example: A grocery store might handle uncertainty by stocking a mix of popular and non-perishable items. They know demand for fresh items like fruits and vegetables can fluctuate, so they also keep canned goods and dry foods that have a longer shelf life. This way, if fewer customers buy fresh produce, the store still has non-perishable items to sell, reducing the risk of waste and loss.

Another way companies handle uncertainty is by offering flexible pricing or discounts if demand drops unexpectedly. For instance, a travel company might offer discounts on flights or hotels during unexpected slow periods to attract more customers and keep revenue steady.

In short, markdown pricing helps businesses move products that aren’t selling well by lowering prices, while handling uncertainty is about preparing for unpredictable situations to minimize risks and keep sales stable.

Unit 1 Marketing Analytic and Market Sizing