Review Slide for last lecture
Measuring Price Sensitivity: Controlled Conditions
In-Store Purchase Experiments
Most common method is to use two or more retail outlets
that have similar characteristics (experiment and control).
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“+”
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Ability to disentangle price and other promotion
“-”
Can be extremely expensive.
 Competitors’ actions can contaminate results (special
sales promotions, advertising)
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Appropriate for products sold through more controlled
methods (mail-order)
 Inappropriate for products of great seasonality
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Measuring Price Sensitivity: Controlled Conditions
Laboratory Purchase Experiments
These experiments attempt to simulate the real store purchase
experience. Mall intercepts an example of laboratory experiments.
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Very adaptable.
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“+”
Inexpensive.
 High validity
 Control for demographics
“-” Artificial (Heightened consumer awareness)
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Appropriate for products that are at
Inappropriate for products that
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Measuring Price Sensitivity: Controlled Conditions
Difference between laboratory experiment and simulated
experiment
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“+” Conjoint analysis can be conducted very quickly and at a low
cost.
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“-” Validity
Appropriate for determining what familiar attributes to include
(and at what levels to include them at) during the product/service
design process.
 Inappropriate for attributes that are less familiar to the
consumers.
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Conjoint Analysis
Most methods used to calculate consumer preference are
compositional. For example, consumer ratings of attribute
importance represent a compositional approach.
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Conjoint analysis is a decompositional approach to measuring
consumer preferences. Consumers rate a product while evaluating
several product attributes simultaneously.
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Conjoint Analysis
Consumer preference data is collected for several product
configurations.
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Product configurations are presented such that various tradeoffs can be assessed on a monetary basis.
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Data can be reported on an individual or aggregate basis, which
is useful for segmenting a market based on price or other
product attribute.
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Sensitivity analysis can be conducted with the data to assess
the impact that changes in attributes have on price sensitivity.
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Discussion Questions
For each scenario below, which method should be used to measure price
sensitivity?
 You want to determine price sensitivity for an existing brand of
orange juice.
 You are a long distance telephone company trying to determine
what causes price sensitivity and how price sensitive consumers
are in their selection of a long distance telephone service.
 You are a hotel chain trying to determine what features to include
in a room (color TV, free toiletries, etc.).
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You are a laundry detergent maker introducing a flanking brand
and want to see how many sales you will take away from your
flagship brand as well as from competitors' brands. It is
important, however, that competitors not find out about the test.
Otherwise, they will be forewarned of the new brand's
introduction.
Discussion Questions
 For each scenario below, which method should be used to
measure price sensitivity?
 You are the editor of a weekly newspaper and are
considering raising the price of the paper from $.40 to $.50.
 You have developed a new headphone radio with built-in ear
muffs called "Hot Tunes." You want to determine price
sensitivity for the product.
 The marketing managers for Advil Pain Relievers want to
determine the effectiveness of coupons to encourage
purchase.
 A chain of grocery stores is trying to decide which products
to feature in price promotions.
Cost and Cost-Plus Pricing (Chapter 1)
Tactical Pricing Orientations
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Cost-Driven Pricing
Customer-Driven Pricing
Competition-Driven Pricing
Key Terminologies
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Unit contribution is the difference between the price and
the variable cost
Margin
Markup
Margin
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Margin refers to profit in terms of revenue, expressed as a
percent
 Manufacturer’s margin
 Retailer’s margin
$1.50
Manufacturer
Cost of sales: $1
Selling price: $1.50
Unit contribution: $.50
Margin: 33%
$2.00
Retailer
Cost of sales: $1.50
Selling price: $2.00
Unit contribution: $.50
Margin: 25%
Consumer
Markup
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Markup refers to profit in terms of cost, expressed as a
percent
 Manufacturer’s markup
 Retailer’s markup
$1.50
Manufacturer
Cost of sales: $1
Unit contribution: $.50
Markup: 50%
$2.00
Retailer
Cost of sales: $1.50
Unit contribution: $.50
Markup: 33%
Consumer
Conversion Between Markup and Margin?
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1/Markup = 1/Margin -1
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A 25% markup =
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A 20% markup =
% margin
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A 25% margin =
% markup
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A 50% margin =
% markup
% margin
Distinction Between Fixed and Variable
Costs
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Fixed cost is independent of the number of units
sold.
Variable cost is dependent on the number of units
sold.
Ask The Right Questions
Wrong question:
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What prices do we need to cover costs and achieve our
profit objectives?
Right questions:
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What costs can we afford to incur and still earn a profit?
How much sales gain would be required to profit from a
price cut?
How much sales loss would be tolerable to profit from a
price increase?
Problems with Cost-plus pricing
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Cost-plus pricing will lead to over-pricing in a weak
market (Death Spiral).
Example
Mini Case Study: Self-Expedited “Death
Spiral”
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In 2007 Movie Gallery changed the 7-day
rental period to 5-day.
The 7-day option was retained, at an
additional fee.
In the same year Movie Gallery filed for
bankruptcy protection and stocks dropped
below $1.
Year
# Stores
1985
1
1987
5
1992
37
1996
850
1999
950
2003
2000
2005
4700
What Could Have MG Done?
Channel Strategy
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Pricing Strategy
Problems with Cost-plus Pricing
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Cost-plus pricing will also lead to under-pricing in
a strong market.
Next Lecture
 Break-Even Analyses (Chapter 9)