Different competitors have different cost structures

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Different competitors have different cost structures, i.e., difference in: Fixed costs Margins Break-even point Product-line pricing Balance pricing over the product line because… Optimize the entire “firm’s” profit, rather than just a single brand’s profit
25 Change in Price E.g., Cut price by 10% Change in Revenue Change in Margin Change in Demand Change in units sold Change in break-even i.e., Profitability Change in “cost structure” ( ours and competitors’ ) - Reduce fixed cost - Reduce variable cost - Etc. Change in competitor’s price Change in competitors’ units sold Long-run positions in industry Considerations in Developing a Pricing Strategy Multiple effects of pricing changes, e.g., a price decrease Change in margin, and therefore breakeven volume Change in demand, i.e., units sold Change in competitors’ strategy Issue: Will the decrease in margin be offset by the increase in units sold?
26 Placebo effect of pricing Puzzle solving Students come into the room. They can buy SoBe drink, watch a video for 10 mts, and then solve puzzles. Group 1: The SoBe drink is sold at regular price ($1.89) Group 2: The Sobe drink is sold at a discount price ($0.89) SoBe 1.89 SoBe 0.89 0 2 4 6 8 10 12 Number of puzzles solved Wine Tasting (Expensive vs. cheap wine) What surprised the researchers, however, was that people who drank the more expensive wine had a larger activation in their medial orbitofrontal cortex. In other words, the subjects were not reporting that the expensive wine was better merely because they figured it ought to be better. Rather, they were actually experiencing more pleasure when they drank a bottle of wine priced at $90, compared with when they drank the same wine from a $10 bottle. NOTE : In both cases, the wine served was identical Source : Shiv et al (2005, Journal of Marketing Research ) Wine tasting People are invited to a wine tasting task. Everyone gets the SAME wine to taste. Group 1: Price $90/ bottle Group 2: Price $10/ bottle While they are tasting, a brain scan in taken
27 Paying more: Localism Consumers with a local identity exhibit a mental association to local traditions, culture and people than to global traditions, culture and people. In addition, localist customers tend to adopt a “sacrifice mindset,” which makes it easier for them to pay more for goods and services irrespective of where they are produced. In other words, localists—because of their sacrifice mindset—are less price sensitive. As a result, they are willing to pay more for a product even when the product’s country of origin is not known to them. Thus, localists would be less price sensitive, say, for products at Wal- Mart no matter where the products are sourced.
28 Local & global identity Compare quantity purchased before and after price increase in a grocery store in China After customers enter the grocery store Group 1: Receives a “local identity” brochure Group 2: Receives a “global” identity brochure Customers sign the brochure to show support for the “movement”

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