Silkoset R. Pricing. A Guide To Pricing Decisions 2023

Ragnhild Silkoset
Pricing
Ragnhild Silkoset
Pricing
A Guide to Pricing Decisions

ISBN 9783110998337
e-ISBN (PDF) 9783110987102
e-ISBN (EPUB) 9783110987119
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Nationalbibliothek
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© 2023 Walter de Gruyter GmbH, Berlin/Boston
Contents
Preface
Chapter 1 Objectives for the Pricing Strategy
Introduction
Choice of Pricing Strategy
Pricing Strategy Matrix for New Products
Price Skimming Strategy
Penetration Pricing Strategy
Economy Pricing Strategy
Premium Pricing Strategy
Different Types of Objectives with the Pricing Policy
Development of the Company’s Pricing Strategy
Summary
Chapter 2 Value-Based Pricing
Introduction
Value, Price, and Quality
Benefit
Steps in VTC Analysis
Step 1: Determine Customer Segments
Step 2: Map Competing Players
Step 3: Map Differentiation Attributes
Step 4: Quantify Customer Value
Step 5: Calculate Total Economic Value
Mistakes Made in Value-Based Pricing
Practical Example of VTC Analysis
Summary
Attachment: VTC Analysis for the Case “Harmony Cottage
Village”
Chapter 3 Measure Customers’ Reactions to Price Changes
Introduction
Measure Price Sensitivity
Historical Data
Direct Measurements
Experiment
Scenarios
The Van Westendorp Model for Price Calculations
Steps in the Development and Implementation of the Van
Westendorp Model
Step 1: Map Customers’ Price Preferences
Step 2: Analyze Customer Responses
Step 3: Calculate Price Ranges
Conjoint Price Analysis
Steps in the Development and Implementation of Conjoint
Analysis
Step 1: Map Customer Preferences
Step 2: Develop Product Profiles
Step 3: Analyze Customer Compromises
Step 4: Calculate the Economic Effect
Simulate Sensitivity – Utility
Price Sensitivity
Simulate Market Share
Summary
Case: What Should the Price Be on your New Products?
Attachment: Excel for Conjoint Analysis of the Fan Example
Setting Up Excel for Analysis
Attachment: Excel for Conjoint Analysis of the Case
“Harmony Cottage Village”
Step 1: Map Customers’ Preferences
Chapter 4 Different Prices for the Same Products
Introduction
The Buyer
The Location
The Product
The Time
Summary
Chapter 5 Different Prices for the Same Customers
Introduction
Financial Impacts on Customers’ Willingness to Pay
Switching Cost Effect
Difficult Comparison Effect
Expenditure Effect
Shared Cost Effect
Perceptual Influences on Customers’ Willingness to Pay
Price-Quality Effect
Unique Value Effect
Substitute Effect
End-Benefit Effect
Summary
Chapter 6 From Price Competition to Price War!
Introduction
Steps in Dealing with Price Wars
Step 1: Analyze the Situation
Step 2: Minimize the Harmful Effects
Step 3: Evaluate Competitors’ Reactions
Step 4: Calculate the Financial Consequences
Step 5: Assess the Synergy Throughout the Market
Phases and Reactions in a Price War
Ignore
Accommodate
Attack
Defend
The Result of a Price War
How to Win a Price War
Price Wars in the Grocery Industry
Recommendations for Grocery Chains
Summary
Chapter 7 Unfair Price!
Introduction
Steps in Dealing with Unfair Prices
Step 1: Map the Basis of Comparison
Step 2: Map Customers’ Reactions
Step 3: Map your Customers’ Emotions
Step 4: Manage Customer Behavior
Pricing Marketing Guidelines
Guidelines for Price Cooperation
Ethics and Legislation
Summary
Chapter 8 Price Tactics, Sales and Promotions
Introduction
Steps to Determine Tactical Pricing
Step 1: The Goal of the Price Change
Step 2: The Time of the Price Change
Step 3: The Size of the Price Change
Step 4: The Execution of the Price Change
Step 5: Communication of the Price Change
Price Promotions
Price Reduction
Discounts, Codes, and Coupons
Price Bundling
Loss Leader
Loyalty Programs
Adaptation of Price Tactics According to Customer Value
Price Guarantees
Summary
Chapter 9 Pricing Psychology
Introduction
How Much You Save Is More Important Than How Much
You Pay
Number Magic on e-Commerce Sites
Steps in Psychological Pricing
Step 1: Select Which Numbers to Display
Step 2: Choose How the Numbers are to be Presented
Step 3: Reduce the Pain of Paying
Step 4: Use Discounts Correctly
Summary
Chapter 10 E-commerce and Prices in Digital Markets
Introduction
Steps in the Development of Prices in e-Commerce and
Digital Markets
Step 1: Visible Prices
Step 2: Bundling Price Options
Step 3: Highlight the Best Price Option
Step 4: Visual Design of Pricing Options
Step 5: Determine Choice Options and Price Combinations
Step 6: Offers with Subscriptions and Time Limits
Step 7: The Customer only Buys Value
Step 8: Combine Different Pricing Models
Step 9: Map Out Competitors’ Prices
Step 10: Pricing Additional Services
Online Sales and Global Players
Price Robots and Price Comparisons
Summary
Chapter 11 Prices in the Sharing Economy
Introduction
Sharing Economy and Sharing Platforms
Differences between Sharing Economy and Traditional
Economy
Steps to Set Prices in the Sharing Economy
Step 1: Determine Customer Group
Step 3: Mapping Differentiation Attributes
Step 4: Determine Customer Value
Disadvantages with the Sharing Economy
Circular Economy and Price
Summary
Chapter 12 Pricing Calculations
Introduction
Significance of Costs
Calculation of Profitability Analysis
Calculation of Price Elasticity and Cross-Price Elasticity
Summary
References
About the Author
Index
Preface
One of the most difficult decisions a business manager must
make is in pricing their products [1]. If they price too low, they
risk not covering the costs or generating profit. If they price too
high, they can risk potential customers never becoming paying
customers. Important questions in pricing decisions include the
following:
How should I price my products?
How much will sales change if I increase the price?
To whom will the product lose market share if I change the
pricing?
What value do the customers put on the different product
benefits?
Price is one of the most flexible elements in the marketing mix,
and it has a direct effect on the profitability and cost efficiency of
a company. However, even though price has a major impact on
companies’ earnings, it has, until a few years ago, been partly
overlooked in academic research [2]. In marketing, we see that
the predominant focus is on product innovations, brand
building, distribution channels, and communication on social
media. Price is treated as the easiest factor to adjust, but
unfortunately many price changes are based on intuition, gut
feeling, or the marketer’s personal experience.
Strategic plans for a company’s pricing policy require one to
adapt to the competitive situation, the company’s profitability
targets and sales, long-term survival, flexibility, the company’s
management structures, the company’s strategic objectives, and
routines for enforcing price tactics [3].
The purpose of this book on pricing decisions is to present a
basic tool for pricing strategy that can be used by students,
companies, and entrepreneurs in all phases.
The book starts with the objectives for the pricing strategy
for both existing and new products. This is followed by Chapter
2, where I discuss value-based pricing and value-to-customer
(VTC). VTC analysis is a useful tool that puts the various price
alternatives into a system and coordinates them with the
company’s overall strategy. Simple calculations are described.
The analysis provides a good basis for decision-making for the
company’s long-term work with pricing strategy. Chapter 3
focuses on practical tools for mapping the different price points.
This part is especially important for startup companies and
companies that are launching new products in the market. The
topic here is more analytical, and I use well-known analysis
models to map price alternatives. The analysis is explained using
Microsoft Excel (hereafter referred to as “Excel”).
Throughout this book, I recommend dynamic pricing, where
you vary prices based on the customers’ willingness to pay. In
Chapter 4, I describe how one can vary the prices for identical
products or services, while in Chapter 5 I describe how you can
get the same customer to volunteer to pay more for a product.
Competition on price can, however, be so intense that it ends up
in a price war, and Chapter 6 describes how price wars arise,
how one should act along the way, and how to prevent a price
war. To remind one about the realities, Chapter 7 is devoted to
customer reactions to unfair prices. Chapter 8 is devoted to the
proper use of price tactics, in terms of sales and discounts, while
Chapter 9 describes how the presentation of numbers affects
whether products are perceived as good bargains or not. In
Chapters 10 and 11, I have written more specifically about
pricing strategy for e-commerce and the sharing economy. At
the end of the book, chapter 12 includes elementary profitability
analysis.
Chapter 1 Objectives for the Pricing
Strategy
Introduction
Price is an important tool for a company to achieve its strategic
goals. In this chapter, I describe different types of objectives for
pricing policy. In times of crisis, the goal may be survival, while in
good times, the goal may be growth and increased market
share. Another objective may be to calm the competition, while a
more aggressive objective may be to remove or take over a
competitor. At the same time, there are surprisingly few
businesses that are aware of how price strategy can be used to
meet the company’s strategic objectives.
Choice of Pricing Strategy

The most elegantly stated pricing strategy I know is from IKEA.
They state: “When we design the furniture, we start with the price
tag.” This is an important lesson that many other companies
should listen to. Customers value products differently, and the
question is not how much we have to pay to cover the costs of
purchasing or producing the product. IKEA focuses on the costs
that can be defended given the value and willingness to pay the
customer segment has for IKEA’s products.
Value-based pricing is often the recommended pricing
strategy from a professional point of view (see →Figure 1.1). The
aim is to ensure customers are satisfied with the price they pay
for the product, as well as the company being able to utilize the
variation in the market’s willingness to pay. To achieve such a
pricing strategy, the company must identify which attributes of
the products or services create unique value for customers.
Making a distinction between price, value, and quality is
important for handling prices in the correct way. This is because
the price should reflect value. Price is often defined as meaning
that the customer must sacrifice to obtain a product. Value is
defined as the customer’s assessment of the usefulness of a
product based on the perception of what you give and what you
get in return. Quality, in turn, is about the fulfillment of the
product or service attributes. The literature claims that a
purchase is based on value and not quality. You can’t disagree
with that. I discuss this in the second chapter of this book.
Figure 1.1: Different Objectives with the Pricing Strategy.

Cost-based pricing focuses on “fair returns” and hardly at all on
the customers themselves [→4]. You can easily calculate a
multiplicative surcharge on production or purchase cost. This
builds improperly on the principle that the costs of production
are stable and do not change with sales volume. This leads to
underpricing in strong markets and overpricing in weak markets.
The paradox with such a strategy is that the less you sell, the
higher the unit costs are, and the less competitive you will be.
Cost-based pricing thus becomes a more reactive pricing
strategy, where you do not sit in the driver’s seat and lead your
own price development.
With competitor-based pricing, the company sets the price
close to the price of a specific competitor, and preferably a little
below if they are a market challenger [→4]. Such competitor-
based pricing gives the competitor a full deck to play with, and
they can control market access exactly as they wish. Lowering
prices in markets that are not important to them, for example,
forces other companies to earn even less money from these
customers. In markets where the company has a clear and
strong competitive position, customers will still prefer the
competitor even though their prices are higher. Thus, the
competitor also succeeds in these customer segments.
In the case of a customer-based pricing, the goal is to map the
customer’s willingness to pay for the product during the
purchase process. This is a standard strategy for car dealers,
who often operate with a single price on the label for the car, but
who have great freedom to lower the price and add additional
equipment, all based on the information they pick up on how the
customer reacts to the introductory price as well as on their
ability to pay [→5]. Thus, the realized price can deviate a lot from
the actual price. The risk with such a pricing strategy is that the
profitability is calculated based on list prices, while the realized
prices can deviate a lot from this.
Pricing Strategy Matrix for New Products
A pricing strategy matrix looks at the price profiling of the
company at an overall strategic level. The matrix sets guidelines
for the customers’ perception of the company’s products and
quality, which in turn affects the willingness to pay for the
products (see →Figure 1.2). This strategy lays the groundwork
for entrepreneurs and for new product launches. Switching
between the strategies afterward is difficult as the customers
have already established an idea of where the company is in the
price-quality map.
Figure 1.2: Price Strategy Matrix.
Pricing strategy for new products generally follows two paths,

namely “product skimming” and “product penetration” [→6]. A
common mistake many make with innovations and new
products is that they start the pricing planning too late. Price
should be included as a development criterion at the very
beginning of the production process and with the customer’s
perception of value as a starting point.
Price Skimming Strategy

Price skimming is a demanding strategy as the company
positions itself towards a sharp customer segment that requires
extraordinary products and extraordinary performance. Prices in
such a market are in the upper layer and are made possible
through involved and interested customers who have low price
sensitivity to new product launches. One example is customers
who are particularly interested in fashion, and who are willing to
pay high prices to get access to new trends. As the market
matures, these garments reach a more price-sensitive market,
and one switches to a more volume-based strategy. Another
example is technology, where many customers are willing to pay
extra for the latest models. The advantage of such a pricing
strategy is that it is far easier to reduce the price in the future
than it is to increase it.
The advantages of price skimming are that you have a high
profit margin and quickly earn the development and production
costs. Dealers, however, can also earn quick money and are a
driving force in continuing with the strategy. Price skimming
creates an experience of high-quality products.
The disadvantage of price skimming is that the competitors
can reduce their prices and thus take over large parts of the
market. This strategy can succeed only for small-volume sales.
Also, former customers can be frustrated by the high
introductory price. The strategy is not particularly cost-effective
either.
Penetration Pricing Strategy

Penetration pricing follows a contrary strategy, where one prices
the product lower than the economic value to the customer. This
follows from the fact that customers have a high price sensitivity
in the introduction phase, often because the product requires
trialing before it is considered useful. In addition, these are
products that are often exposed to strong competition
immediately after being launched. The production capacity for
such products is high, so that a high sales volume can be
maintained. Penetration pricing is also used in many phases of a
product’s life cycle by reducing the price sharply to meet new
customer segments and their willingness to pay. Note, however,
that a strategy where you reduce the price of products this much
can make it difficult to increase the price again later. Correct and
good information about customers’ price sensitivity is a
prerequisite to succeed with this strategy. We also see that it is
used in the retail industry: for example, Kroger and Costco
implement a penetration pricing strategy for their organic
products.
The advantages of penetration pricing include the fact that it
reduces the threshold for the customer to be able to start using
a product. It decreases and weakens the competition and can be
a tool for achieving market dominance.
The disadvantage of penetration pricing is that it rarely
succeeds when the competitor has a very strong brand that
dominates the market. If prices increase, customers will
disappear. The strategy also has a high potential for triggering a
price war.
Economy Pricing Strategy

With economy pricing, one provides a low-quality product at a
low price. This strategy is often used by companies that sell very
similar products without special advantages, such as generic
products at retailers. The products have little variation in quality,
and the prices are predictable and determined in the market.
These are products that have been on the market for a long
time, and customers are mostly looking for refills when
consumed, or they need some products but are indifferent to
which they choose. These are also products that customers do
not expect to have for a long time.
The advantage of economy pricing is that this is a safe pricing
strategy in turbulent times. Customers want to pay for a
minimum, and that’s what is delivered. This strategy can also
generate higher market shares if you keep the price below the
competitors’ level.
The disadvantage of economy pricing is that small companies
may have difficulty establishing themselves in these markets as
they are unable to maintain profitability. Customers are either
not seen as loyal or they are looking for the lowest possible price
and behave accordingly.
Premium Pricing Strategy

With a premium pricing strategy, the company keeps the prices
artificially high with a view to increasing the quality experience
for the customers. The products have superior quality or
attributes that surpass the quality or attributes of competitors’
products. In such markets the customers have strong faith in the
high price and high-quality statement. Customers are very
quality conscious and have both the willingness and the ability to
pay higher prices. One example of a premium pricing strategy is
luxury cars, such as Mercedes Benz, Audi, and Tesla.
The advantage of premium pricing is that one can compete
fully based on brand and awareness in the market. The brand
stands as a quality carrier, and customers have good knowledge
about the various providers. The strategy leads to higher
profitability.
The disadvantage of premium pricing is the high marketing
costs. In addition, there is a limited customer segment, and one
constantly risks losing customers.
Different Types of Objectives with the
Pricing Policy
These examples of objectives are adapted from Hoch and Rao
[→3]:
Price-profit satisfaction. Here, the company is interested in
keeping prices stable within certain time intervals. This
happens across demand changes with the purpose of
having a predictable income.
Sales maximization and growth. In this case, the prices are
set so that you get the highest possible sales for a product
or product line. Here, the price policy satisfies the objective
only if the company achieves maximum sales.
Make money. In some industries a company wants to use
its positioning to sell products at premium prices to make
quick money.
Slow down competition. With this objective for its pricing
policy, the company wants to prevent new competitors
from entering the market or one wants a predictable
competitive situation to optimize the resource usage.
Market share. This pricing policy can be used to increase
the company’s market share or achieve a leading position
in its market.
Survival. In situations with a large degree of uncertainty,
such as the coronavirus pandemic, many companies find
that the goal of the pricing policy is simply survival. This
means that they must endure a lot of defeats and
obstacles to maintain their core business.
Market penetration. Some companies want to achieve the
highest possible unit sales, often because volume is closely
linked to unit costs. This pricing policy is possible with high
price sensitivity to new products because customers will
respond with increased purchases at reduced prices.
Market skimming. When launching new products, some
companies will choose a market skimming policy. In these
cases, the company estimates the highest price an
innovation can achieve in the market, given the various
competitive advantages the product has compared to
substitutes (replaceable products).
Early cash recovery. With this price policy the company
creates a large and continuing demand for the product
with the purpose of gaining quick earnings. With high
market uncertainty, you can also accept a relatively low
price, so that you have a buffer against future declining
demand.
Satisfactory rate of return. Many companies want a pricing
policy where they set prices that maximize current profits.
They estimate the demand and cost of alternative prices
and select the prices that produce the maximum current
profit, cash flow, or return on investment.
Development of the Company’s Pricing

Strategy
Companies that choose to focus on profit maximization risk
experiencing bottlenecks in their production and delivery. This in
turn can affect sales and delivery. That’s why not all products
can meet all the objectives set. Some products must be sold with
lower margins to achieve market growth, while others will
reduce new competition. One set of products can operate in a
market with declining demand, while others may experience
being replaced with new technology. The most important thing
to remember is that a common understanding of the objective
of the pricing strategy is necessary for the company’s employees
to process pricing decisions in the correct way.
In an empirical study, Liozu and Hinterhuber [→7] analyzed
several hundred industrial companies in over 110 countries and
found that the companies’ price competence had a strong effect
on profitability. They further found that value-based pricing had
a direct and positive effect on the companies’ profitability, while
competitor-based pricing reduced profitability. They tested how
various pricing strategies influenced price competence and
found that companies that implemented a value-based pricing
strategy had a superior effect on their price competence,
followed by a weaker effect from cost-based pricing and the
lowest effect from competitor-based pricing. The price
competence developed, in other words, through the companies’
conscious choice of pricing strategy. For those companies that
see prices as a lose/win situation between the company and its
customers, the research shows that this provides no valuable
expertise on prices in the company. Those who focused on
continuously finding ways to innovate prices obtained a clear
effect on the companies’ competitive advantage [→8, →9].
To assist in the process of creating a clear pricing strategy,
some key questions need to be answered [→6]:
1. What is the company’s strategy?
2. How does the pricing strategy support or hinder the
implementation of the company’s other strategies?
3. How does the pricing strategy affect the performance of
the other departments in the organization?
4. How do the departments collaborate on the pricing
strategy?
5. What effect does the pricing strategy have on the
management and leadership of prices in the company?
6. What impact does the pricing strategy have on the
company’s customers and competitors?
Price policy is about the overall objective and driving rules for
the function price has in the company. Price strategy defines the
objective and can be developed through following these tips
[→6]:
1. Ensure that the objective is clearly formulated,
measurable, and consistent.
2. When there are multiple targets, make priorities or specify
how the objectives are related.
3. Ensure that everyone who makes pricing decisions in the
company, at all levels, understands their responsibility
within the objective.
4. Understand the consequences of the objective for finance
as well as the behavior of the buyers in the market.
5. The more competitors and customers know about the
company’s pricing strategy, the better.
Transparency prevents misunderstandings and gives the right
signals about the long-term intention of the company with its
products and services. This is described in Chapter 6 on price
competition. In addition, it is important that price decisions are
made in consultation with the company’s marketing strategy,
which in turn is rooted in the company’s overall strategy.
Summary
This chapter shows how important it is to coordinate price work
so that it helps a company to achieve its strategic goals. As part
of this, I have discussed a whole range of different types of
objectives a company may have for its pricing policy. I have then
described the main attributes of a value-based, competitive, and
cost-based pricing strategy. With this I have shown a pricing
strategy matrix for brand-new products.
Chapter 2 Value-Based Pricing
Introduction
Value-based pricing is one of the most widely used methods for
setting prices for products and services. At the same time, it can
be demanding and difficult to achieve in practice [→10]. In this
book, I go through, step by step, how value-based pricing is
implemented. In this review I use VTC analysis (value-to-
customer analysis), and I demonstrate a practical example of
how to perform a value-based pricing strategy. A VTC analysis
consists of five steps, namely customers’ perception of value,
competing alternatives, product uniqueness, quantification of
values, and finally drawing this together into the economic value
for customers. VTC analysis ensures a comprehensive
understanding of a company’s pricing strategy.
Value, Price, and Quality

A Purchase Is Always Based on Value and Never on Price! This
statement may seem surprising given that this book is about
price. What I mean is that if a consumer perceives that they must
give more than they get from a transaction, they will stop buying.
Ergo, if the price is higher than the utility of the product, there
will not be any exchange. In other words, the utility describes
whether the value is positive. To obtain sales, one must
therefore either increase the value or reduce the cost to sell the
product. I will go through these important concepts below in
more detail.
Perceived value is the consumer’s overall assessment of the
utility of a product based on the perception of what is received
(benefits) and what is given (costs). This means that value is
individual and personal. It is a compromise based on what you
get versus what you give. For a breakfast juice, perceived value
will consist of the attributes of the product (taste, smell, color)
and conditions that lie outside the product (prestige,
psychological well-being, packaging). The perception of value
can also vary depending on where you are in the buying process
[→11]. At the time of purchase, value can be perceived based on
low prices, sales, or discounts. When preparing to buy, value can
be perceived based on access to information, assessments, and
availability. I discuss this in greater depth in the next section.
Price is defined as what one sacrifices (money, time, risk) to
acquire a product. Price in this context is more than the money
you pay for a product. For example, on Black Friday, some
customers are willing to wait in line for hours to save money on
a product. For others, money is less important, and they are not
willing to sacrifice this time to acquire a product.
Perceived quality is defined as the consumer’s assessments of
a product’s superiority or excellence [→11]. This means that
quality is not an objective characteristic of a product, but the
consumer’s interpretation of the utility value.
We can summarize this discussion in an equation where we
put the concepts in context.
What you get (f unctional and emotional benef it)
V alue =
What you sacrif ice (time,money,risk)
When the equation is greater than 0, the customer experiences a

positive transaction benefit and will be willing to make a
purchase. As previously mentioned, the elements in the equation
will be perceived differently between customer groups,
situations, over time, and between products. We will discuss this
in detail throughout the book.
The matrix in →Table 2.1 gives an overview of what the
customer sacrifices in a purchase [→12]. Customers sacrifice not
only the “monetary amount,” i.e., dollars and cents, they also
sacrifice several more elements in a purchase, such as risk and
time. This is important to remember when we investigate further
customers’ purchase situations.
Table 2.1: Dimensions of Price [→12, →13].
Dimensions of price
Effort Risk
Monetary: Financial Financial
cash personal
credit organizational
countertrade
Nonmonetary: Time Consequences

travel social
shopping psychological
waiting physical
performance functional
Effort
Financial price
– cash Currency, checks, drafts, debit cards
– credit Credit cards, charge accounts, line of credit, accounts payable
– Barter, swap, or trade products
countertrade
Time
– travel time The time it takes to physically get to the store (seller’s location)
– shopping The time it takes a buyer to search for and evaluate a product
time
– waiting time The time it takes a buyer to get checked out of a store, waited on
by a salesperson, waited on in a service firm, or to wait for
ordered products
– Performance The time it takes to use a product or carry out a certain action
time
– Monitoring The time it takes to remember to carry out a certain action
time
Risk
Financial risk
– financial risk The risk that the product will not be worth the financial price
Consequences
– The risk that a poor product choice will harm a consumer’s ego
Psychological
risk
– Physical risk The risk to the buyer’s or others’ safety in using products
– Functional The risk that the product will not perform as expected
risk
– Social risk The risk that a product choice may result in embarrassment
before one’s friends/family/work group
Benefit
To illustrate the importance of focusing on value, look at the
water bottles in →Figure 2.1. If you want to satisfy the functional
benefit, one liter of Dasani water at Walmart for $1.96 can
absolutely be the right decision. However, there are more
benefits than the purely functional one customer seeks to satisfy
when buying a bottle of water.
Figure 2.1: Water in Many Varieties and Price Ranges.

In point form we can describe it this way:
functional benefit – you want to quench your thirst
social benefit – you want to signal class affiliation
affective benefit – the personal feeling of consuming
recognition – you want to satisfy personal circumstances,
for example being a news seeker
hedonistic benefit – you want to achieve a sense of joy
aesthetic benefit – you want to satisfy the need for style and
elegance
situational benefit – satisfaction here and now
holistic benefit – lifestyle and wholeness are in focus
These benefits affect something as simple as one bottle of water
varying in price from free to the tap through a few hundred on
the bottle and for the most expensive water – Svalbardi. The
latter is a 4,000-year-old extra clean water. You get it for $80 for
750 ml. Til is a liter price at $107. However, it is supposed to be
possible to get hold of Svalbardi water on Svalbard for only $40
per bottle.
Steps in VTC Analysis

Value-based pricing appeals to those people who want to work
actively with pricing strategy, yet it is often misunderstood
[→14]. One mistake that is often made with this pricing method
is confusing value and differentiation value. Value-based pricing is
a strategy where a price is set based on what separates
(differentiates) the value of our product from the value of
competing products. This error or misunderstanding means that
many companies either do not utilize their prices optimally or
they give up and choose instead cost-based or competitor-based
pricing. In →Figure 2.2, I illustrate the steps we must use to
conduct a VTC analysis for value-based pricing.
Figure 2.2: Steps in the VTC Analysis.
Step 1: Determine Customer Segments

At the start of the development of a value-based pricing
strategy, you must first decide which customer segment you
want to satisfy. Customer segments can vary based on different
willingness to pay, given the perception of value and situations.
In practice, this means that there are groups of customers who
value the attributes of the product differently. In the VTC
analysis, you must select one customer segment at a time and
run each analysis separately. If you want to serve several
customer segments, you must therefore map a value-based
price for each individual segment. In Chapter 5, I explain in more
detail how one can map out how customers vary with respect to
the attributes they want.
The next step in the VTC analysis is to compare your product
against the best alternative the customer segment can choose.
Try to be as specific as possible. Ask what customers would have
bought if your product had not been on the market. This is the
“next best alternative.” Such a comparison is essential for that
value-based pricing to work. This also means that the method
works best if there are real alternatives in the market. And it
almost always does.
Step 3: Map Differentiation Attributes

Then you need to map out which attributes differentiate your
product from the best alternative. You do this by looking at the
different product attributes and deciding where you are better,
but also where you are worse than the competition. Remember
that these attributes must be visible, clear, and important to the
customer when making their purchasing decisions.
It can be difficult for customers to specify which attributes
are most important to them. They may just feel what is right or
know what they do not want. The work to identify attributes is
thus important and defines the guidelines for what is analyzed
and quantified later. Often the sellers are the closest to having
this knowledge as they are in contact with customers daily.
Sellers can compare across customer segments and product
types and will, in many cases, be better placed to define the
essential attributes. Not least, sellers know what qualities
customers are willing to sacrifice to buy a product or service.
Step 4: Quantify Customer Value

The next point, and perhaps the most difficult, is quantifying the
practical value the customer segment puts on the differentiation
attributes. Remember, this includes only the attributes that are
different (both better and worse). I will go through in detail how
this quantification is done in the conjoint analysis in Chapter 3. It
is also possible to use qualitative customer interviews, although
this is a far more subjective and therefore more unreliable
method.
In the corporate market, examples of such quantification
include:
changes in wage costs and compensation – measured in $
productivity change – measured in time
user training costs – measured in $
maintenance costs – measured in $
duration – measured in $
reliability and downtime – measured in $
installation costs – measured in $
employment costs, severance packages – measured in $
raw material costs – measured in $
production costs – measured in $
access to new markets and customers – measured in $
In the consumer market there is also a whole range of practical
ways to quantify attributes. For example, a Wi-Fi provider can be
assessed based on the following attributes:
purchasing costs for equipment – measured in $
installation costs – measured in $
training costs for use of the equipment – measured in time
reliability and downtime for the Internet – measured in $,
use of 5G as a replacement
subscription costs – measured in $
duration of the equipment – measured in $
speed – measured in time
portability – measured in $, if you can use the Internet in
several places, e.g., a cabin
coverage – measured in $, use of 5G as a replacement
product packages – measured in $, how much the price is
affected by several services from the same supplier
The goal of Step 4 is thus to quantify the attributes that set us
apart from the competing alternatives.

The last step in the VTC analysis is to sum up the numbers and
calculate the total economic value for the customers. It is easy to
take a wrong step and think that this is the market value of the
product. It is not. These calculations define the maximum price
you can get in the market, given a normal competitive situation.
If your competitor has completely irrational prices, or suddenly
dumps their prices, your price calculations must take this into
consideration. However, before you follow and dump the prices
yourself, read Chapter 6 on price wars so you do not fall into a
price war trap.
Mistakes Made in Value-Based Pricing

An entrepreneur or startup company probably often thinks that
their product is fantastic for all types of customers. They often
have difficulties understanding the purpose of prioritizing
specific customer segments. It is important to emphasize that
defining a specific target group does not mean that the other
customer groups are not wanted. However, it is often financially
impossible for a small business to communicate and serve many
customer segments at the same time. Prioritization in terms of
targeting customer groups simply means that you start with the
customers you are most likely to succeed with.
A common mistake that is made with value-based pricing is
that one includes all the functions of a product [→14]. This is
practically impossible as even very a simple product can have
dozens of functions. Just think of cellphones. They vary in terms
of brand, screen size, performance, storage, camera function,
color, technology, accessories, and so on. A proper method is to
value the attributes as being different, visible, distinct, and
important for the customer segment.
A second mistake that is made is to expect the customer’s
perception of value to be the same as that of the manufacturer
[→15]. The producers, market operators, and sellers of a product
have in-depth knowledge of how the product works, and how it
differs from competing products. The customers do not
necessarily have the same knowledge. Their perceived value is
therefore often below the total economic value as they do not
know all the product attributes.
Value-based pricing is not a guarantee of success. It is
important to be aware that the starting point is the price of the
best competing alternative for customers. However, if this
competitor has a completely random pricing strategy, it will also
affect your market price. If they price their products far below
market value, it is difficult to convince customers of the
excellence and value of your products. This means that in some
product categories you have intelligent competitors and can use
value-based pricing. In other product categories, you may have
no choice but to follow a competitor-based pricing strategy.
One challenge with value-based pricing is quantifying
abstract attributes, such as status, brand value, and exclusivity.
This can be coded into the conjoint analysis, but the results must
be used with caution. The more abstract an attribute is, the more
difficult it is to quantify it. Therefore, it is easier to use value-
based pricing in the business market and in service industries
[→9]. A plumber can, for example, calculate how much water
and electricity their heating system reduces customers’ costs.
The more specific the attributes, the easier it is to calculate the
monetary value of the differentiation values.
Practical Example of VTC Analysis

In the following section, I will show a practical example of a VTC
analysis using numbers.
The numbers used are taken from an example of fans that
are exemplified in the next chapter of the book. There you will
see the actual calculation of the value of the attributes of a fan
and how the target group is identified. The fans vary in area of
use (table fan/pedestal fan/ceiling fan), control (manual/remote
control), color (black/white), and price ($39.90/$45.00/$55.00).
In the example here, we use the figures for a traditional
customer segment that is concerned with comfort. Mostly white
fans are relevant for these customers. Because they like to have
the fan both inside and outside on hot days, they prefer pedestal
fans. One of the biggest competitors on the market, Home
Depot, sells beautiful black pedestal fans for $39.99. However,
these do not have a remote control, but Home Depot believes
that the beautiful black color compensates for this. Also, their
fans use less power, estimated at $1 per season.
The VTC analysis for the fans is illustrated graphically in
→Figure 2.3. In the next chapter, we have calculated the value of
the various attributes. This is called the “differentiation value.”
The differentiation value for remote control is $1.08 and for color
$3.56, a total of $4.64. The negative differentiation value
(electricity cost) is $1. Based on the analysis, the economic value
for white pedestal fans for our customers, given the competitor,
is $43.63. A selling price of $42.99 can therefore be a realistic
alternative to signal a good deal.
Figure 2.3: VTC Analysis Graphical Layout.
Summary
This chapter has described value-based pricing and has shown a
very practical example of how to implement value-based pricing.
For this, the VTC analysis tool was used. Within pricing, VTC
analysis stands for “value-to-customer estimation.” VTC analysis
ensures a comprehensive understanding of a company’s pricing
strategy, including how to determine the customer group, map
competitors, identify unique product attributes, and set a
numerical value for these attributes. This is then estimated into a
total economic value to the customer. At the end of the chapter,
I discuss mistakes that are easy to make when starting with
value-based pricing. As an appendix to the chapter, I have added
a case demonstrating VTC analysis in practice.
Attachment: VTC Analysis for the Case

“Harmony Cottage Village”
The example we are going to use is based on the “Harmony
Cottage Village,” where the numbers are calculated in the
conjoint analysis in the next chapter. Let’s say that a competitor,
“Bear Cottage Village,” sells cabins for $225,000. These cabins
are built from log, but they only offer cabins by the water. Their
price thus forms the customers’ best alternative, here called the
“reference value.”
The cabins we offer have the following differentiation
attributes – they are built from log (value $9,340) and you can
get undisturbed land (value $10,899). Our customers can also
get turnkey cabins, but this is the same as the competition, so
there is no differentiation value. In total, our differentiation
values amount to $20.239 (see →Figure 2.4). “Bear Cottage
Village,” however, offers fiber optic Internet and TV connection,
to a value of $1,990. “Harmony Cottage Village” cannot offer
this.
From the figure for analysis for economic value (VTC
analysis), we see that the maximum price we can charge in the
market is $243,249. One strategy for setting this type of price,
especially for expensive products, is to take the net
differentiation value and divide this equally between buyer and
seller. Such a compromise creates goodwill, and the customer
gets the experience that one wants to find common values. In
this case, it amounts to approximately $10,000 per party in the
transaction. The sale price for a log cabin located, undisturbed,
in “Harmony Cottage Village” is therefore set at $233.249.
Figure 2.4: VTC Analysis for “Harmony Cottage Village”.

Chapter 3 Measure Customers’ Reactions to Price
Changes
Introduction
Deciding on how much to raise or lower the price is a difficult decision. If you increase the price
too much, the company’s sales volume is reduced. If you increase the price too little, the company
loses potential income. It is difficult to balance how much a price can change and obtain the
desired reaction pattern among customers. Often, the flexibility and ease in setting prices up and
down prevents companies from working long-term with their pricing strategy. Price adjustments
are often based on gut feeling, intuition, or the marketer’s experience [→16]. And managers often
get away with this practice, as it is difficult to verify what sales would be like if price changes were
made through informed and competent decisions.
Price sensitivity measures how customers react to price changes. This way we can know how
customers will react – before we have made the change itself. In this chapter, I will go through the
most common ways to measure customers’ price sensitivity. The chapter is divided into two main
parts. In the first part, I describe the most common techniques for measuring price reactions. In
part two, I present a detailed review of the Van Westendorp model and conjoint analysis. Both
techniques are widely used in launching new products or for incremental (gradual) product
innovations.
Measure Price Sensitivity

An important price question companies ask themselves is predicting how customers will react to
various price changes. Price sensitivity measures customers’ reactions to price levels and price
changes. If customers have low price sensitivity, the price can change more without reducing
sales, in contrast to customers that have high price sensitivity.
To map customers’ reactions to prices, it is crucial to ask what is called “representative
customers.” A representative customer means that he or she is qualified to answer the questions,
and must meet the following criteria:
The customer must be real, i.e., he or she is an actual buyer of the product.
The characteristics of the customer must represent the customer segment that the person
represents.
The customer must represent the segmented group.
→Figure 3.1 shows an overview of four ways to measure price sensitivity. This discussion draws on
Nagle and Müller’s [→4] in-depth description of these categories. These are historical data,
through direct measurements, experiments, and scenarios. I explain everything in more detail
below. The table further divides into two dimensions. An uncontrolled condition of the
measurements means that it is not possible to know whether there are factors other than our
price change that affect customers’ purchase or their intention to buy. This can, for example, be
competitors’ price changes, changed wage conditions, family situation, or all kinds of external
factors. The second dimension is the controlled condition for the measurements. This means that
you know whether the purchases, or purchase intentions, are made due to the price changes.
Unfortunately, such controlled conditions are tested in an artificial situation, so that a real effect
on customers’ decision-making cannot be guaranteed.
Figure 3.1: Techniques for Measuring Price Sensitivity (adapted from Nagle and Müller [→4]).
Historical Data
Companies hold huge amounts of data from scanning solutions in the cash registers and from
online purchases. These data can be categorized and adapted to get calculations on sales within
product type, product categories, geographical regions, and different time periods, as well as for
different retailers, volume of sales, products sold together, and so on. Big data and techniques
such as web scraping are also used more and more to catch up with the major trends in sales
fluctuations in markets.
Examples of historical data:
historical sales data
panel data
store scanner data
Graphic and visual solutions in Excel can present complicated sales figures in simple ways so that
you get a quick overview of the sales situations. Such overview graphs will, however, never be able
to isolate the specific effects of price variations. The reason is that you can never eliminate
competitors’ measures, customers’ changing preferences, or other market changes. An overview
of the sales will still be better than no use of the data.
In the following Excel figures, I have demonstrated how to make a graphical pivot table of
sales figures (see →Table 3.1 and →Figures 3.2–→3.5), in addition to color marking columns for
simple illustration of sales results (see →Figure 3.6).
Table 3.1: Excel Data for Pivoting – Sample Data.
Order date Region Sales person Product Numbers Cost per unit Total
15.01.2022 Central Jones Blinders 46 8,99 413,54
01.02.2022 Central Smith Blinders 87 15,00 1 305,00
18.02.2022 East coast Johnson Blinders 4 4,99 19,96
07.03.2022 West coast Williams Blinders 7 19,99 139,93
24.03.2022 Central Johnsen Colours 50 4,99 249,50
10.04.2022 Central Andrews Pencils 66 1,99 131,34
27.04.2022 East coast Lopez Penner 96 4,99 479,04
14.05.2022 Central Jones Pencils 53 1,29 68,37
31.05.2022 Central Jones Blinders 80 8,99 719,20
17.06.2022 Central Davis Tables 5 125,00 625,00
04.07.2022 East coast Johnson Colours 62 4,99 309,38
21.07.2022 Central Wilson Colours 55 12,49 686,95
07.08.2022 Central Davis Colours 42 23,95 1 005,90
24.08.2022 West coast Williams Tables 3 275,00 825,00
10.09.2022 Central Jones Pencils 7 1,29 9,03
27.09.2022 West coast Williams Penner 76 1,99 151,24
14.10.2022 West coast Hill Blinders 57 19,99 1 139,43
17.11.2022 Central Johnsen Blinders 11 4,99 54,89
04.12.2022 Central Johnsen Blinders 94 19,99 1 879,06
21.12.2022 Central Andrews Blinders 28 4,99 139,72
06.01.2023 East coast Johnson Pencils 95 1,99 189,05
23.01.2023 Central Davis Blinders 50 19,99 999,50
09.02.2023 Central Johnsen Pencils 36 4,99 179,64
26.02.2023 Central Jones Penner 27 19,99 539,73
15.03.2023 West coast Williams Pencils 56 2,99 167,44
05.05.2023 Central Johnsen Pencils 90 4,99 449,10
22.05.2023 West coast Dahlstrom Pencils 32 1,99 63,68
25.06.2023 Central Wilson Pencils 90 4,99 449,10
12.07.2023 East coast Lopez Blinders 29 1,99 57,71
29.07.2023 East coast Dahlstrom Blinders 81 19,99 1 619,19
15.08.2023 East coast Johnson Pencils 35 4,99 174,65
01.09.2023 Central Smith Tables 2 125,00 250,00
18.09.2023 East coast Johnson Colours 16 15,99 255,84
05.10.2023 Central Wilson Blinders 28 8,99 251,72
22.10.2023 East coast Johnson Penner 64 8,99 575,36
08.11.2023 East coast Dahlstrom Penner 15 19,99 299,85
25.11.2023 Central Davis Colours 96 4,99 479,04
12.12.2023 Central Smith Pencils 67 1,29 86,43
29.12.2023 East coast Dahlstrom Colours 74 15,99 1 183,26
Figure 3.2: Dialog Box for Graphical Pivoting in Excel.
Figure 3.3: Graphical Pivoting Dialog Box in Excel – Select Spreadsheets.

Figure 3.4: Graph of Pivoting in Excel – Total Sales per Seller per Year.
Figure 3.5: Graph of Pivoting in Excel – Total Sales per Geographical Area per Seller.
Figure 3.6: Excel – Color Mark Columns.
The historical data can only provide sales illustrations. To include a change in sales after a change
in price, the data sets must include this kind of information.
Direct Measurements
Direct measurements are based on an assessment of customers’ willingness to pay. A simple way
to determine the price of products and services is through direct questions, i.e., asking a
representative customer what the minimum and maximum prices are that they are willing to pay.
This gives an indication of the range within which prices can vary and is known as the “Van
Westendorp model.” This way of determining price is simple and easy to implement [→6]. The
drawback with the model is that it forces respondents to relate themselves to a specific price,
even though this might not necessarily be right for them. A more indirect way to determine the
price is to ask them what price they think is so reasonable that they would be unsure of the
quality of the product, as well as what price they think would make a good buy. The results are
plotted in a graph and show the range for an acceptable price level. At the end of the chapter,
there is a more practical demonstration of the Van Westendorp model.
Examples of direct measurements:
direct questions (Van Westendorp model)
purchase response survey
in-depth interviews
Experiment
The extensive use of online stores provides opportunities to run price experiments by
manipulating prices for a period and comparing the effects of previous periods. The difficulty here
is that you cannot know whether the changes in sales are due to price changes only, or whether
there are other external factors that also affect the market. To control for the latter, a laboratory
experiment ensures that all external factors are stable. The disadvantage is that the setting is
artificial and therefore does not necessarily reflect true behavior. If one has more than one outlet,
it can be a good technique to change the prices in some of them, while they are held steady in the
others. This allows for a better test of whether the sales variation is due only to the price change
or other external factors.
Examples of experiments:
in-store experiments
laboratory-purchase experiments
Scenarios
In scenarios, different combinations of product alternatives are first created and presented to
selected customers. Customers are then asked to rank the options regarding attractiveness and
purchase probability. The scenario methods provide a good and detailed basis for analyzing
various price effects on decisions. Sequential preferences are a technique where the customer is
asked to choose between pairs of options where prices vary. Selection analysis (trade-off) gives
the respondents a set of product descriptions and price variations, and the respondents must
then either choose between the most important attributes or make a ranking of different
combinations of alternatives. The latter is called “conjoint analysis” and is described in detail later
in the chapter.
Simulated-purchase experiments are artificial shops where selected customers go in and
select products. Thus, they can vary in location, price, selection, and alternative products.
Examples of scenarios:
choice analysis (conjoint analysis)
simulated-purchase experiments
In the next section, I show a practical example of how to run a conjoint analysis. All calculations
are done using an Excel spreadsheet.
The Van Westendorp Model for Price Calculations

The Van Westendorp model was introduced in 1976 by the Dutch economist Peter Van
Westendorp [→17]. In the model, the respondent (customer) is asked to assess the value of
different price points. A prerequisite for the model is thus that respondents can associate
perceived value to price. It is important to be aware that the results may be misleading if this
assumption is violated. On the other hand, the Van Westendorp method is cheap and easy to use,
and it provides a clear graphical visualization that shows the demand in various price ranges.
In the Van Westendorp model, the respondent must consider four factors around the price of
a product or service:
1. too expensive
2. too cheap
3. expensive
4. cheap
The Van Westendorp method is best fitted early in the product development process when the
customer has not yet developed a completely clear idea about exact prices [→18]. One
disadvantage here is that you may end up with very large price intervals, which could make it
difficult to implement the results. In addition, the results can be quite unstable. One way of
overcoming this is for the company to first set the price range to be assessed, and then ask the
respondent to define its acceptable prices within the specific price range. This prevents irrelevant
alternatives.
Steps in the Development and Implementation of the Van

Westendorp Model
The Van Westendorp model is useful due to its ease of use (see →Figure 3.7). It provides insight
into price ranges within which the company can work. The model can, however, be used
advantageously in combination with other techniques to measure price sensitivity. A combination
of sales data and data where one captures reflections on customers’ buying process will provide
useful additional information. An example of the latter is conjoint analysis, which is described in
this chapter.
Figure 3.7: Steps in the Van-Westendorp Model.
Step 1: Map Customers’ Price Preferences

To map customers’ price preferences, the Van Westendorp model uses four simple questions.
These are:
1. At what price is this product too expensive? (too expensive)
2. What price would be so low that you begin to ask questions about the quality of this
product? (too cheap)
3. At what price does this product start to seem expensive? (expensive)
4. At what price do you think this product is starting to become a bargain – good value for
money? (cheap)
As with any data collection, it is important to have representative customers who respond to the
survey. This is explained in more detail elsewhere in the book.
Step 2: Analyze Customer Responses

In the graph in →Figure 3.8, the x-axis represents the price ranges, while the y-axis represents the
number of respondents in percent. As the price increases, the number of respondents that
perceive the product as being too cheap or a good purchase is reduced. At the same time, the
number of people who perceive the product as being too expensive or quite expensive is
increasing. This creates three crossing points that provide important information about ideal price
ranges:
Figure 3.8: From Westendorp Figure.
1. the point of marginally too cheap

2. the point of marginally too expensive
3. optimal price point
The point of marginally too cheap marks the lowest recommended price for the product. In our
graph this is approximately $226. If the price is set lower than this, the buyers will think that the
product is too cheap and therefore of dubious quality. In the opposite case, the point of
marginally expensive marks the highest acceptable price in the market. This is approximately
$280. If the price is set above this limit, customers will not think the product is worth the price
they have to pay. The optimal price point is where expensive and cheap cross each other. In our
graph, this is approximately $250.
Such an interpretation, however, requires there to be a lower limit for questionable quality.
There is a whole range of products where you buy more and more the cheaper the product, for
example small items in bulk. In such cases, the model provides less valuable information. Another
challenge with this type of question is, of course, that the respondents can deliberately answer
that they want an unnatural low price.
Step 3: Calculate Price Ranges

The interval between marginally cheap and marginally expensive is the price range within which
prices can be adjusted. In theory, the cutoff point is the optimal price point, the price at which
customers report the optimal price, i.e., where as many people as possible are satisfied with the
price.
Because the model requires customers to know the value of the product, the Van Westendorp
model is particularly useful in the business market, where customers have in-depth knowledge of
the value of the products and services they purchase. The method is less effective in the
consumer goods market as customers do not necessarily know the value of a product. It is
therefore important to include extensive product information when the survey is conducted on
consumers. This will ensure a better quality of answers.
It is important to be aware that the optimal price point for a product is not necessarily the
optimal price for the company. The Van Westendorp model does not consider the company’s fixed
and variable costs. Calculations of profitability analysis can therefore show a different optimal
price.
The model gives no regard to competitors’ reactions [→18]. The model is therefore most
stable for new products where there are few competitors. Of course, this happens very rarely. It is
therefore recommended that the Van Westendorp model is used in combination with the other
techniques described in this chapter.
Conjoint Price Analysis

The informational value of a conjoint analysis comes from the fact that it analyzes the price
sensitivity of the actual attributes of a product. A conjoint analysis identifies, combines, quantifies,
and calculates the effect of these product attributes. This analysis can be done quite advanced
with specialized statistical analysis tools and various analysis models. However, this does not fit
the target audience of this book. In the appendix to this chapter, I have chosen to show the
procedure and the analysis using Excel. A more detailed explanation of this analysis is included.
Steps in the Development and Implementation of Conjoint

Analysis
I have chosen to divide the conjoint analysis into four steps to demonstrate how to conduct the
analysis with the purpose of identifying the value of various attributes of a product (see →Figure
3.9): Step 1: Identify customer preferences; Step 2: Develop product profiles; Step 3: Analyze
customer compromises; and Step 4: Calculate the economic effect.
Figure 3.9: Steps in the Conjoint Analysis to Map Customers’ Willingness to Pay for Product
Attributes.
A conjoint analysis involves data collection among customers. Therefore, the customer sample
must consist of people interested in buying the product. If not, the results of the analysis have no
value. It is therefore important to be sure that the customers one asks represent real buyers of
the product. Earlier in the book, we emphasized that the selected customers must be qualified to
answer the questions.
Step 1: Map Customer Preferences

All products and services consist of a combination of different attributes. Let’s take something as
basic as a fan.
In →Figure 3.10 we have defined fans as follows:
Figure 3.10: Attributes of a Fan. Picture from →https://www.lasko.com/products/performance-
table-fan-black-d12525/ 07 March 2022.
The main attributes that affect the purchase of a fan are: 1. application of use; 2. control; 3.
color; and 4. price.
All of the attributes have different levels, referred to as “election criteria,” where customers
must make choices. They cannot have more than one of these election criteria at the same
time.
Combinations of the choice criteria constitute different product profiles for fans.
The example shows that all the products consisting of one combination of attributes together
constitute the product profile. In our example, we could have combined all the attributes and all
the levels and created 36 different product variants (3 applications × 2 controls × 2 colors × 3
prices).
If you ask your customers whether they want to have a fan with or without remote control,
most of them will answer with remote control as it makes it easier to use the fan. Customers’
answers, however, are not always based on their real needs or reflect what they would purchase.
Others may respond based on what they assume the signal effect the use entails. This is
particularly evident when you ask about more sensitive attributes, such as exclusive design or
status. In addition, it can be difficult for customers to describe with words what they prefer when
making product choices. Many products are bought unconsciously, e.g., consumables such as
soap and toothpaste, while others have a whole range of different assessment situations where
one carefully weighs from time to time, such as buying a sofa.
The first step in conjoint analysis is thus spending time on carefully identifying what attributes
customers are considering when they buy products in the product category. These attributes can
be objective, as we saw in the example with the fan. But they can also be subjective, such as how
the design of a piece of furniture fits into the buyer’s interior in general. Observation of
purchases, interviews, and focus groups help to uncover the attributes that are important to the
target group.
The attributes included in the analysis must be visible, clear, and important to the customer
when they make their purchasing decisions. The purpose of conjoint analysis is thus to estimate
optimal product variants for the various customer segments so that the probability of purchase
increases.

In the fan example, we see that the combination of product attributes and levels gives 36 different
product variants. It is easy to understand that this many varieties is not appropriate. Fewer
choices will lead to customers getting a “good enough” alternative and being satisfied with their
choice. In addition, some options are unrealistic: for example, those that stand out with the best
quality, highest performance, and lowest price. In other words, we need to identify the most
relevant combination of attributes that fit the customer segment. The method explained here is
based on what is called “fractional-factorial design” in conjoint analysis. This means that some
product combinations have been selected for further analysis.
By setting up the alternatives, we get an overview as shown in →Table 3.2. Each row
(horizontal) represents the product profile, while the columns (vertical) represent specific levels
within their attributes.
Table 3.2: Example of Fan Profiles.

Profile Tablefan Pedestalfan Ceilingfan Manual Remote White Black $39.90 $45.00 $55.00
1 1 0 0 1 0 0 1 1 0 0
2 0 1 0 0 1 0 1 0 0 1
3 1 0 0 1 0 1 0 0 0 1
…
Profile 1 is a manual table fan in the color black for $39.90. Profile 2 is a black pedestal fan with
remote control for $55. Profile 3 is a manual white pedestal fan for $55. It is important to
remember that the products can have only one level of attributes. As an example: a fan is either
black or white.
Before we can analyze the data, there is an important next step, which in technical language is
called “multicollinearity.” This sounds harder than it is. In practice, this means that the data set
must remove “obviousness.” If the fan is white (marked with 1), we know that it is not black. And
when the fan is not white (marked with 0), we know that it is black. In other words, whether the
fan is white or not, we do not need to discuss the color black. This seems trivial, but it is important
when we continue with the statistical analysis. It prevents biased results in our analysis. Therefore,
we correct the data set by removing one of the columns at each of the attribute levels. The new
data sheet looks like →Table 3.3. Note too that we have added one column, which is called
“assessment.” We will need this shortly.
Table 3.3: Excel Spreadsheets Where One Level per Attribute Is Removed.
Profile Table fan Pedestal fan Manual White $39.90 $45.00
1 1 0 1 0 1 0
2 0 1 0 0 0 0
3 1 0 1 1 0 0
…
In our data set, we thus remove the following columns:

ceiling fan was removed from the application attribute
remote control was removed from the control attribute
black was removed from the color attribute
$55 was removed from the price attribute
Note too that we have not lost any information from the data set by removing these columns. This
data set will be used further in the next step in the conjoint analysis.

There are many ways to run a data collection for conjoint analysis. The positive thing is that it is
easy to collect this type of data manually. There are also free online tools, such as Forms in
Microsoft Office 360 and →www.surveymonkey.com. Many online data collection tools with
payment solutions provide conjoint solutions. One of the most common is Qualtrics.com.
When you set up the data collection, you must start with creating a range of different cards
with different product combinations. An example of such a card for product packages 1 and 2 for
our fan example would be the following (profile 1 is a manual table fan in the color black; see
→Figure 3.11). The next step is to decide who should respond to the survey. Here it is very
important not to make mistakes. Those who respond, i.e., the respondents, must be
representative of the target group. Put another way: Those who are asked to respond must be
relevant customers. If you ask your family or friends on Facebook, you can run the risk that their
answers will satisfy you, or that they are never going to buy a fan at all. Then the answers have
little worth. In addition, you must think about whether you want to expand the market, meaning
that you add potential customers you do not serve today.
Figure 3.11: Examples of Product Sheets for Conjoint Analysis.
A common question is how many customers you need to ask. A rule of thumb is that you should
have a minimum of 10 customers for each of the attributes you use in the product profiles. In the
fan example, we have four attributes (type, color, control and price). This will be 4 × 10 = 40
respondents. From a statistical standpoint, it is recommended to have at least 200 respondents. In
practice, this can be difficult for many small businesses, but remember that the fewer the
respondents, the more unstable and inaccurate the statistical results. This means that if you have
few respondents, it increases the chance of the statistical results giving wrong recommendations.
After the respondents have been identified, the next step is to run the data collection. There are
several ways to do this. One can ask respondents to put cards in rank order, where the most
attractive combination is added at the top, etc. The order is noted by the person that carries out
the survey, and the ranking is added to the data sheet in Excel. Another way is to ask respondents
to give a score on how attractive they think the option is. Here you can select a scale, for example
from 1 to 5, where 1 is very unattractive, 2 is unattractive, 3 is neutral, 4 is attractive, and 5 is very
attractive. One can also ask them to specify the probability in percent of them wanting to buy the
product on the card. For the analysis that is used in this book, it is important that respondents
select their choice from one scale, which will give three or more alternative answers. This is called
a “continuous variable.” I will return to this in the analysis section.
To obtain additional knowledge about who your customers are, is it also expedient and wise to
gather more data about them. In this way, you can later identify who the most attractive
customers are. Examples include age, gender, income, interests, and so on. This section is,
however, outside the scope of this book but is well described in many method books in economics
and administrative sciences [→19]. Conjoint analysis can be performed with specially developed
analysis tools, with standard statistical tools, such as SPSS, R or SAS, JMP, or Excel, as shown in this
book.

This way of conducting conjoint analysis gives us the opportunity to estimate the effect of
different combinations of levels on attributes.
To calculate the relative importance of the attributes in the fan example we use the number
analysis from the previous step in the following way. “Utility” here is a measure of change in
customer ranking.
The utility numbers in the equation correspond to what we call “unstandard beta coefficients”
from the regression analysis (see the appendix for the Excel calculations). The equation shows
that the price is the most important attribute when customers are considering a fan (37 percent).
Then comes the color (33 percent), followed by the type of fan (27 percent). The function of the
fan, i.e., whether it is manual or has a remote control, has little effect on the choice (9 percent).
Application of use Table Pedestal Ceiling 1.3 2.0 0 2.0 – 0 = 2.0 2.0/7.4 x 100 = 27%
Control Manual Remote –0.7 0 –0.7 – 0 = – 0.7 0.71/7.4 x 100 = 9%
Color White Black 2.0 0 2.0 – 0 = 2.0 2.0/7.4 x 100 = 33%
Price $39.90 $45.00 $55.00 2.71.70 2.7 – 0 = 2.7 2.7/7.4 x 100 = 37%
Benefit in total: 2.0 + 0.71 + 2.0 + 2.7 = 7.4
1We use absolute values to calculate the ratio of benefit in total.
Formula for the Importance of the Attributes

It is often best to report such numbers through illustrations. In →Figure 3.12 we illustrate the
importance of the attributes and in →Figure 3.13 the importance of the levels of the attributes.
Figure 3.12: Illustration of the Importance of the Attributes of the Fan.
Figure 3.13: Illustration of the Importance of the Levels of the Attributes of the Fan.
We already have a lot of information about which attributes the customer prefers in their choices.
The next thing we can do is calculate the optimal fan! We do this by putting the numbers into an
equation. b0 is the constant term from the analysis and describes the attractiveness of the fans
before considering the four aforementioned attributes. bi is the regression coefficients. Xi is the
attributes.
Choice = b0 + b1 X1 + b2 X2 + b3 X3 + b4 X4
Option = b0 + b1(f an type) + b2(f unction) + b3(color) + b4(price)
Bestchoice =1. 7+2 (pedestalfan) +0 (remotecontrol)
+2 (white) +2. 7 ($39. 90) =8. 4
Worstchoice =1. 7+0 (ceilingfan) + (-0. 7) (manual)
+0 (black) +0 ($55) =1
The most preferred fan is a white pedestal fan with remote control at £39.90. This gets a utility
score of 8.4. The worst combination of attributes is a black, manual ceiling fan for $55. This gets a
utility score of 1.
Simulate Sensitivity – Utility
We can also simulate sensitivity analysis. The sensitivity analysis tells us how much we can
improve (or worsen) the preferences of a product when we change one attribute while the other
attributes are kept stable. Remember that we do not consider the competitors’ reactions here.
Let us say that we want to simulate changes on the table fan, which has a utility score of 1.3.
When we choose the color white, the utility score is 3.3 (1.3 + 2.0), compared to the utility score for
the color black of 1.3 (1.3 + 0). When we change to the price of $39.90 the new score is 4.0 (1.3 +
2.7). For a price of $45, the utility score is 3 (1.3 + 1.7), while for a price of $55, the utility score is
1.3 (1.3 + 0).
This many numbers are better explained in a graphic illustration (see →Figure 3.14).
Figure 3.14: Simulation of Sensitivity for Table Fan.
Price Sensitivity
We can calculate the price sensitivity of each of the attributes based on the numbers we have. We
do this by first estimating the utility intervals. We start this by testing the value of fan color.
The utility interval for the fan color can be estimated in the following way:
1. the utility interval for price is 1.7 (1.7 – 0 = 1.7)
2. the price change is $5 ($50 – $45 = $5)
3. each price range is worth $2.94 ($5/1.7 = $2.94)
4. the utility interval for color is 2.0 (2.0 – 0 = 2.0)
5. willingness to pay for color is $5.88 ($2.94 × 2 = $5.85)
Based on the calculations, we find that customers have $5.85 more in terms of willingness to pay
for a fan of the color white than the color black.
The relative value calculates the willingness to pay when one also considers the other two
attributes, fan type and function.
The relative utility interval for the fan color can be estimated in the following way:
1. relative utility interval in total is 3.3 (2 + (−0.7) + 2 = 3.3)
2. relative utility interval color is 0.6 (2/3.3 = 0.6)
3. relative willingness to pay color $3.56 (0.6 × 5.88 = 3.56)
The relative willingness to pay for color is $3.56.
We can do the same calculation for the fan function. We first create the equation with the
values for the sake of overview. And then we choose the first price range to also show that
example.
The relative utility interval for the fan function can be estimated in the following way:
1. the useful range for price is 1 (2.7 – 1.7 = 1)
2. the price change is $5.1 ($40 – $39.90 = $5.1)
3. each price range is worth $5.1 ($5.1/1 = $5.1)
4. the utility interval for function is −0.7 (−0.7 – 0 = −0.7)
5. fan function is worth $–3.57 ($5.1 × −0.7 = –3.57)
6. relative useful range in total is 3.3 (2 + −0.7 + 2 = 3.3)
7. relative utility interval function is −0.2 (−0.7/3.3 = −0.2)
8. relative willingness to pay for fan function is $–1.08 (−0.2 × 51 = −1.08)
Based on the calculations, we find that for the attribute of a manual fan, there is $3.57 less
willingness to pay compared to a fan with remote control. Relatively speaking, in relation to the
other attributes, customers have a $1.08 less willingness to pay for a manual fan.
WARNING! This type of price sensitivity analysis can be completely misleading. The analysis
assumes linear relationships on price, which is not necessarily the case. The analysis assumes
good-quality data. Also, the actual setup of the data collection can lead to an artificial reaction to
price. Those who respond to the ranking of the alternatives may be concerned with price based
on how the survey was conducted. This does not necessarily reflect price awareness in a natural
setting. In addition, the analysis estimates the attributes individually. However, they can be
multiplicative. For example, that the willingness to pay increases for a well-known brand, while it is
lower for an unknown brand.
Simulate Market Share

Simulation of market share is limited to the data that are investigated in the analysis. If you have
forgotten important attributes or do not have the right attribute combinations, the analysis will be
weakened.
Simulation of market share is based on the work of Daniel McFadden, who received the Nobel
Memorial Prize in Economics in →2000 for the development of a utility formula. It has the
following elements:
Exp (c×UA )
Market Share =
Exp (c×UA ) + (c×UB ) + (c×UC )
UA = the probability of choosing product A, i.e., the utility estimate

C = a confidence parameter, i.e., how confident one is on the utility estimate
Exp = The exponential function. In Excel the formula is “=EXP(Cell reference)”
The formula shows four randomly selected examples of different ways of assembling a fan
based on our four attributes (→Table 3.4):
Table 3.4: Four Selected Fan Models.
Product Fan type Function (benefit) Color (benefit) Price (benefit) Sum benefit Market share
A Table fan (1.3) Manual (−0.7) White (2.0) $39.90 (2.7) 5.3 37 %
B Table fan (1.3) Manual (−0.7) Black (0) $45.00 (1.7) 2.3 2%
C Pedestrian fan (2.0) Remote (0) White (2.0) $45.00 (1.7) 5.7 56 %
D Pedestrian fan (2.0) Manual (−0.7) White (2.0) $55.00 (0) 3.3 5%
We put the utility values into the formula and get the following values:
Market Share Exp (5.5) 200
= = = 0.37 = 37%
Exp ( (5.3)+(2.3)+(5.7)+ ( 3.3 ) ) 536
Product A
We see that the market share for product A is 37 percent. By doing this for all models, we can
estimate the distribution in market share. These are shown in →Figure 3.15. The market share for
product B is 2 percent, for product C it is 56 percent, and it is 5 percent for product D.
The analysis is in accordance with the findings we have obtained previously. We saw that the
most attractive were white pedestal fans with remote control for $39.90 (alternative C). Because
we are not willing to sell them at that price, we have here produced a simulation with a price of
$45. This has given a market share of 56 percent when compared to the other three product
alternatives.
Figure 3.15: Illustration of Simulated Market Share.
Summary
In this chapter, I have gone through the most common ways to measure customers’ price
sensitivity. The methods distinguish between prices tested in more natural situations and prices
tested under more controlled conditions. Both methods have their different strengths and
weaknesses. In addition, a distinction is made between measuring actual purchases and
customers’ intentions to buy. The chapter then described two widely used techniques for
measuring price reactions, namely the Van Westendorp model and conjoint analysis. Both
techniques are used in launching new products or improving product innovations. It is important
to evaluate the advantages, disadvantages, weaknesses, and strengths of the models before they
are used.
Case: What Should the Price Be on your New Products?

Anders M. Mamen, Lecturer, Kristiania University College
Bob works as a sales and marketing manager in a small microbrewery he has started together
with some friends. Now he wonders what one 0.5-liter can of their new lager beer should cost. He
has studied economics and marketing at a business school and knows that price has an impact on
profitability. If the price is too high, he risks customers not buying. But if the price is too low, he
ends up selling a lot of units at a low price, with poor profitability as a result. In recent months,
Bob has been working on a new product. He gets positive feedback from friends, acquaintances,
and potential customers. This is something they are interested in buying. When he asks what they
are willing to pay for the product, he receives varying answers. The big question is: What should a
can with 0.5 liters of lager beer from our microbrewery cost?
One thing is to look at competitors. There are many who sell beer, so he knows that they must
deal with the price of competing breweries. But the new product has some attributes that
competitors do not have, and he knows that they can be well paid for locally produced beer. The
cost of sales and fees provides one indication of the minimum price, but since this is a new
product that customers say they want, Bob thinks that he has a unique product that customers
are willing to pay for.
How can Bob, with relatively simple means, find out what is the right price for the beer?
There are many different methods for finding what a product should cost. Some are good and
others are less good. Here are some tips on what Bob can do.
First, he must talk to customers who buy beer and know what microbrews are. So he must ask
in the right season. Customers may have a different willingness to pay on nice summer days than
on a cold day in November.
Second, he should find a way to ask for what is reasonable. It is easy to get an answer that
leads to the wrong conclusion. If you ask On a scale of one to five, where one is not very probable
and five is extremely likely, how likely is it that you want to buy this Pilsen in the grocery store at $4.19?,
my experience is that the answers will not make you much wiser.
It’s a tool for measuring price sensitivity. The method is known as the Van Westendorp model.
What should you do if you want to use this method? First, you need to present the product in
a way that customers understand. My experience from working with innovation processes is that
it can be difficult to introduce new products in one simple way for customers. It is often the case
that technical explanations and specifications are not important for prospective customers. What
customers want to know is: What benefits do I get by using this product? My experience is that the
best way to introduce a new product is to create one simple “ad.”
Then you must ask about willingness to pay. In the Van Westendorp model, there are four
questions that you must ask in a specific order:
At what price do you perceive this product as:
so expensive that you think it’s too expensive to buy?
so cheap that you doubt the quality?
so expensive that you think it’s expensive, but you would still consider buying it?
so cheap that you consider it a bargain?
We give the first question the name “too expensive,” the second “too cheap,” the third
“expensive,” and the fourth “cheap.” Following the order of the questions is important for this to
work in practice.
For a beer from a local microbrewery, $6 can be expensive, $2.50 may seem so cheap that I
doubt the quality, $9 can be so expensive that I do not want to buy the product even though I
really want it, while $4 can make the beer seem like a good buy.
It may be wise to give people defined prices. For one 0.5-liter can of beer from a local
microbrewery one would perhaps use intervals of $0.50 or $1 between response options, but if it
was a more expensive product, I would perhaps have $10 or $100 between price options. One
reason for having predefined prices is that it makes it easier to analyze the results.
The next thing we need to do is to transfer the results to an analysis program, such as
Microsoft Excel.
The first thing I do is to name the columns after the name of the question and rank answers in
each column (regardless of the respondents) from inexpensive to expensive.
Then I delete nonsense answers: for example, those who have answered 0 for everything, and
those who do not give logical answers (e.g., that “too expensive” has a lower price than
“expensive”).
The next thing I do is to find out what percentage have answered the various options; that is,
0 percent have said that the product is “expensive” or “too expensive” at a price of $0. Then I get
the percentages of the “expensive” and “too expensive” answers in ascending order. I do this to
be able to create a chart in Excel where the lines for “expensive” and “too expensive” have a
rising curve.
The graphs for “cheap” and “too cheap” should have a descending curve in the chart. To
achieve this, we must first do the same operation as above, and then take 100 percent and
subtract the percentage that has the black price alternative (see →Figure 3.16).
In a graphic representation, there will be some places where the lines intersect.
“Acceptable price range” is the area from where the line for “Too cheap” crosses
“Expensive” to where the line for “Too expensive” crosses “Cheap.”
The point where the lines of “Special” and “Expensive” intersect, referred to as “indifferent
price,” will indicate that there are just as many who think it is cheap as expensive.
“Optimal price” is where the lines for “Too cheap” and “Too expensive” intersect.
Figure 3.16: Van Westendorp Example.

In this example, the recommended price range is from $4.80 to $6 (including taxes), the
indifferent price is $5.50, and the optimal price is $5.80 for a 0.5-liter can of beer from the local
microbrewery where Bob works.
Attachment: Excel for Conjoint Analysis of the Fan Example

Excel is a program that most students, companies, and entrepreneurs have access to. The choice
of Excel means that I must add some pre-assumptions and make some decisions on behalf of the
reader of the book. I choose a generally accepted analysis technique that fits most people, and
which is based on already existing calculation functions in Excel. For those who need more
advanced analysis, there are many good textbooks on conjoint analysis, in addition to market
analysis agencies that also take on such assignments.
Setting Up Excel for Analysis

To use Excel, we must first activate the analysis function that is available for all Excel users. This
feature is called “Analysis ToolPack.” The procedure is as follows.
Start the Excel program. Click File> Options. Select Add-ins on the left side and then Analysis
ToolPak. Then click on OK (see →Figures 3.17–→3.19).
Figure 3.17: Adding Analysis Tools to Excel.

Figure 3.18: Adding Software Package to Excel.
Figure 3.19: Selecting Software Package in Excel.
In the Excel sheet, you can now click on Data on the top line (see →Figure 3.20), and the analysis
tool is now installed and ready for use.
Figure 3.20: Find the Analysis Program Already Installed in Excel.

There are many limitations when using Excel for this kind of analysis. One of the most common
problems you encounter is that the data set cannot contain any open cells (missing values), i.e.,
that the customer has answered “do not know” or “will not answer.” Such cases must be deleted,
or the missing value must be replaced. In addition, the layout of all product options should be on
one side of the data sheet, while the customer’s responses are on the other. We have done this in
all the examples in this book, so it should be easy to follow.
In the fan example, we have now made eight options and gathered data from one customer
(which is unrealistic in a real-world setting but OK for the sake of giving an example). The data set
is given in →Table 3.5.
Table 3.5: Data Set for the Fan Example.

A B C D E F G H
1 Profile Table Pedestrian Manual White $39 $45 Ranking
2 1 1 0 1 0 1 0 5
3 2 0 1 0 0 0 0 2
4 3 0 0 1 1 0 0 3
5 4 0 0 0 1 1 0 8
6 5 0 1 0 0 0 1 7
7 6 0 0 1 0 0 1 1
8 7 1 0 0 1 1 0 6
9 8 1 0 1 0 0 0 4
We run the “fan” example in the following way. First click on Data Analysis in Excel, select
Regression, then OK (see →Figure 3.21).
Figure 3.21: Selection of Data Analysis in Excel.

Next, select the area in the Excel sheet where the y-variables are located. y-variables are what are
called “dependent variables,” i.e., the variables you want to predict with the analysis. For our
example, it is the customers’ preferences. These are in the range H1 to H9 in the data sheet. The
x–variables are the independent variables, i.e., the variables that influence the customers’ choice.
In our example, this is the various product combinations we test, and in the data set, they are in
columns B to G and from row 1 to 9. Remember to exclude column A. This is not a predictor variable
but only a label of the numbering of the packages. Because each of the variables has a name at
the top of the data sheet, we mark this in the Labels box. We then select OK (see →Figure 3.22 for
an illustration).
Figure 3.22: Regression Analysis Dialog Box in Excel.
→Table 3.6 shows an extract from the regression printout in Excel. I have removed some columns
and reduced the number of decimals to make it more readable. There are many method books for
more in-depth interpretations and explanations [→19].
The first number we need to look at is R Square. This figure has values from 0 to 1. Here is the
number 0.6. This means that 60 percent of the variation in customer preferences (i.e., the
dependent y-variable) is explained by the attributes of the fan (i.e., the independent x–variables).
In other words, 40 percent of the variation in preferences are not explained in our model.
Table 3.6: Results from the Regression Analysis for the Fan Example.
A B C D E F
1 SUMMARY OUTPUT
2
3 Regression Statistics
4 Multiple R 0,8
5 R Square 0,6
6 Adjusted R Square −1,8
7 Standard Error 4,1
8 Observations 8,0
9
10 ANOVA
11 df SS MS F Significance F
12 Regression 6,0 25,3 4,2 0,3 0,9
13 Residual 1,0 16,7 6,7
14 Total 7,0 42,0
15
16 Coefficients Standard Err t Stat P-value
17 Intercept 1,7 10,7 0,2 0,9
18 Table 1,3 4,7 0,3 0,8
19 Pedestrian 2,0 10,0 0,2 0,9
20 Manual 0,7 7,5 0,1 0,9
21 White 2,0 6,5 0,3 0,8
22 $39 2,7 5,5 0,5 0,7
23 $45 1,7 4,7 0,4 0,8
The next numbers we are going to look at are the ones called “coefficients.” The technical
language name is unstandardized beta coefficients. These can have positive or negative values. The
first coefficient, Intercept, with a value of 1.7, is the constant term. This is b0. This tells us which
score the respondent has on fan preferences, regardless of model, color, function, or price. The
next value is table fan, with a beta coefficient of 1.3. This number must be interpreted against a
baseline, i.e., the column we removed. Here it was the ceiling model. The number means that with
a ranking from 1 to 8, the respondent reports 1.3 higher scores on the table fan compared to the
ceiling model. For the pedestal fan, the respondent reports 2.0 higher value on his ranking
compared to the ceiling model. The next number, manual, with −0.7, means that manual fans
score 0.7 lower on the ranking compared to the column that was removed, i.e., remote control. In
other words, customers value remote control higher than the manual fan. Then we see that the
color white is to be preferred over black, with a coefficient of 2.0. For the last attribute, price, we
see that a price of $39.90 has a score that is 2.7 higher than the score for the price of $55, which is
baseline. The price of $45 has a score that is 1.7 higher than the score for the price of $55, but 1.0
lower than the score for the price of $39.90 (2.7 – 1.7 = 1.0).
Based on the analysis, we can estimate what level of attributes constitutes the optimal
combinations. We take the highest value in each attribute and put them together into a product
profile. In the fan example, this is a pedestal fan with remote control, the color white, and a price
of $39.90. However, this solution is not necessarily strategically right. A price must also cover the
costs, and $39.90 can be unrealistic even if the customers have this as their first choice.
Anyone who has worked with statistics immediately sees that none of the coefficients are
significant (the P-value column, which should have a value of 0.05 or smaller). This is, of course,
quite as expected since we have only one (!) respondent in our example. The results are therefore
associated with a large degree of noise and randomness. As mentioned earlier, one should have a
minimum of 200 respondents, i.e., the more the better.
The analysis technique we use is linear regression analysis. This assumes that the dependent
variable is continuous, as we mentioned earlier. We solve this knowing that customers’ rankings
or preferences must be on a scale of three choices or more. Preferably one should have a scale of
at least five choices. In our case, we used eight.
Attachment: Excel for Conjoint Analysis of the Case “Harmony

Cottage Village”
In this Excel example in the book, we will develop a new cabin field, “Harmony Cottage Village,”
located in a valley, 1.5 hour’s drive from Oslo, Norway, and a two-hour drive from the nearest ski
resort, Trysil. The distance and geographic location cannot be changed. Therefore, these
attributes are not included in the conjoint analysis. Instead, I have included four other attributes:
the price of the ground, the location of the cottage ground, whether you want to invest your own
efforts or not, and which type of cottage you prefer (see →Figure 3.23).
Figure 3.23: Overview of Attributes and Levels of the Product “Harmony Cottage Village”.
When combining the various levels of product attributes, we end up with 16 product variants (2
price levels × 2 ground locations × 2 efforts × 2 cabin types = 16 variation options). Note that I have
left out some attributes that one could expect to be important. One example is the degree of
services in the form of snow removal and to-the-door delivery of groceries. These are elements
that can easily be offered to the customer later through extra payment or subscription, and which
do not necessarily have an impact on the cabin decision purchase.
Step 1: Map Customers’ Preferences

In our Excel example from “Harmony Cottage Village,” we saw that the combinations of levels and
attributes led to 16 product variants. However, few cabin customers will be able to compare that
many options. The next step will thus be to select the combinations that are most relevant. In
→Table 3.7 I have listed some suggestions for relevant alternatives. In the analysis later in the
chapter, however, we will see that by collecting eight examples we can estimate the attractiveness
of all 16 product alternatives.
Table 3.7: Product Options for the Case “Harmony Cottage Village”.
HARMONY COTTAGE VILLAGE
Package Price Location Efforts Type
Package 1 250000 Water Turnkey Certified
Package 2 290000 Water Turnkey Log
Package 3 250000 Undisturbed Turnkey Log
Package 4 290000 Undisturbed Turnkey Certified
Package 5 250000 Water Raw Log
Package 6 290000 Water Raw Certified
Package 7 250000 Undisturbed Raw Certified
Package 8 290000 Undisturbed Raw Log

In the Excel sheet, I have chosen −1 and 1 as product selections. I have done this to show different
ways to set up a data set. The data sheet will look like what follows in →Table 3.8 when one has
removed columns as described earlier. The empty columns from K 1 to K 15 are the customer
responses we will enter later.
Table 3.8: Eight Selected Product Combinations for “Harmony Cottage Village”.
Package Price Location Efforts Type No No No No4 No No No No No No No No No
1 2 3 5 6 7 8 9 10 11 12 13
1 −1 −1 −1 −1
2 1 −1 −1 1
3 −1 1 −1 1
4 1 1 −1 −1
5 −1 −1 1 1
6 1 −1 1 −1
7 −1 1 1 −1
8 1 1 1 1
Package no. 1 (first): Turnkey, environmentally certified cabin, ground by the water. $250,000.
Package no. 2 (second): Turnkey, log cabin, ground by the water. $290,000.
Package no. 8 (last): Raw building, log cabin, undisturbed ground. $290,000.

In the example “Harmony Cottage Village” we have selected eight product combinations that 15
respondents were asked to rank. →Table 3.9 shows the data set.
Table 3.9: Data Set for the Case “Harmony Cottage Village”.
Package Price Location Efforts Type No No No No4 No No No No No No No No No
1 2 3 5 6 7 8 9 10 11 12 13
1 −1 −1 −1 −1 8 3 5 8 5 7 8 7 3 8 5 7 4
2 1 −1 −1 1 1 2 3 1 4 3 2 3 8 3 7 8 7
3 −1 1 −1 1 4 4 7 2 3 5 6 1 7 7 1 5 8
4 1 1 −1 −1 5 5 1 3 2 1 5 2 1 5 4 1 2
5 −1 −1 1 1 2 7 8 4 7 2 4 6 2 1 8 4 1
6 1 −1 1 −1 6 6 2 5 8 4 3 5 5 2 6 2 6
7 −1 1 1 −1 7 1 6 6 6 8 7 8 6 4 2 3 5
8 1 1 1 1 3 8 4 7 1 6 1 4 4 6 3 6 3
This Excel layout shows a slightly different way of performing the statistical analysis. Here, the
ranking is made by the customer’s value, where (1) is best. After collecting data from relevant
customers, you can build a dashboard in Excel (see →Figure 3.24 as an example). The figures are
explained in more detail below.
Figure 3.24: Dashboard.

In the dashboard for the Excel analysis of “Harmony Cottage Village” I illustrate a few models to
demonstrate the opportunities. The first, →Figure 3.25, “Importance of the attributes,” shows the
estimated importance (from the regression analysis) of the attributes in a distribution of 100
percent. This makes it easy for the user of the dashboard to compare the values in perspective to
each other.
Figure 3.25: Importance of the Attributes.
The next, →Figure 3.26, shows the importance of the levels of the attributes. This is the regression
coefficient for each attribute, with the difference between the levels. Here, the values + and – are
due to the way the data set is encoded.
Figure 3.26: The Importance of the Levels.
To calculate which product packages are most attractive, we multiply the regression coefficients
by the selected levels of product attributes. We design the colored circles and columns in →Figure
3.27 by selecting Conditional formatting on the icon bar in Excel. Market share is calculated using
the utility function described earlier in the chapter. The colors are created by choosing Conditional
formatting on the icon bar in Excel.
Figure 3.27: Most Attractive Product Packages.

Most attractive customers, →Figure 3.28, are calculated by summing the regression coefficients
for the product package attributes multiplied by the inverse of the customers’ ranking, plus
intercept (beta 0). The ranking of the numbers shows which customers have selected the most
optimal product packages.
Figure 3.28: The Most Attractive Customers.
Next, the selected product packages graph summarizes the ranking and reports how many
respondents have chosen the various product packages as their first choice and their last choice
(see →Figure 3.29).
Figure 3.29: Selected Product Packages.
Willingness to pay per attribute is calculated by estimating the utility value per price range
multiplied by the utility value of the attributes. Individual estimates do not consider the other
attributes, while relative estimates do (see →Figure 3.30).
Relative utility per attribute illustrates the score the customers have on the various attributes
Figure 3.30: Willingness to Pay per Attribute.

Figure 3.31: Relative Utility per Attribute.
Chapter 4 Different Prices for the
Same Products
Introduction
In this chapter, I will show how one can vary the prices of
products that are apparently equal or similar to each other. To
do this, I have divided the chapter into four parts. First, I discuss
how you can vary the price of a product based on the buyer of
the product. If one has no or little experience with pricing
strategy, this is a common method to use for price
discrimination. The second and another common way to vary
prices is through localization. The third way describes the
opportunities to vary prices based on different ways of designing
the product. Examples here include how the product is used, or
how large quantities are purchased. Finally, I have included price
variation based on the time when the product is purchased. This
is everything from seasonal variations to frequency of use.
Price segmentation means that you charge different prices
for products that are equal or similar. This seems intuitively
impossible, but I will go through several factors that are crucial
for such a strategy to work. Segmentation means dividing the
customers into groups where the customers are equal within
their group, but different between groups. Customer
segmentation is usually based on the customer’s age and
gender. As I will show in this chapter, such demographic factors
are often less effective than other types of segmentation.
Examples of the latter include product design, time of purchase,
and location.
Simple examples of demographics include the lower price of
train tickets for children, students, and seniors. Cinema tickets
vary between children and adults, and ski resorts offer lower
prices on annual passes to those with a local address. More
subtle examples are different menus at some restaurants in
tourist areas, with higher prices for guests, and lower prices for
locals. In addition, there might be big differences in flight ticket
prices depending on how far in advance you book your ticket. In
other words, we differ according to our willingness to pay.
To be able to maneuver different prices on similar products,
one is dependent on what are called “price fences.” A price fence
is strong when it is based on fixed criteria that customers must
meet to qualify for lower prices. Two examples of such factors
are age (children, seniors) and geography (coupons from local
newspapers). A weak price fence will not always be able to
separate the customer segments from each other. An example
of this is when electronics are cheaper in one state than in a
neighboring state. A second example is education status
(students get lower prices), where many transportation
companies have set an age limit of 30 years to continue being
considered a student. Weak price fences can lead to profitability
leaks.
Varying prices between customer groups give room for extra
earnings. But this also comes with high risk. Wrongdoing can
lead to furious customers because they think they have been
treated unfairly. I have described this risk and how it is handled
in Chapter 7, which is entitled “Unfair price!” →Figure 4.1, which
illustrates prices of Coca-Cola cans, demonstrates how the price
can vary depending on geography.
Figure 4.1: Example of Variation in the Price of a Coca-Cola can
be based on the Point of Sale.
It is important to understand the difference between price

sensitivity, willingness to pay, and price elasticity.
Price sensitivity is a characteristic of the buyer or customer.
Some people are more sensitive to price changes, and this
can vary between different products and services. It can
also vary within a product through the combination of
different attributes or from one purchase point to another.
High price sensitivity refers to customers who are price-
conscious, while with low price sensitivity, price is not the
main driver for purchases.
Willingness to pay is also a characteristic of the buyer or
customer. A measure of willingness to pay shows how
much value a consumer has put on a product or service.
Willingness to pay is measured in the form of money.
Price elasticity is the percentage change in demand divided
by the percentage change in price. In other words, this is
about the aggregate demand for a product and the shape
of the demand curve. Price elasticity is usually negative,
i.e., you buy less of a product if the price increases. There
are exceptions: for example, for unique luxury products
where high prices increase demand. When it comes to
price elasticity, it is common to distinguish between
product categories and brand categories. An example of a
price change in product categories is when all petrol
stations increase their petrol prices, we only buy slightly
less petrol. If only one brand player, for example Shell,
changes the price at all their petrol stations, it will have a
big effect on their sales. The calculation of price elasticity
and cross-price elasticity is described in the last chapter in
this book.
In the following sections, I will review the main principles for
price segmentation. I have chosen to categorize the principles
into four parts, namely attributes of the buyer, location, product,
and time (see →Figure 4.2).
Figure 4.2: Four Categories within Price Segmentation.
The Buyer
Segmentation is well known in marketing and is especially
important when it comes to price. Customers have different
needs and different willingness to pay. By varying the price
based on these segmentation criteria, one will utilize in a better
way the potential for earnings in a market. The logic is that it is
better to offer different prices in a market with different
willingness to pay rather than offering the same price to
everyone. The solution is to create a system that makes sure the
buyers must qualify for the lower prices. This prevents everyone
from choosing the cheapest solution. An example of such
qualification is age.
Price segmentation based on attributes of the buyer is often the
simplest as this is easy to identify and accept. For example,
hairdressers have a lower price for haircuts for children because
the parents would alternatively choose to cut the children’s hair
themselves. By reducing the price, they ensure that these
customers will not disappear, while at the same time this cost
reduction does not ruin the mainstream market. The most
important thing about this type of price segmentation is that the
criteria are predefined, objective, and easily identifiable. This is to
prevent a negotiating practice that negatively impacts the
mainstream market. This fits together with what was described
in the previous section, i.e., that the criteria for price
determination must be clear and understood throughout the
company. If someone chooses to reduce the price for customers
who complain of a high price, it could be devastating for the
whole price strategy of the company.
Examples of customer attributes that can be mapped include
the following:
1. Age
2. Gender
3. Education
4. Position
5. Income
6. Social status
7. Family situation
8. Life stage
9. Occupation
Note that the price segmentation requires that the attributes of
the buyer lead to different willingness to pay. If the attributes do
not affect the willingness to pay, it would be wrong to segment
prices. Recent research shows that customers are very skeptical
about their buying history being used to segment prices [→20].
To identify which attributes of the buyer are decisive and
relevant in the price segmentation for the company’s specific
products or services, one is completely dependent on
documented information. This I discussed in Chapter 3, which
measures customers’ reactions to price changes.
The Location
If customers shop in different areas, they can be segmented
based on location. This is a very common way of segmenting
prices, and well-known examples include various outlets in the
retail and service industries. An electrical store with shops in
many places can vary the prices of its goods depending on the
different geographical areas. The customers willingness to pay in
the geographical area is often used as a reason. Remember,
however, that customers talk to each other, so any price
discrimination must be legal and perceived as fair. Localization
often has weak price fences. Localization also differentiates
between sales in the physical store and online sales.
A common practice is that online sales are priced below
products in physical stores. The argument is often that store
sales include professional expertise, personal advice, and
guidance, which helps to increase customers’ perceived value. It
is up to each individual business if they want to have different
prices in store and online. Detailed information on prices in e-
commerce is presented in Chapter 10.
Areas where several competing companies are co-located
put price pressure on the products. This is because the effort
and cost customers spend finding and choosing an alternative
product is lower. In several cases, this leads to chain stores
having lower prices in urban areas than in more rural areas. But
be careful. Sometimes one can read a newspaper story about
angry customers who feel exploited by this kind of price
variation within established branded chains. This is because
customers who do not perceive the price variation as fair feel
punished and thus give emotional responses.
Location can also be shown through much simpler examples.
When you buy tickets to a performance, concert, or sports
competition, the prices vary depending on where in the hall or
arena you want to sit (see →Figure 4.3). Seats with good sound
and a good overview are often far more expensive than tickets
further away from the center of events. These are clear criteria
for price variation that customers are used to from before, and
where one voluntarily buys oneself a good place rather than
being punished for something you cannot control.
Figure 4.3: Ticket Prices Based on Location.
Examples of attributes of localization that may affect the

willingness to pay include:
1. location
2. city – rural area
3. population density
4. language
5. climate
6. distances
7. number of providers
8. borders
International trade often has price variation on their products. E-
commerce, which is discussed in Chapter 10 of this book, is an
example of this. Trade barriers in the form of customs duties,
subsidies, quotas, and taxes affect the price of a product. In
addition, there are shipping, insurance, and payment
agreements. The challenge with international price
segmentation is to segment entire countries. One and the same
country, such as Italy, may have large inward differences in
terms of willingness to pay. A study that mapped the popularity
of apps in the App Store in 60 different countries showed a large
degree of variation in price sensitivity. Higher price sensitivity
was identified in countries that scored highly on the degree of
cultural factors such as masculinity and uncertainty avoidance
[→21].
The Product
Price segmentation based on the product can be divided into
four types, namely product design, product bundling, product
use, and product quantity.
Product design as a price segmentation criterion is simple,
widely used, and has a great effect. An example most people are
familiar with is Tylenol, which is sold in different strengths, in
different quantities, and in different varieties. There are round
pills, oblong pills, effervescent tablets, suppositories, oral
solutions, and dispersible tablets, intravenously, with banana
flavor and film-coated pills (see →Figure 4.4). All variants have
prices based on the customer group’s needs and willingness to
pay. For example, the elongated pills should be easier to swallow
than the round pills. Thus, those who have a difficulty swallowing
pills have an increased willingness to pay for this benefit, and
these pills are more expensive. It should be noted that the
different product variants do not necessarily have different
production costs.
Figure 4.4: Variants of Painkiller Pills with Different Prices.

For price variation based on product design, one piece of advice
is to offer a low-cost version that is insufficient to meet the needs
of customers with a higher willingness to pay, but which has one
acceptable price for customers with a lower willingness to pay.
In this way, one pays for a good instead of being punished for
one’s own inadequacy.
Examples of product design attributes that may affect
willingness to pay include:
1. superior performance
2. better operational reliability
3. additional attributes
4. lower operating costs
5. super or unique attributes
6. higher startup costs
7. faster and better service
Price segmentation through product design is especially easy
when selling services. Airlines have used the product design
strategy for many years. The market consists of business
travelers with a high willingness to pay, and leisure travelers
with a lower willingness to pay. Economy tickets are cheaper but
have fewer benefits associated with them. They cannot be
changed, have less luggage included, you get less help if
something unforeseen should happen on the trip, you do not
have access to fast-track check-in or a lounge, you have less
comfortable seats, your luggage comes last on the luggage belt
(at least in theory), and so on. For business travelers, time is
often a key factor and triggers a higher willingness to pay.
Business travelers want to have the extra services available, even
though they do not necessarily know if or when they will need
them. Therefore, price variation on airline tickets works in the
market. With increased price competition between airlines,
however, the boundaries between which customers get access
to the various benefits are floating. We experience categories
such as economy-plus, business-smart, business-pro, and a
whole range of variants within these.
The result is that those customers who originally had the
highest willingness to pay no longer feel that they get the extra
services they pay for but must stand in an equal line with
everyone else. Thus, the basis for the price variation on product
design disappears, and there is a risk that everyone chooses the
low-price variant.
Product bundling is a well-known way of segmenting the
price. Newspapers package digital and paper editions at a total
price that is lower than if the products were purchased
separately. Therefore, many people choose the package solution
over the single purchase, and thus earnings increase (see
→Figure 4.5). Car dealerships offer car sales with various
campaigns, be they trade-in campaigns, metallic-paint
campaigns, winter-ready cars, funding campaigns, accessories
campaigns, technological performance campaigns, or premium
promotions. The variation is almost infinite. The purpose of
product bundling is to offer a good trade to customers with a
lower willingness to pay, while at the same time those customers
who want freedom of choice get the opportunity to achieve it.
Customers with a lower willingness to pay often choose to spend
more money on buying the product package rather than buying
a single product. The reason is what we call “transaction
benefits.” I will return to this in more detail in Chapter 9 on
psychological pricing.
Figure 4.5: Product Bundling.
There are several ways to bundle products. Products that are

bundled can be complementary. This means that they have a
natural connection, such as a car and a towbar. The bundling can
also be cross-selling. This means that they are used
simultaneously, such as, for example, shampoo and conditioner.
Web sales have easy access to product bundling by utilizing
input visibility based on the algorithm estimation from products
that have been purchased at the same time by previous
customers. Thirdly, bundling can consist of optional extras, for
example installation, service, and insurance. One example is that
purchases over $50 receive free shipping. Product bundling can
be hidden from the customers, even though this is often not
equally effective in varying the price. If a hotel, for example,
charges $250 per night and $10 for one bottle of exclusive water,
most customers would probably see it as robbery. If the hotel,
however, charges $260 per night and the exclusive water is
included, it is perceived as a very good purchase.
Research shows that the products you choose to promote in
the product bundling are of great importance for how attractive
the product package is. In one experiment, a paper folder and a
box of chocolates were packed. When product bundling was
presented as a hedonistic value, meaning that you got the
chocolate with the purchase, 82 percent responded that they
were willing to buy (see →Figure 4.6). When product bundling
was presented as a utility value, where you got an additional
cheap paper folder in the deal, 52 percent of the participants
responded that they were interested in buying. And when
product bundling was presented as money saved, 61 percent
said yes to buying it. This variation may be an indication that
customers often feel guilt when they buy products only for their
own pleasure, and the way it is packaged, thereby affecting how
prominent this guilt feeling is [→22]. Note, however, that
customers do not feel the same guilt when buying a gift for
others, such as flowers, wine, or subscriptions. One possible
product bundling is therefore to offer a gift subscription
together with a 50 percent discount on magazines for your own
use. For hybrid bundles, in which products and services are
packaged together, trials show that one can achieve higher
willingness to pay for these compared to a situation where the
products and the services are sold separately [→23]. The
premise is that the service part of the packages should be at a
low level for cheaper package options, and at a high level for
premium packages. This is described in more detail in Chapter 9
on psychological pricing.
Figure 4.6: Probability of Purchase with Various Advantages of
Product Bundling [→22].
A further distinction is made between optional bundling and

value-added bundling [→4]. With optional bundling, you combine
two or more products together at a fixed price. The sum of this
package is lower than the products purchased separately.
Concert organizers offer packages with hotel accommodation
and restaurant visits included in the price. Restaurants offer pre-
packaged three-, five-, and seven-course menus at a lower price
than if the dishes are purchased individually. Football teams sell
season tickets at a lower price than if the tickets are purchased
for each match. Sports shops sell skis, poles, bindings, and boots
in ready-made packages. Meanwhile, the customers are free to
buy these products individually. Added-value bundling adds to
one or another form of extra value to customers with lower
willingness to pay. It is only this group of customers who
emphasize these additional benefits of having a value. This
prevents the contagion effect between groups with high and low
willingness to pay. An example of this is the packaging of a game
along with a game console. Such digital products, where the
extra production costs of the games are almost zero, are
particularly applicable for product bundling [→24]. Those with a
higher willingness to pay choose to buy games they see as
interesting, regardless of the product bundling. Those with a
lower willingness to pay, on the other hand, buy the package
and get the predetermined games with the purchase.
Product usage segments the price based on the value
customers experience when using the product. Here, a
distinction is made between two types: connection sales and
metering [→4]. Tie-in sales are about selling the main product
cheaply, often below market price, while the use of the product
is highly priced. Everyone knows about the sale of mobile
phones, where the phones are often sold under the market price
if you are willing to tie in to specific subscription arrangements
with bindings. This is especially attractive to customers with low
product knowledge. They choose such solutions to reduce their
own risk. Other examples include the development we are now
seeing in the car sales industry, where dealers offer subscription
schemes with specific criteria for the number of kilometers for
which the cars can be used (see Care By Volvo). Customers do not
pay for the car, only the usage. This is therefore an offer far
below the market price. The technological risk (see Chapter 2)
and uncertainty within the reusability of new cars affect some
customers when choosing a subscription solution despite the
fact that the monthly payment is larger than the purchase of a
new car.
When it comes to metering, this is a solution where
customers pay for different usage of the product. The customer
can rent a parking space in a parking garage monthly, or they
can choose to pay for each individual parking. Getaround is an
example of payment for the usage of a car. Variation in cars’
brand, year, model, and location affects the customer segment’s
willingness to pay.
Product quantity is price segmentation based on how much
you buy of a product. Here, a distinction is made between four
types: volume, order quantity, incremental volume, and two-part
pricing [→4]. For the volume the price varies because customers
who buy large quantities are often more cost-conscious than
buyers of lower quantities. In addition, it is often attractive to
retain large-volume customers because they are relatively
cheaper to handle.
Volume discounts are common in the business market where
large quantities are common. The volume discount is often
calculated based on the transactions over a specific period, such
as last year (see →Figure 4.7). The number of orders refers to
when the company has high fixed costs per order, such as
warehousing costs, bundling, invoices, shipping, and personnel.
The company has an incentive to stimulate customers to buy
larger quantities per order rather than many small purchases.
This is done by giving discounts to those customers who are
willing to buy larger quantities than they otherwise would have
done. Incremental volume is used in the business market. The
buyers get a discount based on their volume range. This
stimulates customers not to switch supplier underway. Two-party
pricing refers to cases where the price is divided into two – a
fixed price and a usage price. The cruise ship industry uses this
price quite consciously. The cruise itself has one price where
everything on board is included, i.e., accommodation, food,
entertainment, and non-alcoholic drinks. On land you can
choose to go free on your own without a guide, or you can take
part in organized tours within different price ranges. These price
adjustments ensure that more can afford to choose a cruise as a
holiday type. This example, of course, applies to the old days,
before the year 2020, when the cruise industry was still
flourishing and there was no pandemic.
Figure 4.7: Subscriptions at the Concert Halls.
The Time
Items with a short shelf life or lack of stock, such as fresh
products, fashion, experiences, and service, are critically
important to manage in terms of time of purchase and
consumption. Last year’s fashion is sold at greatly reduced
prices and sometimes at a loss, while old milk cannot even be
given away for free. A rock concert cannot store unsold tickets.
Price segmentation based on time assumes that customers
value the product differently based on time the of the day, week,
season, or year. In stock trading, prices are delayed by 15
minutes, and you can buy so-called “snapshots” to get real-time
data on stock prices if this is important for you. A restaurant has
cheaper lunch dishes than dinner dishes. The reason is that the
willingness to pay is higher in the evening. A theater offers
cheaper matinee performances in the morning. These tickets are
attractive to students and pensioners, who may have free time at
this time of day, but who also have a lower willingness to pay.
This does not destroy the main market in the evening, and you
can make better use of the resources – which cannot be stored
for later use. Moreover, research shows that when customers
are under time pressure, they select individual products at lower
prices rather than product bundles [→25].
There are two main types of price segmentation based on
time, namely peak load pricing and yield management pricing
[→4].
The objective of peak load pricing is to move the peak load
demand into times of availability (see →Figure 4.8). In other
words, this has to do with capacity costs. Cities implement
different prices to pass through the toll booth as a capacity cost.
As most people drive through the toll booth at the working day’s
start and end, roads experience capacity problems. By increasing
the price in the hectic period, customers can select the time
range where the prices are lower. Another development is the
new, electric smart power meters in all homes and businesses.
This enables a differentiation of electricity consumption based
on the load on the power grid. Those who have a lower
willingness to pay for electricity are willing to start the washing
machine at a more unfavorable time than those who are not
concerned about the price of electricity. This improved capacity
utilization saves network companies large investments in new
lines and power cables. However, if the price is set too low in line
with low-capacity costs, one can quickly experience the opposite
peak load.
Figure 4.8: Peak Load Pricing.
Yield management pricing is used when the capacity is exhausted

and companies risk missing sales. Everyone wants to go on
holiday during the school holidays, and kennel places for dogs
are quickly sold out. At the same time, the kennels have spare
capacity in the low season. By offering lower prices during the
low season, they might turn the demand so that those who can
travel at less popular times receive incentives to choose this. This
time perspective can also apply where you operate with shorter
time periods. With an airline that has the greatest demand for
aircraft seats from business travelers on Mondays and Fridays,
you can use the price mechanism to reward those who can
choose another time on weekdays. Thus, they do not miss the
sale but get the relief spread over the time. And the tour
operator will find that the seats are sold out before the hotel
rooms. They can even out this capacity by offering a much
cheaper week two of the holiday. Total earnings increase, while
the load is evened out.
Summary
This chapter has been about how to vary the price between
products that are apparently similar or like each other. The
chapter was divided into four parts. The first concerned the
variation in the price of a product based on conditions that had
to do with the actual buyer of the product. This method is easy
to use, but often not as effective as the others described in the
chapter. The second method, which is also a common way of
varying prices, is through localization. Different geographical
locations affect markets with different willingness to pay. The
third way to have price variation concerns different ways of
adapting the product. Different design variants of a product
often provide good opportunities for price variations. Finally, I
included price variation based on the time the product was
purchased. This applies to everything from seasonal variations
to frequency of use.
Chapter 5 Different Prices for the
Same Customers
Introduction
While the previous chapter discussed how one can vary the price
between otherwise similar products, this chapter will explain how
one can vary the prices for the same customer. To do so I have
divided the chapter into two main parts. The first part deals with
the financial impacts on customers’ willingness to pay. The
second part deals with the perceptual influences on the
willingness to pay. Each element includes a rating, which is
drawn from the work by Nagle and Müller [→4].
It is easy to imagine that customers’ willingness to pay is
fixed and cannot be changed. The price sensitivity indicates that
an increase in price reduces the number who will buy the
product. It sounds perhaps illogical that one can get one
customer to volunteer to pay more than strictly necessary, but I
will give several examples showing that this is fully possible and
even keeps them happy.
To start the thought process, look at the phone that is
probably next to you. How many times have you switched
between different mobile phone manufacturers lately? For
example, from iPhone to Samsung? Probably not many times.
Having tried once, you quickly finds that it takes a long time and
creates much irritation to learn how the new phone works. You
want to avoid this, and this implies that you have a higher pain
threshold (read lower price sensitivity) before you decide to
swap to a cheaper brand. Maybe you don’t even bother to try.
This pain threshold means that mobile phone manufacturers can
increase the price further before customers take the step to
switch brand. This effect is called the “switching cost effect” and
is one of the examples we will go through in this chapter [→4].
Financial Impacts on Customers’

Willingness to Pay
Financial impacts on customers’ willingness to pay are about the
resources required in the price assessments. In this section, we
will take a closer look at four types of financial impacts on
customers’ willingness to pay, namely the switching cost effect,
difficult comparison effect, expenditure effect, and end-benefit
effect. Under each point is the pointed question one must ask to
identify the effect on the customers [→4].
Switching Cost Effect

The higher the costs a customer experiences when switching to
a different product, the higher the willingness to pay the
customers have for the product [→4]. A distinction is made
between three types of switching costs, namely the direct
switching costs, the financial switching costs, and the relational
switching costs. The direct switching costs are about costs that
apply by switching between manufacturers or brands. Examples
are time and money. If a company changes its entire storage
system, they must identify alternatives as well as calculating
downtime and organizational consequences and strain, and not
least, the time it takes to learn up the new system. These costs
might result in the decision to postpone the entire decision.
The financial exchange costs include, for example, fees, the
cost of breach of contract, establishment fee, and lock-in period.
This is something banks use quite deliberately in their
marketing, in that they offer to pay the fees and costs for you if
you transfer your loan to their bank.
The relational exchange costs are the psychological effects of
breaking a relationship and entering a new one. Local banks
know that many of their customers are willing to continue with
them as their bank for the reason that they have been part of
their life throughout their childhood. Such affective bonds can
be very strong, and it can feel painful to break them [→26].
Switching cost results in a lower willingness to switch supplier.
This in turn means that price sensitivity decreases more the
higher the switching costs. In other words, with high switching
costs, we accept higher price changes than we would otherwise
have done before we chose to switch products.
Ratings:
To what extent have customers made investments (both
financial and psychological) that they must repeat if they
change products?
How long are customers bound by these investments?
Difficult Comparison Effect

The more difficult it is to compare the different products, the
higher the willingness to pay [→4]. A distinction is made
between three levels of difficult comparison, namely a
comparison of brands, new entrants in the market, and pack
size.
A brand symbolizes an added value, an image, that
customers value. This added value is difficult to compare and
allows brands to charge a higher price for identical products.
Brands affect the ability to compare product attributes. In
grocery stores, you often see the chains’ private labels, such as
Great Value spaghetti from Walmart, on the same shelf as the
manufacturers’ brands, such as Barilla. Studies show that this
increases sales of private labels [→27], and the reason is that the
location makes it easier to compare products. The opposite also
applies. Customers are less sensitive to the price (e.g., higher
willingness to pay) of well-known brands when it is more difficult
to compare alternatives. In addition, the brand effect has an
impact on comparability.
New entrants in the market encounter resistance from
existing players who want to protect their market share. This is
used quite consciously by providers of mobile subscriptions.
Comparing different subscriptions is almost impossible, and
thus customers tolerate higher price increases before they take
the step of changing subscription. When the information-
gathering process is demanding, price sensitivity is reduced.
Uncertainty leads to resistance to change. As an example, the
Chase Bank has a complicated price list with a variety of different
amounts for its services (see
→https://www.chase.com/content/dam/chasecom/en/checking
/documents/clear_simple_guide_total.pdf).
The size of the products also makes price comparisons more
difficult. Unit sizes such as kilograms and meters are easy, and
standardized price units are required to be stated on the price
label. But how much is a unit of dental time? Prices for services
are more difficult to compare because they are not easy to
quantify. Service providers are required to provide a general
price list to anyone who asks. But customers cannot easily know
in advance what specific services they are going to need. This
means that the prices for the main services are compared, such
as the actual hourly price at the dentist, while the prices for
other products, such as anesthesia and X-rays, are more difficult
to compare. Therefore, one has a lower price sensitivity for these
extra activities.
Ratings:
How difficult is it for customers to compare the different
products?
Can the attributes of the product be observed, or must it
be used before anyone knows anything about them?
What percentage of the market has positive experiences
with your product compared to the competition?
Is the product complicated? Does it require additional
knowledge for customers to be able to compare the
attributes?
Are the prices between the different products easy to
compare, or do they have some combinations that make
the comparison difficult?
Expenditure Effect
The larger the share of the income a purchase makes, the more
sensitive customers are to the price [→4]. The expenditure effect
increases the willingness to invest in the time to compare
information and prices, and to actively seek means to reduce
their costs.
In these cases, it is important to remember that a customer
may have a completely different basis for comparison than they
have with smaller purchases. Maybe the choice is between a
vacation trip to Florida or buying a new car. At the same time,
the transaction is of greater importance, so the buyers are not
necessarily willing to compromise on the desired attributes.
From a price point of view, this means that the higher the
proportion of a budget a purchase accounts for, the more price
sensitive is the customer. When the purchase constitutes a small
share of the budget, the price is less important, and the
willingness to pay increases.
In practice, this also means that the same product can have a
completely different price sensitivity based on the volume the
customers buy. If you buy a pack of eggs for one cake, this is one
completely insignificant cost, and you are not concerned by the
price whatsoever. If, on the other hand, you buy 2 tons of eggs a
year, the price is very important.
Ratings:
What is the nominal product cost ($), and what proportion
does this make up of the household’s income (percent)?
Shared Cost Effect

It is always easier to spend other people’s money than your
own! Price sensitivity is reduced when customers use other
people’s money to pay for a product [→4]. In →Figure 5.1, I show
four different ways in which price and benefit vary depending on
the source and the purpose of the financing. Such a table is of
course general and does not apply in every case, but it can still
give an indication of how price sensitivity is affected.
Figure 5.1: Different Sensitivity to the Source and Purpose of
Money [→4].
In cell 1, one uses one’s own money on oneself. This leads to

more concern about the value you get for your money, while
being aware of how much money you spend. Benefiting from
every penny is important. For airplane tickets, one is more
willing to travel at inconvenient times when tickets are cheaper.
At the same time, one is not willing to travel to a less attractive
destination even if flights there are cheaper.
In cell 2, the conditions are lighter. Here you spend other
people’s money on yourself. The willingness to pay increases at
the same time as you want the maximum value based on the
transaction. If you are going to fly in connection with your job,
you are inclined to choose the departure time that fits you best,
while the price becomes less important. The price of the tickets
will be refunded by the employer. This, in turn, forces companies
to set $ limits to prevent overconsumption. Examples include
requirements for ticket type and the maximum amount you can
spend.
In cell 3, you spend your own money on others. Examples
include gifts to others. You spend a lot of time finding a gift that
benefits the recipient, while at the same time being concerned
about the price of the item itself. Perceived benefit per dollar is
important in these transactions. At the same time, the benefit
changes to be the recipient’s perception.
In cell 4, you spend other people’s money on others. As we
can see, one is less concerned by either price or value for money.
Rather, one is more concerned with getting the trade done.
Extensive use of discounts will have little effect on this type of
transaction.
Ratings:
Does the customer pay for everything or just for parts?
How big a share of the payment does the customer pay by
themselves versus others?
Perceptual Influences on Customers’

Willingness to Pay
Perceptual influences on customers’ willingness to pay are about
the subjective perception of price variations. Here we shall enter
four effects, namely price-quality effect, unique value effect,
substitute effect, and final distribution effect.
Price-Quality Effect
Imagine that you are about to buy clothes. In the store you find
two options: one sweater for $100 or three sweaters for a total
of $100. Most people immediately think that the three sweaters
are of lower quality and may not be worth the money. Let us
further imagine that you buy all four sweaters. A few years later
you must clean out your closet. Which sweaters are the easiest
to throw away, and which are left in the closet year after year?
Customers thus do not use price just as a measure of how
much they must sacrifice to get a product or service. The prices
are also like a signal effect on the quality of the products. The
connection has been tested in several studies, and it has been
found that price is an important quality indicator when there is
quality variation within the product class, when it is assumed
that low quality entails a risk, or when other information (such as
brand names) is missing, which affects the ability to assess the
quality before buying [→6]. Price in this context is an extrinsic
signal (i.e., outside the product itself), along with the brand, the
package, its reputation, and origins. An intrinsic signal (i.e., the
product itself) is the inherent attributes of the product. Well-
informed customers put more emphasis on the intrinsic (the
actual) attributes of a product. Customers with particularly high
product knowledge also use price as a signal of quality because
these customers are familiar with the quality variations.
Examples include wine connoisseurs and the price of wine. This
means that buyers are less sensitive to the price of a product
when the price signals quality.
Remember that the opposite is also true. Successful chains
that have a low-price strategy, such as Walmart, Aldo, and Dollar
General, lead to increased price sensitivity and customers accept
lower quality given that they get a good price.
Quality can be divided into different types, including image
and symbolism, exclusive prestige, and average quality. In such
contexts, the choice of quality reflects personality. One example
is the platinum credit card, which symbolizes prestige and
exclusivity in that others cannot afford the fees or have an
income that is lower than the qualification for the card. Another
form of exclusivity is first-class travel on aircraft. It’s probably
not inconceivable that anyone buying such tickets does so to
avoid sitting next to a toddler who is crying.
In luxury markets, the common practice is to not show prices
visibly. Recent research, however, does not support this and
shows that visible prices have a positive effect on the perception
of luxury, brand uniqueness, and the product’s eye-catching
uniqueness [→28]. This affects the desire to buy the product. A
second question is how the perception of luxury starts and stops
on the price scale. One study found a continuum from the
“happy few” to the many less privileged. This extreme
heterogeneity across consumers is good news for luxury groups.
Such heterogeneity provides a great choice for development
strategies from traditional luxury to new luxury [→29].
Ratings:
Is prestige an important component of the product?
Does the product increase in value if it is unavailable to a
certain customer group?
Is the product of unknown quality, and are there any
reliable ways to detect the quality?
Unique Value Effect

Buyers are less price sensitive to products that seem to have
unique attributes that set them apart from competing products
[→27]. The perception of the value of the attributes varies with
the life cycle of the products. For products with short life cycles,
such as fashion, value depends on a continuous development of
the products to fit with the fashion scene. The price sensitivity
for new products is thus low. For products with a longer life
cycle, such as PC manufacturers, the value effect is to fit the
product to different customer segments that value the attributes
differently. The goal of the unique value effect is to influence
customers to be willing to pay a higher price for these attributes,
rather than choosing a cheaper option in the market.
Typical examples of unique value include Heinz ketchup and
Coca-Cola. Both base their products on secret recipes that create
uniqueness and thus increase the willingness to pay for the
products.
Ratings:
Which products do our customers compare our products
with?
How do our customers perceive our products as different
from those of our competitors?
Which attributes are the customers most concerned by
when they choose this kind of product?
Substitute Effect
The substitute effect is about the price of alternative products.
Customers are more price sensitive to products that they
perceive as being higher priced than competing products [→4].
The keyword here is “perceive.” Some customers will perceive
the price as significantly higher, while other customers see the
difference as marginal. The variation can be caused by the
purchasing situation or available time, as well as customers’
needs. An effective way to handle the substitute effect is to
introduce an expensive product for comparison. An example is
Tesla, which compares itself to sports cars, not other electric
cars.
New customers or customers with low market knowledge
are less able to compare products. This makes these customers
willing to pay a higher price. Examples include cafes in famous
destinations. Customers know they are paying a premium but
choose to do so rather than spend time finding alternatives.
Ratings:
What options are customers usually aware of when
considering a purchase?
To what extent are customers familiar with the price of the
alternatives?
How are customers affected by the price of alternative
products?
End-Benefit Effect
Imagine that you are about to brush up on your bathroom and
get a price estimate of $25,000. Let us say that based on your
financial capability, competitive comparison, and knowledge, you
choose to accept the offer. You look forward to getting the job
done and focus all your attention on the finished product, a new,
beautiful bathroom.
This is an example of the end-benefit effect. In such a
situation one ignores the individual prices, such as the price of
shower handles, and accepts to a greater extent higher prices
when profiled as a finished product. If, on the other hand, you
had only changed the shower handle, you would have spent
more time looking at alternatives and different prices of these
specifically.
Other examples of the end-benefit effect are when arranging
special events, such as a wedding, baptism, funeral, or a
romantic dinner for two. In such cases, it feels uncomfortable
exploiting discounts, coupons, or negotiating a price reduction.
The emotional nature of these transactions makes one perceive
the prices as acceptable without asking questions.
Ratings:
Which end benefit do the customers want to achieve
through the product?
How price sensitive are customers to the cost of the end
product?
What share of the end benefits constitutes the price of the
products?
In what way can the products be repositioned with the
customer as an end benefit?
Summary
The purpose of this chapter has been to describe how to charge
different prices to the same customer. To explain this, I have
distinguished between financial and perceptual influences on
customers’ willingness to pay. The financial impacts on
customers’ willingness to pay are the switching cost effect, the
difficult comparability effect, the consumption effect, and the
shared cost effect. The perceptual influences were the price-
quality effect, unique value effect, substitute effect, and end-
benefit effect.
Chapter 6 From Price Competition
to Price War!
Introduction
A price war is the result of a price competition that has taken an
aggressive turn. A price war arises when a price pressure forces
the other competitors to follow [→30]. In the competition, the
focus is only on prices, and over time this can lead to
bankruptcies and closures. In this chapter, I will show how
companies can handle such aggressive price competitions. The
chapter deals with step-by-step solutions for dealing with price
wars. Then it describes different phases and reactions to a price
war. The chapter also describes what the result of a price war
may be. Price wars are common in the grocery industry, and a
separate section takes a closer look at research that has been
done in this sector.
Price wars are characterized by a heavy focus on
competition. Prices are pushed to an undesirable level, the
competition violates the industry standards, and price
reductions happen much faster than in conventional markets. In
the long run, such low prices are not sustainable. This is
especially so in oligopoly markets, i.e., markets with few
providers, such as oil and food chains, where one experiences
aggressive price wars. The reason is that in such markets,
companies are often forced to match a competitor’s price
reductions [→30].
Aggressive price wars often start with one of the actors
thinking the prices in the market are too high, or that they are
willing to “buy market shares” at the expense of margins. In
addition, price wars occur more easily when competitors do not
have confidence in each other, or do not know each other well
[→31].
It is an important goal to stop a price war before it starts
[→31]. Several companies continuously do this by regularly
communicating the purpose, scope, and length of their price
changes through mass media. In this way, competitors are made
aware of the price changes and can develop their reaction
patterns accordingly. One appeals, in other words, to
cooperation with competitors. The most current example of this
is how grocery stores plan their pricing promotions. Often when
they offer a price promotion, they run heavy marketing
campaigns explaining which products will be reduced, and how
long this will last. In an oligopoly market, in which the grocery
chains operate, it is often difficult for the other chains to be
uninterested or indifferent to the price games. The reason they
communicate through the mass media is because a direct price
collaboration between companies is illegal. The legislation on
this is described in the chapter on “Unfair price.”
Steps in Dealing with Price Wars

Businesses should strive to keep price competition at a low level
instead of joining or starting a price war. →Figure 6.1 describes
the steps for dealing with a price war. The recommendations
below are based on a study from the Harvard Business Review
[→31], which has several recommendations for companies that
are exposed to attempts at price wars, together with other
relevant literature in the field [→4].
Figure 6.1: Steps in Dealing with Price Wars.
Step 1: Analyze the Situation

Are there responses that cost less than the estimated sales loss? It’s
easy to lose your head and forget that it is often better to lose
sales in some product categories than engage in a fierce
competition on price. If the price war threatens only a small part
of your total market, it may be better to lose some revenue there
rather than to extend the loss to apply to more products. One
must also consider how long it is assumed that the loss is going
to take place. If it is only for a short period of time, it may be
wiser not to react. The analysis must investigate customers’
price sensitivity and customer segments. Which customers are
affected? Are these customers important? The analysis must
also include business conditions such as cost structures,
capabilities, and strategic position. The assessment must also
look at what you can afford, what is important to maintain, and
what is important to protect.
Step 2: Minimize the Harmful Effects

A company can actively reduce costs to minimize the damaging
effects of a price war. This implies focusing on customer
segments in the market. This is done by targeting the price cuts
only to those customers who you think will react to the
competitors’ price cuts and leaving the rest untouched. You then
focus on growing the volume that is at risk and let everything
else be normal. Investigate whether you can direct the price cuts
to some geographical areas or some product lines where the
competitor has more to lose than you. Remember that the goal
is not always to defend the sales that are lost, but to avoid losing
sales in other important parts or areas. An unfriendly strategy is
to let the other customers of the competitors know that they are
being treated unfairly, that other customers get much lower
prices than them.
Then, focus on your competitive advantages to increase the
value of the products as an alternative to match the price cut.
Often this is a far better strategy. Compete on quality and value
and tell customers about the risks of buying low-priced products.
Step 3: Evaluate Competitors’ Reactions

If you choose to match the price cut, it is important to predict the
next move from the competitors. Will they respond to re-
establish the price differences? Will the price spiral just go
further and further down? Perhaps price cuts are the
competitor’s only way to acquire customers. This can make them
willing to stretch themselves very far. Perhaps is it smarter to
guarantee an equal price rather than setting the price lower. It
can also be complicated to interpret and understand prices,
something I have shown several examples of in this book. As an
example, product bundling or second-price combinations make
it more difficult to compete on price alone.
Step 4: Calculate the Financial Consequences
An important element that is often forgotten in a period of hectic
price wars is calculating the economic consequences of a price
war. An analysis will show whether the sum of all the measures
you put into operation justifies what you would lose in a
potential sale. Such an analysis must include the total costs –
from a long-term perspective.
Step 5: Assess the Synergy Throughout the Market

Given that competitors manage to capture market share, what
effect does this have on the company’s position in other markets
(geographic or product)? Are these threatened? Will the value of
these markets justify the costs of responding? In some cases,
the focus on the total market will change the competitive picture
and action options. Other reactions may be to create flank
brands that take off for price competition, while the other
products are protected.
Phases and Reactions in a Price War

How you should react to a competitor’s aggressive price
competition depends on factors within the company, but also
the environment [→4]. Going straight onto the attack can be
tempting, but not necessarily the smartest reaction. →Figure 6.2,
based on Nagle and Müller [→4], shows four responses to a
price competition.
Figure 6.2: Responses to Price Competition [→4].
Ignore
This reaction is correct when retaliation becomes too expensive.
It is also correct if the competitor is so harmless that it has no
intention to implement major initiatives. Moreover, large
companies can survive low prices for a very long time, so you
can use endurance tactics. Remember that if the goal is profit
and not market share, an ignoring reaction will be correct. Often,
it can be helpful to keep a weak competitor instead of opening
up the opportunity for a new and stronger one.
Accommodate
When conducting an accommodation, you actively adjust your
own competition strategy to minimize the damage caused by the
competitor. At the same time, one is actively working to adapt to
living under the new conditions. This is a defensive strategy to
avoid price wars.
Attack
If you choose to go on the attack, this presupposes that the
competitor is weaker, and that it will pay off in terms of cost to
reduce the price. This reaction is chosen if you cannot “afford” to
lose sales. If you choose such a reaction, a low-cost structure is
required, so that you can survive the period. In the long run, this
reaction will break small businesses.
Defend
If one chooses a defensive reaction, the goal is not to eliminate
the competitors, but rather to convince them to withdraw. One
wants to make the competitors understand that an aggressive
pricing policy is financially unattractive for both in the long run.
The signals that are sent to each other is important, and often
the price reduction is only for a short period, so that aggressive
price wars are avoided.
The Result of a Price War

When asking managers about who started the price war, 90
percent said it was the other company [→30]. Many price wars
start by accident. Even if a company lowers its prices, the
intention is probably never to start an aggressive price war.
Instead, competitors misinterpret their company’s intentions
and choose to respond aggressively [→4]. One piece of advice is
therefore to clearly communicate the intentions with the pricing
policy, both internally within the company and externally to the
competitors. Internal communication will make the company’s
employees work toward a common goal for the pricing policy.
This means that the processing of price in the organization is
implemented and carried out in a predetermined manner. If you
choose to change the prices, it is advisable to pre-announce this
to the market [→4]. The competitors then know that the price
reaction is for a specific time period or a specific product group
and they can adjust their measures accordingly.
Leaders often misinterpret the outcome of a price war. They
can loudly proclaim price reductions on hundreds of items. This
is based on an expectation that demand will increase
correspondingly, which offsets margins. In addition, they
assume that as soon as one has won a new market share, is it OK
to increase the prices. This is certainly not always the case as
customers have established new reference prices against which
they assess prices. Increasing the prices afterwards may prove
impossible (see →Figure 6.3).
Figure 6.3: Triggers and the Result of a Price War.
How to Win a Price War

There are companies that want to go on a full frontal attack and
start a price war. To succeed, there are several prerequisites that
must be in place [→4]. The first concerns the cost advantages.
These must be larger than the competitors’, either in the form of
a flexible organization, different purchasing conditions, or cost
advantages that the competitors cannot easily copy. In addition,
one must have the financial backbone to bear the costs along
the way.
A price war is also more likely to succeed if you are only
looking for a small segment in the market, and you expect the
competitors not to be willing to follow suit. Then you get to keep
the newly acquired market shares for yourself. But price wars
cost money. And for companies that can subsidize losses in one
market through earnings in other, complementary markets will
be better able to bear the costs. A final factor is if the price war
leads to the total market increasing sufficiently so that the actual
earnings are not reduced.
Price Wars in the Grocery Industry

A large study from the Dutch grocery trade mapped the long-
standing effect of a major price war in the country [→32]. The
initiator of the price war was the market leader, who wanted to
stop the leakage of market share to competitors.
The researchers found that the price war led to customers
initially increasing trade as they spent more money on food.
After the initial period, however, the size of each trade fell as
customers changed their behavior to tactically buy products
where they got the best price deals. The price war made
customers price sensitive, and the effect of the weekly price
changes became more important. The grocery chains that
continued with the price war won customers during this period.
The losers were the middle-class chains and the high-end
players. Customers did not perceive any change in the pricing
policy of these stores, and they lost the battle in the price
awareness that had been created.
What did the chains achieve through the price war? First,
those that started the price war won. The chain that started the
price war achieved a positive price image without damaging the
perception of their quality or their services. Those that followed
did not report similar price effects. The second factor is that the
initiator ended up with a higher market share than before the
price war. Of course, the earnings did not demonstrate a
corresponding increase, so the war had its costs. Thirdly, it was
the chains that offered extra services and higher quality, and the
chains in the middle layer, that lost from the war. Customers had
been trained to be price sensitive and chose stores that ran hard
discounts. The fourth effect of the price war, from the
customers’ point of view, was lower prices. This did not come
without consequences. Lower margins as well as lower
investments in product development, innovation, and research
are detrimental to product quality and supply and will harm the
consumer in the long run. The focus on service and selection is
reduced. Fifth, not all chains will survive a price war, and
bankruptcies will occur.
Recommendations for Grocery Chains

The study from the Netherlands provided the following advice to
grocery chains regarding price wars [→32]:
1. If the conditions of competition indicate that a price war is
likely, it will pay to be first. The first man wins the attention
of the customers.
2. High-end players should avoid using the price in their
marketing. A price war will lead to customers becoming
more price sensitive, and the stores are better served by
investing in other customer segments.
3. The low-price chains have the advantage in price wars.
They take advantage of their low prices and get customers’
attention and thereby receive increased store visits. The
low-price chains must lower their prices less than the
middle-class chains to compete.
4. Managers should not be too overzealous even if a price
war increases the influx of customers in the short term. In
the long run, customers return to their original routines.
But those who have an unattractive pricing policy risk
losing customers forever.
5. The chains should study the customers’ reactions before
they step up a price war. If buying behavior changes only
modestly or temporarily, it may be appropriate to compete
on other marketing mix variables to win back customers.
But if customer behavior changes significantly, you have
little else to do but respond by reducing prices yourself.
6. The strongest wins. Where a price war is initiated by one of
the leading chains, these will have the power and strength
to stand out. They can cross-price finance the losses, they
have negotiating power on their prices from the suppliers,
and they still have most customers. If a price war is started
by a chain in the middle layer, the chain can succumb on
its own.
7. Price wars that are directed against competitors are less
effective. Such competition aims to have cheaper shopping
baskets than the competition. A better strategy is to focus
on customer savings.
It is important to be aware of using the term “price wars” versus
“price competition.” Not every price cut is a price war. A price
war goes much further than an ordinary price competition. The
best vaccine against a negative price spiral is to focus on
customer values and products’ unique attributes, to
communicate intentions with price politics clearly both internally
and externally, as well as getting a good night’s sleep before you
set out the response to a competitor’s aggressive pricing
competition.
Summary
Few companies or customers are winners of a price war. Price
wars can change the balance of power in a market and can result
in near monopoly power and increased prices in the long run. In
this chapter, I have described how a company should react if it is
exposed to aggressive price competition that ends in a price war.
The chapter also deals with possible outcomes of price wars as
well as what must be in place to be able to win a price war at all.
The chapter concludes with a description of research on price
wars in the grocery industry.
Chapter 7 Unfair Price!
Introduction
Few things provoke customers more than if they feel they have
been cheated on prices. This chapter is about customers’
perceptions of unfair prices. The chapter starts with a step-by-
step model for how companies can prevent and deal with
consumers who perceive that they have received unfair prices.
The chapter then goes through policies and legislation within
marketing and price fixing.
It is appropriate to remind ourselves that all price variation
that exploits customers’ weaknesses or in some way tries to
manipulate the customer negatively is a shortcut out of
business. You fool a customer only once, and then the customer
is gone forever.
Throughout this book, I recommend dynamic pricing, where
you vary the prices based on the customers’ willingness to pay.
In Chapter 4 regarding different prices for the same product, I
described how to vary the prices for the same product or service,
while in Chapter 5 regarding different prices to the same
customers, I wrote about how to get the same customer to
voluntarily pay more for a product. In Chapter 9 on
“psychological pricing,” I even describe how a number of tricks
can make products appear like a good buy, based on the way
prices are presented. The message in this chapter is to vary
prices based on the customer’s premises.
Steps in Dealing with Unfair Prices

An indisputable premise is that all price variations must be
perceived as fair by customers. Unfair treatment evokes in
customers everything from anger to the desire to harm the
provider in one way or another. This is also the reason why one
should be very aware of whether customers perceive the criteria
for price variation as fair. This means that customers must
qualify for a lower price. This way the customers will not feel
punished. Even giants like Coca-Cola make mistakes in their
price discrimination. In one case they tried to vary prices on
Coca-Cola vending machines based on air temperature. The logic
was that hot weather would lead to a higher willingness to pay
for the soda than on days with cooler weather. This was a short-
lived experiment. Customers felt that they were being exploited,
and the reactions were not long in coming.
In 2017, Richard Thaler [→33] received the Nobel Memorial
Prize in Economics for his research on human behavior in
economics. His research includes the notion of justice. He and
his co-authors found that customers place great emphasis on
the reason for a price increase for this to be perceived as fair.
Reasons that lie outside the company’s control were accepted,
for example higher oil prices for the airline industry, while
internal reasons are unacceptable. Examples include increased
wages because of strikes. We will use this knowledge further
when we discuss the framework for how to handle customers’
perceptions of unfair prices (see →Figure 7.1).
Figure 7.1: Steps in Dealing with Unfair Prices.
Step 1: Map the Basis of Comparison

Customers react differently to identical prices. If there are new
customers in a market, they might not know how this market
works and may react more strongly to price variation than
customers with market experience. Customers with repeated
transactions may therefore have a better understanding of why
prices vary.
There is also a learning effect that affects customers’
understanding and reactions to price changes. Research by
Busse et al., [→5] shows that sellers treat customers differently
based on how well informed they give the impression of being.
Researchers tested the assertion through car repair shops and
found that the given prices varied according to the extent to
which the customers perceived they were informed, uninformed,
or misinformed about the market. When the customers assumed
a price that was higher than the market price itself, the sellers
followed up by offering a higher price, and the prices varied
between women and men [→5].
Yield management for flights has led to customers being
accustomed to large price variations, and price-conscious
customers plan accordingly. Also, the hotel industry implements
such a pricing strategy. In its early stages it was perceived as
unfair, but it has gradually become a more accepted industry
standard. In addition, customers with a long-lasting relationship
with a business or with a higher degree of confidence in it do not
want to exploit their relationship. Such loyal customers can
therefore withstand a higher degree of price fluctuations,
without suspecting that they will be exploited. On the other
hand, when customers see that the company is taking
advantage of a situation by pushing the prices up in the short
term, the reactions come quickly. A current example is the
explosion in the prices of infection control equipment during the
coronavirus pandemic.
What customers do not easily accept, however, are costs that
the company itself has incurred, and which they try to transfer to
customers [→34]. I mentioned salaries earlier, while other
examples include increased interest costs due to low liquidity,
increased administration and document fees, parachutes for
managers, more hirings, etc. Cost transfer from one group to
another is perceived as unfair. Customers accept costs that the
company cannot control. Examples include oil prices, US dollar
exchange rates, new EU regulations that increase costs, higher
electricity costs, etc. Companies deliberately use this when
raising prices. In the event of increased air fares, we usually see
a press release in advance where the airline specifies that the
reason for the price increase is beyond their control. A recent
major meta-analysis of research in the area supports the
assumption that price increases justified by cost increases
increase the perception of fair prices, while price increases that
are not justified reduce the perception of fairness [→35].
The final element in the basis of comparison is the degree of
similarity between products and services [→34]. By introducing
some variation in the products, the customers will find that this
is the reason for the price variation. This can be variation related
to product attributes, service level, or quality. Companies use
this deliberately through their branding policies. Examples
include petrol stations that vary their prices based on whether
the station provides car services, as well as different gasoline
prices at different times of the week and during the day. These
are variations that customers are both used to and accept. Price
variation on charging electric cars, on the other hand, has not
been incorporated into the market. While some charge per KWt,
others charge for a combination of KWt and the number of
charging minutes and provide a reduction in the subscription
scheme. The lack of a common payment model for suppliers of
various fast chargers makes the market unpredictable for the
customer. Unpredictability again gives a perception of
unfairness.
Step 2: Map Customers’ Reactions

It is important to note that customers do not see justice and
injustice as direct opposites. Customers make three evaluations:
whether the prices are the same, whether the prices are
different to the buyer’s advantage, or whether the prices are
different to the buyer’s disadvantage. If the customer gets a
better price than others, they see this as fair and something they
likely have deserved. The reason is that customers want to
maximize their own dividends. This is a result of their own merits
and is in their own interest. When the evaluation is of the buyer’s
disadvantage, they are completely innocent. If they have paid a
higher price than others, it is the company’s fault, and the
reactions lead to various emotions [→34]. The theoretical
reasoning for this type of reaction can be found in the
attribution theory, which describes how people explain causal
relationships.
The comparison customers make can be both explicit and
implicit. Explicit comparison is when you compare prices directly
against each other. Implicit comparison is when customers
receive a higher price than they expected. The latter often
happens when you enter into agreements on subscriptions, but
find that the final price is much higher than you initially
expected.
Moreover, research shows that if customers assume
(although they do not know for sure) that a company charges
unreasonably high prices in relation to their own costs, they
choose this company’s products. Some companies exploit this by
signaling that they have higher costs than they do, and thus
affect customers’ cost/benefit perception [→36]. In addition,
customers consider large and strong companies to be less fair.
This is because they assume that these companies will leverage
their market power through controlling others and utilizing
power through increasing prices [→37].
Step 3: Map your Customers’ Emotions

Customers who are exposed to what they perceive as unfair
prices react cognitively and affectively [→34]. The cognitive
reaction, being the rational perception of price differences,
affects customer satisfaction, future purchase intentions, and
the motivation to complain. The affective reactions can vary in
strength, from slight irritation to strong frustration. Perceived
value is an assessment of how much one has sacrificed versus
what one achieves from the benefits. The experience of having
paid too much, therefore, leads to a reduced perceived value
from the transaction, even if the product’s attributes are the
same. Thus, we also see that price-conscious customers will have
a stronger reaction than customers for whom price is not that
important.
Customers with a cognitive reaction often want to protect
themselves financially by demanding financial compensation.
Affective customers, on the other hand, may want to obtain both
financial and psychological compensation.
In a no-reaction situation, the customer considers how much
time, energy, and replacement cost it will entail to complete the
purchase. For an Internet subscription, this includes the
replacement of routers, passwords, payment agreements, etc.
With a high threshold, the customers might choose to continue
the agreement despite the fact that in principle they are
dissatisfied. At the same time, these customers can hurt the
company’s reputation by spreading their dissatisfaction among
friends and on social media.
Self-protection occurs when customers perceive an injustice
to be so serious that they cannot accept it. Such customers
complain, request a refund, spread negative rumors, and leave
the relationship if possible. These customers will also put extra
effort into finding alternative products or suppliers as well as
identifying the costs associated with switching. The trade-offs
are calculative, and customers leave the relationship if this
benefits them.
The desire for revenge refers to customers with strong
emotional reactions. These customers can be furious, angry, and
rebellious. Ordinary conversations to discuss the situation can
be difficult or impossible. Customers will achieve justice at
whatever cost. They are happy to switch to the nearest
competitor, even if this entails an even worse financial
agreement than the original one. However, the psychological
gain outweighs the feeling of loss. This type of customer is also
inclined to contact nationwide media to make the injustice
known to the whole world and beyond.
Step 4: Manage Customer Behavior

Damage control is best done preventively! Honest and fair
pricing practices prevent situations with angry customers.
When a customer’s dissatisfaction is based on an actual price
difference, the best and simplest solution is to compensate them
with a sum of money, give some form of reward, or give other
forms of compensation. Thus, one accepts that the price
discrimination was unfortunate, and gives the customer support
in his or her view. This can lead to the customer having an even
stronger bond with the company and finding that the company
wants to act fairly.
If customers’ reactions have a strong affective character,
financial compensation will not always be sufficient [→34].
Customers need just as much to vent their frustration. The goal
must be for customers to express their frustration with the
company rather than on social media. This gives the company
the opportunity to explain why the situation has arisen, as well
as to offer compensation. Listening to customers may remove
the desire for revenge. It may even succeed in stopping
customers having external damaging effects.
Pricing Marketing Guidelines

In the US, the Federal Trade Commission (FTC) organizes the
Bureau of Consumer Protection (see
→https://www.ftc.gov/about-ftc/bureaus-offices/bureau-
consumer-protection). Their mission is to stop unfair, deceptive,
and fraudulent business practices. The FTC’s guidelines on
advertising and marketing (see →https://www.ftc.gov/tips-
advice/business-center/advertising-and-marketing) describe the
regulations in the US for both brick and mortar and online sales.
In 2020, the European Commission drafted a new Consumer
Protection Cooperation (CPC) regulation. The main changes
consist of faster reactions and increased attention to digital
everyday life. The CPC ensures that price information, price
labeling, and price marketing comply with laws. European
national consumer agencies have the authority to stop the
marketing of products as well as impose fees and coercive fines
for violations (see
→https://www.ccpc.ie/consumers/shopping/pricing/rules-on-
pricing/ and →https://ec.europa.eu/info/law/law-
topic/consumer-protection-law/unfair-commercial-practices-
law_en).
The main points in the EU guidelines, which also make sense
for other countries, on price marketing are as follows:
Price information must be correct. This means that
information about prices must be clear, unambiguous, and
complete.
It is the average consumer’s opinion that counts. In other
words, it is not the company’s own view of how prices are
perceived that is decisive.
The total prices must be stated in all contexts. The total price
is the complete price the customer must pay for the
item/service. This includes all taxes to consumers.
The full price must be stated in all price marketing. In other
words, it is not enough to state the total price in small print
at the bottom.
When there are marketing cost advantages it must be clear
what the basis for these price advantages is. The usual basis
is pre-price, competitor price, or price after the campaign.
The price advantage must be real. The use of terms such
as “sale,” “seasonal sale,” “rebate,” “on offer,” “discount,”
“Now €”, and the like creates a consumer’s expectation of
a higher prior price and one must therefore be able to
document this.
Pre-price must be real. As a rule, the price must have been
used in the period before the sale and the product must
have been sold at the stated pre-price. It is also not allowed
to promote a luring offer that is not real. The use of the
term “introductory offer” requires the item not to have
been in the portfolio before.
Comparative price must be stated. If you state a comparative
price such as the indicative price, price after the campaign,
list price, package offer, price at competitors or at price
comparison sites, such as pricee.com or best-price.com,
you must mark the actual price and date of the
comparison.
The use of terms such as “cheapest,” “lowest price,” and the
like must be documented in advance. Expressions such as “I
believe,” “we mean,” or similar statements do not exempt
a company from the documentation obligation.
The use of terms such as “price guarantee” must be
documented. This also applies to concepts such as price
promise, low-price promise, and the like. The term “price
guarantee” cannot be used if there are restrictions that
make the right to a price guarantee unrealistic.
The terms of the price match must be clear and unambiguous.
The time period must be emphasized, and the
requirements for disclosure of evidence from the front
user must not be unreasonable. Ad clips are enough.
Free claims must be met. When using the term “free” it
cannot be added to fees, shipping, or other costs.
The term “cheap” must only be used if performance of the
same quality costs less than that of competitors. This
includes imprecise terms such as “low-price profile,” “low
prices,” and the like.
Customer statements about savings such as “best,”
“cheapest,” and so on must be documented. This also
applies to editorial coverage in their own marketing.
The use of terms such as “outlet,” “factory sales,” “stock
sales,” and “bankruptcy sales” must document in the usual
way that the price difference is real. The terms can only be
used if the prices are particularly lower than the prices at
ordinary dealers.
The term “finance package” or equivalent must be real. If it
does not pay for the consumer to buy large packages, it is
misleading to use such terms.
Guidelines for Price Cooperation

National competition authorities ensure that there is the best
possible competition in all markets. National audits ensure that
companies do not illegally cooperate with competitors on prices,
division of markets, and restrictions on production or sales. In
the US, the Clayton Antitrust Act and the Robinson-Patman Act
are laws that exist to prevent anticompetitive price
segmentation. Collusion goes under the term “cartel” and
implies that all or part of the market is put out of play. It is a
company’s own responsibility to ensure that it does not enter
illegal collaborations. The competition authorities handle
applications for exemption from price cooperation.
Price collusion is illegal. A company cannot have contact with
current or potential competitors regarding which prices to
operate with.
Market sharing is illegal. A company may not have contact
with current or potential competitors to divide customers or
areas among themselves, set quotas, or agree on product
specialization.
Tender cooperation is illegal. A company cannot cooperate on
the submission of tenders, neither on price nor terms, before the
tender is submitted.
Ethics and Legislation

Well-functioning and competitive markets are based on the
premise that all transactions are voluntary. Ethical assessments
for pricing strategies can be summarized in five points [→4] (see
→Table 7.1).
Table 7.1: Ethical Criteria for Pricing.

Ethical criteria’s Implications
The price is paid Customers shall be aware of the actual price of the
voluntary product
The transactions are No information is kept hidden from exploited
based on equal customer groups
information
No one shall exploit The prices shall not exclude important customer
buyers voluntarily groups from buying the products, such as medication
The prices are justified No prices shall vary based on exploiting the market,
by costs such as a shortage on products
The prices provide equal No transaction shall be based on personal gain
access to products
Point 4 is especially interesting during the coronavirus

pandemic, where we see that the prices of medical materials,
such as antibacterial lotion and face masks, have shot up. Hand
sanitizer comes in many sizes. Numbers from the Nielsen
analysis bureau in the US show that the prices of hand sanitizer
rose by 53% during the pandemic [→30]. Network players that
mediate such sales, such as Amazon.com, banned early on
artificially high prices that exploit people in vulnerable situations.
Summary
Dynamic pricing must be performed in a way that customers
perceive as fair. This chapter started with a step-by-step model
that shows how companies can prevent and deal with
consumers who perceive that they have received unfair prices.
The chapter then reviewed guidelines and legislation within
price marketing and price cooperation.
Chapter 8 Price Tactics, Sales and
Promotions
Introduction
While price tactics is the daily execution of price management in
a company, pricing strategy is about the overarching rules you
must follow. If these two are not developed in relation to each
other, the actual pricing tactics can have a major devastating
effect on the long-term pricing strategy. In this chapter, I will go
through several ways to operationally work daily with prices. The
chapter starts with a practical step-by-step framework for
working systematically with tactical pricing decisions. Then I
describe a whole range of different price promotions that are
available. It is important to be aware that choices about the use
of different price promotions have long-term consequences for
what customers perceive as a fair price of a product. Arbitrary
upward or downward adjustment of prices can therefore lead to
long-term damage to sales. Therefore, if the work of price
promotion exercises is not based on an established price
strategy, the price execution might be completely arbitrary. This
can lead to great harm to the company’s long-term earnings.
Price promotions can be proactive when you want to expand
a market, you want to increase sales or profits, or to develop
customer advantages that provide superior performance to
customers. Price promotions can also be reactive, such as in
one’s response to competitors’ actions, to get rid of excess
inventory, to increase short-term income, or to exit a product
group or lay down the company.
Steps to Determine Tactical Pricing
Price promotions influence customers’ expectations. Recent
research by Shaddy and Lee [→38] shows that price promotions
cause customers to be more impatient because of the desire for
quick reward [→38]. This impatience triggers a higher
willingness to pay to have a shorter waiting time. In this chapter
the message is therefore that a primary goal of the price
promotion is to get customers to make the purchasing decision
faster than they would otherwise have done.
The following five steps (see →Figure 8.1) are important
decision criteria for implementing a price promotion [→6].
Figure 8.1: Steps for Determining Tactical Pricing.
Step 1: The Goal of the Price Change

The company must start by asking itself whether it really wants
to use a price promotion. This question seems unnecessary but
is essential for one to be aware of the strategic reason why one
chooses to use a price promotion. Do you want to increase
attention, increase sales, attract new customers, create
incentives to change brand, or create loyal customers? Some
customers carefully compare different products, while others
shop out of sheer habit. Some customers may be very price
conscious, while others are more brand loyal. Others want extra
service and security for their purchases.
Next, you must decide who will be offered the price
promotion. One must decide if it is directly to the customers, the
distributors, or the retailers. If you choose one of the links in
between, you must consider whether these allow a share or the
entire price reduction to be passed on to the customers or not.
Will the price promotion target the right customer segment?
Sales can lead to changed associations among customers, such
as perceptions of lower quality.
Step 2: The Time of the Price Change

When will the price promotion apply from? Is it for certain
seasonal fluctuations? In response to competitor games? In case
of sales failure?
How often should you have a price promotion? If you have
price promotions too often, this could have a great impact on
customers’ willingness and expectations about the next sales
period. Maybe they expect to never buy the product at full price.
How long should you have a price promotion for? At long
intervals, it will be difficult to measure the real effect of the price
promotion. In addition, this is an important signal to
competitors, so that they know whether a price war is underway
or not.
Step 3: The Size of the Price Change

How much should be offered in a price promotion? Do you have
a special edition of a product to be sold in a certain quantity?
Has the number been determined?
Which product variants should be offered for price
promotion? Is it all versions within a product, or is it a specific
size, edition, or specific models?
How and by how much should the price be reduced? The
amount to be reduced must be determined, as well as the way it
is to be done. This is also based on customers’ price sensitivity
and assumed reaction patterns.
How will the competitors react? Will they put down their
prices correspondingly or even more? If so, how will we follow
up on our price promotion?
The financial consequences of the price change must be
calculated. How will cost promotion affect the sales and
profitability of the business in the short and long term?
Increased short-term sales may mean a shift in future sales, but
at a lower price. In addition, the sales might affect targeted
customers who are not willing to make cross-purchases of
second products.
Step 4: The Execution of the Price Change

Price promotion is not just a percentage reduction in price.
There are several different ways to make price promotions,
ranging from price reductions, discounts, coupons, and codes to
bonus programs and loyalty points. Research shows, among
other things, that if the price reduction is compared with the
sales price, customers perceive the price reduction as much
larger than if it is compared with the original price [→39].
Step 5: Communication of the Price Change

Make sure that the prices and price promotions that are
communicated are easy to understand, transparent, and easy to
handle internally [→40]. Provide clear and practical information
about what the offers entail. Provide true information about
before and after prices. Avoid vague wording, such as “up to 50
percent discount.” Reduce the time and energy it takes for a
customer to take advantage of the offer. Registrations and filling
in information reduce the effect. Avoid the term “suggested list
price.” Customers feel exploited. If the term “free” is used.
Rather, you should tell them how much money it is about. For
temporary price reductions, be precise about the start and stop
date. Be clear about the actual cost incurred after an
introductory offer on subscriptions.
Price Promotions
Price promotions may vary in time, product bundling, discounts
on prices, and other factors.
Examples of different types of price promotions include:
1. early bid: buy before May 1, get a 50 percent discount on
the price
2. last chance: buy now for 60 percent off, travel within 30
days
3. product bundling: get one free hotel night when buying a
season ticket
4. 40 percent price reduction on the entire range
5. 10 percent discount on purchases over $100
6. free shipping
7. free sample pack
8. bonus packs, get more on the purchase
9. buy one, get one for free
10. buy one, get half price on the next
11. buy two, get the cheapest for free
12. three for two
13. seasonal discount
14. loyalty card
15. price match and price guarantees
16. free gifts
17. refund
18. $40 discount on the price
19. $1 market
20. reduced price: before $199, now $190
21. quantity discount: buy five get 5 percent discount
22. 1 percent discount per year in age
23. loyalty program
24. price packages
25. shelf price discount
26. coupons and digital codes
27. price cut: new price $19.90
28. bonus points
29. shock sellers
30. event and trade fair prices
31. industry-specific prices
Price Reduction
Reducing the price is the easiest factor to adjust, but this is also
the situation for the company’s competitors. Therefore, price
reductions should be based on certain criteria that the customer
must meet to access the discount. Remember that criteria used
to discriminate against customers must be perceived as fair.
Time factors are widely used in price reductions: for example,
that an item is sold with a price reduction for a certain number of
days. Such a price reduction is often advertised continuously, so
that customers are motivated to follow up and kept informed
about what is happening in the companies. Another time factor
is seasons, and everyone is used to seasonal sales after winter,
summer, and holidays. Such seasonality has, however, tended to
expand, so that you now have both pre-holiday sales and
midsummer sales. The effect is that lower prices are expected
throughout the year. We also see more and more businesses
using holidays and anniversaries as a price variation factor: for
example, having Singles Day/Week and Black Friday phenomena
increased, as well as sliding into Black Week (see →Figure 8.2).
Countries like the US tend to combine sales and various
anniversaries – everything from Presidents’ Day to Veterans’
Day, etc. Remember, however, that such a sale is not necessarily
appropriate. If a price reduction gives less income than in
ordinary activities, the purpose must be reconsidered. Recent
research shows that price promotions around major events,
such as the Olympics, generate higher sales only if one is careful
regarding the choice of synergy between brands and the events
[→41]. Expiration date is a time factor that is used more and
more. Instead of grocery stores throwing away products that are
close to expiration, they sell them at greatly reduced prices a few
days before the date expires. Such a strategy both appeals to a
sustainability perspective with less food waste and is available
for all customers who have a desire for green consumption
[→42]. The majority of customers who shop for these types of
products are also customers at other food stores.
Figure 8.2: Black Friday All Week.
The advantage of using price reductions as a tactic is that they

motivate customers to shop for products earlier or shop for
products they otherwise would not have done. Customers are
often more concerned with how much they save, rather than
how much they spend. And customers perception of a good deal
results in satisfied customers. Also, if the purchase is made
under a time limit, i.e., “run and buy purchases” before they are
sold out, customers also feel that they have accomplished
something that rewards themselves. Using different social
media, you can now differentiate to a much greater extent the
customer groups, so that you can target the tactics at specific
customer groups that you want to reach. This can be new
customers or other types of customers, or making existing
customers aware of new usage opportunities. In addition, it can
be a reminder to existing customers to come back and use the
business more often, and thus try to increase customer loyalty.
The risk of using price reductions is when it is done without
goals or purpose. If you engage in a wave completely reactively,
such a tactic can result in large loss of income. And if you offer
the wrong products, customers will quickly understand that they
are being exploited. This comes back to strike you. Price
reductions that are used too often also destroy the basis for
ordinary prices.
Discounts, Codes, and Coupons

A discount is something that is given back at a paid price. This
can be in the form of percentages, a $ amount, or as a refund
and the use of coupons. One example is that with a trade you
get a coupon with a 10 percent discount on the next purchase if
it is used within a certain time. Online stores often have specific
codes with limited duration that one needs to enter to obtain
discounts. Another type of discount is a percentage off on the
next trade if you recommend the website to a friend.
The decision on which products should be given a discount
or not must be seen in connection with complementary and
substitute products. A complementary product is a product that
is purchased together with the main product, such as a
PlayStation and games. A substitute product is a product that
can replace the main product, such as Netflix and HBO Max.
Cross-price elasticity – that is, how the sale of one product
affects the sale of another – affects whether a discount obtains
the desired effect. If a 10 percent discount on the sale of a
PlayStation increases the sale of games by 20 percent, the
discount can lead to increased profit. However, if the discount on
Pepsi Max soda only increases the sales of this soda, you must
calculate how much extra you must sell in order not to lose
profit. Elementary techniques for calculations are described in
Chapter 12 on pricing calculations.
The advantages and disadvantages of discounts follow the
same discussion as for price reductions. The effect of discounts
can be even more targeted when the customer receives them
physically as part of the receipt. For online shopping, codes,
which are in fact a type of digital coupon, can be used
purposefully to get customers to complete a trade on items they
have left behind in the shopping cart. At other times it can be
used as a reward: for example, you get a code for a discount on
your birthday or when the company has a birthday. However,
some customers become coupon experts, and large purchases
with the deliberate use of coupons can be a real loss for the
business. Through conscious use of media channels, coupons
can provide targeted measures to specific demographic
customer groups. Another advantage is that you get attention
even though many customers forget to use the coupons when
buying. However, if you make coupons with too strong
restrictions, such as a very short deadline, this can hurt rather
than promote the company’s reputation [→43].
Price Bundling
Price bundling is a well-known phenomenon. Buy two, get the
cheapest for free! Or three for the price of one! Customers
perceive that they get more than they pay for and experience
this as a good deal. Methods for product bundling are well
described in Chapter 4 on different prices for the same product
and include price as a mechanism.
The advantage of price bundling is that you do not harm the
reference price. Customers will receive incentives to shop for
more money than they otherwise would have done, and the total
sales increase. However, it is important that the products that
are chosen provide extra value to the customers. If you combine
the wrong products in a price bundle, the irritation can outweigh
the expected increase in value. Again, it is about understanding
the customer and creating a product mix that builds on their
premises.
Loss Leader
A loss leader is a product that is sold below market price and
sometimes also below production price. The purpose of a loss
leader is to capture the attention and draw customers into the
store or to the website. The goal is then to sell other products
that offset the loss. A loss leader must be a product with a high
degree of price sensitivity so that the price reduction affects the
buying behavior. A classic example is an extraordinarily cheap
turkey for thanksgiving (see →Figure 8.3).
Figure 8.3: Season sales.

The advantage of using a loss leader is that you can remind
previous customers to return to the store and get the attention
of new customers. Grocery stores often use loss leaders to signal
that they want customers through reduced prices, and they use
the tactic deliberately as a marketing effort. Customers
understand, of course, that this is a game and is used only when
it suits them. In addition, there is a risk of products being sold
out, and the whole effect might become negative. Moreover, if
the loss leader attracts customers who do not want to spend
more money in the store, the whole tactic fails. Another
unsuccessful strategy is to create a loss leader based on surplus
stock. Such surplus stocks are based on the corporate or the
store’s premises and not the customers’ needs. The effect may
therefore be absent. The reputational effect of a failed loss
leader can also be more damaging than if one did not choose
such a tactic.
Loyalty Programs
The purpose of loyalty programs is to get ordinary customers to
become permanent customers with repurchases. Loyalty
programs use different strategies. The most common are bonus
points for each purchase, where you collect points and can turn
these into items or other reward systems. Loyalty programs
were formerly used widely in the grocery and airline industries,
and these have now expanded into coffee shops, clothing stores,
and online shopping. Everyone now asks for a mobile number
with a view to including the customer in the customer club.
The advantage of a loyalty program is that, when done
properly, it gets the customer to feel appreciated. Satisfied
customers return and become loyal. The loyalty program is thus
used as a differentiating element to separate the store from the
competing stores. At the same time, as more and more loyalty
programs are being offered, the actual distinction between them
becomes more difficult to maintain. The value of the data and
the ability to segment customers based on various criteria have
been important effects of a loyalty program. However,
customers have become more concerned about how data on
their personal purchasing behavior are disseminated and used.
The European General Data Protection Regulation (abbreviated
to GDPR) has set a completely new standard for how shops and
companies can collect and use this type of data. Consent is
required and makes the work with the loyalty programs far more
demanding. The US government has not implemented
corresponding regulations. However, it is important to note that
the GDPR applies to organizations operating within the EU and
those worldwide that target – directly or indirectly – individuals
in the EU.
Adaptation of Price Tactics According to

Customer Value
There are several recurring mistakes that businesses make in
connection with pricing tactics. These are often the result of ill-
considered plans and result in incorrect effects of the price
promotion [→6].
1. Price reductions within the seasons are often unprofitable.
2. Price reductions too often reduce customers’ willingness
to pay.
3. Price reductions often have little effect as a response to
new competing brand launches, product packages, or
innovations.
4. Price reductions are more effective when you launch your
own new brands.
5. Price reductions do not fix a bad product.
Price tactics are all about creating boundaries and separation
that ensure that customers must qualify for a price reduction. A
healthy price tactic works dynamically with prices so that they
are constantly optimal for the various customer segments’
willingness to pay. If the price is too high in relation to a
customer segment’s willingness to pay, it will be a missed
opportunity. And vice versa, if the prices are set too low, they will
be unused opportunities (see →Figure 8.4).
Figure 8.4: Adjust the Price Points According to Value.
Missed opportunities are markets where the product has been

overpriced in relation to the customers’ perceived value. What
often happens in such cases is that the company assesses the
product according to its own value, not the customer’s opinion.
In such cases, it is easy to imagine that the only solution is to
reduce the price. But the problem is just as often that one has
not been able to identify the factors that create value for the
customer.
One example of this is the newspaper industry, which due to
the transition to digital newspapers is struggling to get paying
customers. They try everything from free weeks, to $5 for five
weeks, to giving customers access to three free articles per
week. Nothing seems to work. Despite the initiatives, customers
have a low willingness to pay. What is interesting is that the
various papers think of each other as competing products
(substitutes), while customers see them as complementary.
Often, customers want cases covered from different
geographical areas, with different opinions, and with different
journalists. The Amedia media company realized this by
understanding that a reader is not only interested in a single
newspaper, but a combination of newspapers. They therefore
combined their subscription scheme to include all 73 national
and local newspapers. As a result, they experienced a 43%
increase in paying subscriptions.
Price Guarantees
Price guarantees are about a company guaranteeing to pay the
difference if customers find the same product at lower prices
elsewhere. This makes it easier for companies to market their
price-match guarantees rather than their actual prices.
Customers, therefore, associate the business with low prices,
without necessarily knowing the exact prices.
New research shows a paradox within price guarantees in
that customers assume that this type of store offers the lowest
prices [→44]. Customers who have large search costs would
therefore prefer to shop at these vendors rather than spending
time searching for the lowest prices in the market. The irony is
that this means that companies can charge higher prices than
they would have done without such a price guarantee in the
market.
Summary
Tactical pricing, or “price promotions” as it is also called, has a
great effect on a company’s long-term earnings. In this chapter,
I have gone through several ways to work operationally with
prices daily. The chapter started with a practical step-by-step
framework for working systematically with tactical pricing
decisions. After that, I reviewed a whole range of available price
promotions.
Chapter 9 Pricing Psychology
Introduction
In this chapter, I show how the individual perception of a price,
payment, or discount is affected both by the number itself and
by the visualization, the environment, and the way the price is
combined with other prices. The chapter starts with a
description of reference price and how customers focus on
transaction benefits rather than the actual price they pay. Next, I
give an example from an online booking site, where a whole
range of techniques is described. Finally, I review four steps that
describe the use of psychological pricing.
Most people are familiar with the use of 90, 95, and 99
endings. But did you know that if customers get the choice
between “buy one, get one for free” and “two for 50 percent,”
most customers choose the first option? Even if the actual
amount is the same, the first option is perceived as better. When
we get one free on a purchase, this is seen as an additional
value, while a discount of 50 percent is perceived as a reduced
loss [→45].
How Much You Save Is More Important

Than How Much You Pay
This section should be called “transaction utility and acquisition
utility” [→46]. It’s about the fact that customers are often more
concerned about how much money they save on a trade
(transaction utility) than about how much they pay (acquisition
utility). To illustrate this, when we have been at a sale in a store,
we come home and announce how much money we have saved!
We seldom talk about how much money we have spent.
This relationship is illustrated in →Figure 9.1. It shows that
customers have a reference price that sets the level for what
they consider to be an acceptable price. If they obtain a price
that is lower, the trade is perceived as good, and they focus on
the transaction utility. As mentioned earlier, the reference price,
which is the willingness to pay, is affected by several factors, the
most common of which are experience, the environment, and
the numbers you are exposed to here and now.
Figure 9.1: The Relationship between Transaction Utility and

Acquisition Price.
Number Magic on e-Commerce Sites

Let’s analyze a regular website that sells hotel accommodation
Figure 9.2: Illustration of Hotel Prices Online.
1. Note that the list of hotels is sorted by featured hotels. In

very small letters it states that the sorting order is based
on the compensation the network operator receives from
the hotels. In other words, the order is not trivial. However,
often we do not look at the top of the screen when we start
searching for a hotel. We turn our focus straight to the
prices and selection of hotels.
2. A Covid-19 restriction warning pops out in yellow color.
Here one must fill in details about the country of residency,
vaccination, and insurance to get information about travel
restrictions and regulations.
3. They deliberately include reviews from other guests. This is
because it is difficult to evaluate the quality of experience
with products before trying them. We, therefore, put extra
trust in other customers’ opinions.
4. Let’s then look at the actual price of the accommodation.
The original price of $1,626 per night is detailed and
includes the number 6. The accommodation has a special
offer at $1,271 per night. Ergo, the last digit is now number
1, and we experience the cost as lower. In addition, the
first numbers have gone from 16 to 12, which is perceived
as a big reduction. Interestingly, when multiplying $1,271
by 7 nights, the total price is $8,897, while the total price is
stated as $10,460. The stated total price is perceived as a
good bargain since it consists of round numbers, while the
actual total price requires the mental capacity to interpret
and therefore is perceived as higher. And red prices? Well,
as we will see in this chapter, they work well. The sizes of
the letters affect which numbers we see first. And with a
price of $10,460, we see the next option at $3,227 as a
bargain (5). In other words, our reference price was
strongly affected. It is not a coincidence that the first hotel
on the list is more expensive than the second one.
Did you notice that the first and second hotels are marked with
“Ad” and the third and fourth hotels are identical with identical
prices (6)?
Bonus points are good and feel less painful to use (7). So, all
the options here can collect bonus nights. Ergo, this can affect
our choices.
Secret prices must be a deal in our favor (8)! But wait, by
clicking on the link one must be a member to qualify for the
offer. But this is urgent. The second alternative, which costs
$3,227, and which now looks very attractive (and which also has
a sponsored follow-up), has a limited-time offer of 35% savings
[→9]. Because this reservation is far into the future, we do not
get the usual “sold out” option. As customers, this gives us no
additional information when choosing among the alternatives.
The reason why they include it is that we feel the time pressure
and are reminded that as time passes the choices disappear.
So, the question is: what’s the actual price (10)? A link that
comes up only after you have clicked on one of the hotels says:
“See fees and policies for additional details or extra charges.”
Therein lies the answer. A mandatory resort fee of $45 per day
per room will be added. Parking is not included, even though the
room costs $10,000. They charge $45 a day for parking. Do you
have many children? This costs extra per day. Are you planning
to bring your dog? This costs an extra one-time price of $150.
And of course, international residents must not forget the 20
percent tip in the United States. By the way, fancy a balcony? Sea
view? Extra fees. Breakfast? This depends on the choice you
make. With some of the other hotel options there are also
additional charges for getting access to the facilities (gym,
swimming pool, etc.), Wi-Fi in public areas, early check-in, and so
on.
Accordingly, even though we decided to go for the second
choice with a price of $3,227, the realized price will be close to
$4,430. The most expensive option on the first hotel for this
period is stated as being US$10,460. This is admittedly exclusive
of taxes. But then we are probably over in a customer segment
where the price is insignificant, and that segment is hardly in the
target group for this book, so we leave it at that.
Remember that all the world’s psychological tricks cannot fix
a bad, overpriced product to make it good. Deceiving a customer
to make choices they could otherwise not have done hits back
hard. You only fool a customer once. Then they, and everyone
around them, are gone forever. And so it should be.
Transparency and openness about what customers pay is the
rule.
Steps in Psychological Pricing

As we have seen in the previous example, there are many ways
to present prices, including which numbers to use, print size,
color, comparisons, order, the time factor, shortages, and so on.
In this section, I will go through a whole series of such
techniques and explain how they work. All techniques are based
on research in reputable academic journals. The techniques are
based on established theories within the information economy,
and especially the theories around reference price effect,
anchoring effect, prospect theory, and endowment effect.
Because this book has an applied purpose, I decide to focus
on how the theories are applied. To simplify the process, I’ve
organized it into four steps (see →Figure 9.3). These are Step 1,
the choice of numbers; Step 2, map the surroundings of the
numbers; Step 3, identify the motives for purchase; and Step 4,
create a good trade.
Figure 9.3: Steps in Psychological Pricing.
Step 1: Select Which Numbers to Display

In this first step in psychological pricing, we will look at how
numbers should be presented to customers. We will first look at
the well-known 99 ending technique. Then we will look at how
the way the numbers are presented influences the perception of
whether the price is high or low. Are there complicated
numbers? Sometimes it’s an advantage, other times not. Which
is better, whether a price goes up or down, right or left?
Sometimes we accept numbers without reacting, while in other
situations a price invites haggling. The techniques here may
work a few times but other times not. The sample shows the
variation and what the research has found so far. There are no
absolutes.
The choice of number bases itself on the reference price
effect. The reference price effect is about the internal standard
with which you compare a specific price. If it is products you buy
frequently, such as grocery products, you have much better
knowledge about the prices of competing products in this
category. If it is products you seldom buy, the price comparison
is based more on expected price levels or historical prices. The
research contribution on reference price has developed over the
years. In the post-war years, the reference price was perceived
as prices being compared against a subjective interval, and the
larger the interval, the more uncertainty prevailed over the
correct price. In the 1970s, one focused more attention on how
much customers remembered previous prices [→47]. Attention
was focused on memory research and how customers perceived,
coded, processed, stored, and recalled prices when making
purchasing decisions. Explicit and implicit memory became
important, and a distinction was made between remembering
and knowing prices. Price psychological effects on the
processing of numbers were emphasized, and, not least, how
conceptual factors (Burger King advertising) and perceptual
factors (hunger) recreate implicit price memories.
Cognitive capacity affects the perception of prices. Studies
show that customers perceive round prices as more readily
available, as it requires less cognitive capacity to perceive them.
This affects purchases that have to do with habits [→48]. An
example where cognitive capacity comes into play is the number
of syllables in the price. Our brain works all the time, regardless
of our consciousness. Even though we do not stand in a store
and say the numbers out loud to ourselves, the brain interprets
it in this way when we read the prices. Research shows that
prices with many syllables are perceived as higher [→49]. A price
reduction with fewer syllables is therefore perceived as a lower
price: For example, (1,350) one-thous-and-three-hund-red-and-
fif-ty has nine syllables, while (1,500) one-thous-and-five-hund-
red has six syllables. Research has also tested the use of a
comma to mark thousands in a price. And they found that if you
removed the marking, customers perceived the prices as lower.
Why? Because with a comma we read it as (1,350) one-thousand-
three-hundred-and-fifty with a total of nine syllables. Without a
comma we read it as (1350) thir-teen-fif-ty, that is, four syllables,
and thus a perceived lower price [→49].
Emotion affects the cognitive capacity. If you are selling
products that appeal to emotions, such as makeup, training
clothes in fresh colors, or crime novels, show numbers that are
easy to process mentally. This gives a feeling of well-being and
matches the product category. The opposite is also true. If you
are about to sell protein powder to training fanatics, you must
bear in mind that such individuals have put a lot of time and
effort into finding the right formula, amount, and diet. Prices
that require more cognitive processing will correspond to the
category to which they belong. Complicated pricing will make
the product feel right [→50]. However, there is also research that
has tested whether this effect really exists, and the conclusion is
that it is weaker than previously claimed [→51].
Specific numbers are perceived as honest. A study of attribute
prices has investigated the difference between using round
numbers and specific numbers in the ads. The researchers found
that customers paid more when the numbers were stated
specifically, such as 217,565 rather than 215,000 [→52].
Customers in fact perceived the specific price to be lower, even
though it was in fact higher. A specific price led to increased
uncertainty as it did not fit with established practice. In addition,
using specific numbers gives the impression that the price is
determined through careful calculations and reflects the actual
costs. This could have implications for how list prices can be
used. In addition, the customers perceived round prices as an
invitation to negotiate.
Experiments show that if you start negotiations with a
precise number format, for example $746, the customer
assumes that the actual amount is close to the price [→53]. If, on
the other hand, you start with $800, the customer will perceive
the negotiation room as much larger. Specific numbers thus
reduce the subjective perception of the scale on which prices
vary (see →Figure 9.4).
Figure 9.4: Specific Figures at High Prices.
“The power of 99” is a well-known pricing technique. A price of

24.90 is perceived as much lower than 25.0. This is because we
read the numbers from left to right, and 4 is lower than 5. In
addition, numbers from 0 to 4 are considered low, while
numbers from 6 to 9 are perceived as high. Therefore, 24.90 is a
better option than 26.90 [→54]. The irony is that a price of 34 is
perceived as less attractive than a price of 39. By increasing the
price by 5, the sale often increases.
In addition, we are trained to assume that extensions of 90,
95, or 99 indicate that the product is on sale. So these are good
deals. Brand stores such as Ralph Laurent deliberately use the 99
extensions only on sales products, while they use round prices
on ordinary products. This is to ensure that their clothes are not
perceived as a cheap brand. However, be aware that the
research on 99 effects reports mixed results.
Step 2: Choose How the Numbers are to be Presented

How big is a price change? This depends on what it is compared
against. This comparison is not only about the numbers that are
presented together, but also about how they are placed visually,
their color, and the size of the letters. In these examples, taken
from research, we will look at how various effects work.
Anchoring effect is about which number you consciously or
unconsciously compare a price against. This theory shows that
even a random number in the surrounding, whether related or
not, influences the perception of whether a price is high or low.
Customers unknowingly compare the price to the exposed
number. Research shows that if a group of customers is given
different temperatures – let’s say one group is given 25 degrees
Celsius, while another group is given 7 degrees Celsius – those
with the highest temperature will pay significantly more for a
product than those with the lower temperature [→55]. The same
effect is found when a poster with completely random numbers
is hung on the wall.
When one customer has established an anchor that he or
she compares the prices to, it is difficult to change the
willingness to pay afterward. This is because changing your
mind requires unlearning, acceptance of past mistakes, and the
ability to accept new evidence. As a prerequisite to expose
customers to previously higher prices for the same product, the
previous prices must be based on facts and a true situation (see
Chapter 7 regarding the price-communication regulations).
Showing a price reduction without referring to the previous
price has no anchoring effect. This makes it more difficult for
customers to assess the value of the discount. The interesting
thing here is that you can expose customers to higher prices for
a second product. Even in these cases, the reference price will be
affected (see →Figure 9.5).
Figure 9.5: Price Exposure.
The anchoring effect has a very strong impact on customers’

reservation prices. A review of research on the anchoring effect
demonstrates that mood and individual differences (ability,
personality, and information styles) matter little for the
anchoring effect [→56].
The wording used on prices affects the perceived price. The use
of words that describe a deal affects whether the prices are
perceived as high or low. If we use the term “high” versus “low,”
this will prime (affect) the perception of whether the price is high
or low [→49]. The word “high” gives associations with a high
price, and vice versa. If you are going to launch a new, expensive
product, you will intuitively think that the old products should be
reduced in price. However, this is not always correct. By lowering
the price, you lower the reference price. One option is therefore
to rather increase the price of the former products in the
portfolio.
Similarly, small numbers are perceived as stronger. Changes
in small numbers, i.e., numbers from 0 to 4, are perceived as
more significant than endings in large numbers, i.e., numbers
from 6 to 9. Therefore, a price reduction from 4 to 3 is perceived
as stronger than a change from 8 to 7. Research shows,
however, that this effect is reduced if there are more than three
digits [→57].
Visualization of the price exposure affects the price perception.
Should prices be presented in specific colors? Research shows
that it all depends on whether you are a man or a woman [→58].
A price reduction that is shown in red has the greatest effect on
men. The reason is said to be that men use visual symbols more
actively, while women are generally more aware of prices when
shopping and therefore are better at recalling previous prices.
This also means that for products where there is a high degree
of involvement the effect decreases.
The larger the letters, the larger we experience the prices to
be. This is an advantage if you want to form a reference price for
comparison. If, on the other hand, we want our own price to be
perceived as low, a smaller font size will make the prices seem
lower [→49].
The order of the price exposure affects the perception of prices.
Should you show the price or the product first? It all depends on
what type of product it is and whether the customers are price
sensitive. MRI scans (brain scan) show that if you are exposed to
the price first, this affects the evaluation the most [→59]. If you
are exposed to the product first, the product becomes most
important. For regular products it can therefore be best to
display the price initially, as this is most likely to result in a
purchase. This is because these customers are considering to a
greater extent whether the product is worth it. Accordingly,
when selling expensive luxury products, it would be more
appropriate to display the product first. This is because the
assessment of the customer is whether they like the product.
The price is, therefore, less important as customers are not price
sensitive for these kinds of purchases.
We all have mental maps in our mind that unconsciously
control how we perceive an event. We finish our food, burn a
candle, look up at the sky and down to hell, we look up at our
football team, while we look down at our opponents. We also
use direction when we read the numbers from 0 to 9: The lowest
numbers are on the left, the highest on the right. This
unconscious mental map affects the perception of prices. If we
are going to make something look cheap, it should be placed to
the left. When we want to make something look like good value,
we place it on the right. And on websites, we place small
numbers at the bottom of the page and high numbers at the top
[→60].
If you are in a sports store and are first exposed to a
backpack at $98, another backpack at $125 will be perceived as
expensive. On the other hand, if you are first introduced to a
backpack at $295, a backpack at $125 is perceived as cheaper.
The reason for this is that at low–high the reference price is
formed based on the $90, while at high–low the reference price
is formed from the $200 numbers.
Reading order has a significance for the numbers we see
first. By placing the highest number on the left, this will be read
first and shape the reference price. This applies to all numbers. A
price change from $79 to $65 is perceived better than a price
change from $82 to $68 (see →Figure 9.6). Both have a price
change of $14. The reason is that the change from 7 to 6 is
perceived as smaller than the change from 8 to 6. And, not least,
this change means that customers are now buying the most
expensive alternative, at the same time as they consider the
trade to be better.
Figure 9.6: Numbers Are Read from Left to Right.
Step 3: Reduce the Pain of Paying

Paying for a product feels like sacrificing something. But the
experience becomes less painful when we get more time. Also, it
is better to pay small amounts today than large amounts in the
future. Does a customer have a guilt feeling when buying your
wellness products? Bundle them together with a functional
benefit product and give them the right price reduction.
The prospect theory is based on the work by Kahneman, for
which he received the Nobel Memorial Prize in Economics in
2002 [→61]. The theory shows that losses and gains are
perceived differently even if they are for the same amount of
money. To explain the theory, imagine that you are about to
contact a kennel to buy a small, lovely Australian Cobberdog
puppy. You will then be asked if you want to buy pet insurance.
Although these beautiful dogs are kind of a new breed, the
puppy has strong, healthy parents. In other words, it will be
difficult to predict whether the dog is going to be a big expense
in the future. So, the question is whether you are willing to take
a future risk with a possible high cost, or whether you will pay a
smaller annual amount to hedge against a risk that may never
come.
The prospect theory describes how people choose between
different alternatives, and how they (often incorrectly) interpret
the probability of future events. Customers want to avoid future
losses, even when the probability is minimal. They are therefore
more willing to accept a sure loss on the day. This variation in
the value of loss or gain has had a major impact on pricing
strategies, and several of the effects in this chapter show exactly
how customers act irrationally due to risk aversion.
Language related to money increases the pain. If you see the $
sign next to a price, this reminds you of the pain of spending
money. And this can lead to you wanting to pay less. The pain of
paying can be triggered quite easily. In fact, the $ sign can lead
people to use less money [→62]. At the same time, the sign must
sometimes be used for customers to understand that it is the
price the number symbolizes. This tactic can therefore only be
used where the customer is in no doubt that this is the price in
question. One example is the prices on a restaurant menu, which
are often displayed without the sign.
It feels less painful for a customer to use bonus points if
these are called something other than money. For example, the
United airline uses the term “MileagePlus” points, while the
airline company Norwegian uses “CashPoints.” According to the
research, it will feel more painful to use Norwegian’s points
[→63]. The more difficult it is for a customer to tie points to an
actual amount of money, the easier it is for them to use their
points. What do bonus points from loyalty cards and gift cards
have in common? They both reduce the pain of paying. By
distinguishing between means of payment and customers’ own
money, the perception of payment changes [→63]. Of course,
customers know they are paying, but it is easier to use this type
of payment as it does not represent money out of the pocket.
Also, the combination of bonus points and actual payment
reduces the psychological cost of paying. The same effect is also
seen if one compares the use of payment cards versus physical
money. It is more painful to pay with physical money than to
enter a code for the payment card.
Next, researchers recommend focusing on time rather than
money when describing a product [→64]. Time increases the
awareness of the experience with the product, while money
leads to a focus on the ownership of the product. The effect is
assumed to be strongest for nonprestige products (see →Figure
9.7).
Figure 9.7: Products Where the Focus Is on Money versus Time.
You have probably noticed it: Many products have much smaller
packages now than before! And the potato chip bag now
contains more air than potato chips. This is an effective way to
avoid price increases. Reducing the packaging reduces costs and
increases margins. And not least, it contributes to avoiding
negative attention to price changes. If this takes place through
small changes, it is not easily noticed either. Reducing the
physical size of a product decreases the costs and increases
margins. Even more important is the fact that increasing the
income is achieved without raising the price (or warning people
about a negative change). The changes can take place in four
dimensions, namely the height, width, length, and weight of the
product [→65].
Customers care about the experienced size of the price (i.e.,
whether it is high or low). But they also care about the perceived
fairness of the price. Even if the price is low, customers can still
perceive the price as unfair. In the same way, customers may still
perceive high prices as reasonable – depending on a few factors.
Customers perceive cost-based pricing as fairer than prices
based on market conditions [→34]. But, because customers do
not have knowledge about the company’s costs or quality, the
transparency increases buyers’ perception of justice. An
emphasis on the quality of the ingredients will be perceived to
justify the price.
Bundle products with hedonistic benefits. There are many ways
to bundle products. When it comes to willingness to pay for the
various product bundles, research reports an effect when
wrapping hedonistic benefits [→22]. Hedonistic purchases are
about immediate happiness, but often trigger guilt. This guilt is
reduced when the product or service is bundled with a utilitarian
product. The same research also shows that when one bundles
hedonistic products together, price reduction has less effect
than when bundling products across categories (see →Figure
9.8).
Figure 9.8: Bundling Price Reduction on Hedonistic Product.
Studies [→22] also show that if two new products are bundled
together, the bundle is perceived as more attractive if its
delineation of one product in the bundle has a hedonistic
approach. Example: The kitchen machine can be used to make
exotic dishes (hedonistic) versus the kitchen machine can be
used to make healthy dishes (utilitarian).
Upon the selection of products that are bundled together,
research shows that when bundling an expensive product
together with a cheaper product, the value perception is reduced
for the whole bundle [→66]. This is because customers do not
unilaterally add the values of the products together, but they
“subtract” the price of the cheapest product. To subtract in this
context means that the sum together is less than the prices
individually. The subtracting effect occurs when a product comes
from a product category with low-priced products. An
experiment showed that when customers could choose between
a one-year membership at a fitness center and equipment for
home training, about half of the participants selected one option
versus the other. When the home training was bundled with a
free DVD, only 35 percent chose this option. The reason is that
when adding a product to the low-price category, it reduces the
perceived value of the bundle.
Add to small differences in prices for products that are similar.
The idea of having endless choice options often leads to decision
refusal. You do not want to miss out on the benefits of the other
alternatives, and saying no to these feels like a loss. Humans
have an inherent loss aversion. By creating almost equal choice
options, the feeling of losses will be smaller [→67], and it
becomes easier to make a choice.
Research shows that few choices with small differences make
it easier to make choices. In one study, two groups were given
the choice between two different packets of chewing gum with
the same price versus two packs with a small price difference
[→67].
Group 1: Two packs of chewing gum at the same price
(example $1.40). Group 2: Two packs of chewing gum at a
slightly different price (examples $1.40 and $1.50).
The interesting thing here is that even though the prices
were almost identical, the price difference led more people to
choose to buy chewing gum. The paradox is that at the same
price, the participants found that the packages were different,
and they were unable to choose. At different prices, they
experienced the similarity as being greater, and this promoted a
choice. This means that at the same price, customers must look
for other prominent attributes of the products. When prices are
different, it is easier to distinguish the products from each other.
Prepayment before consumption. When customers pay for a
product or service before they receive it, they are aware of the
benefits they will receive, which reduces the pain of having to
pay. This effect has been tested in research, and the results show
that prepayments are beneficial for all involved parties. The
opposite is also true. If customers have already experienced the
product, it feels considerably more painful to pay later [→68].
This effect is useful for those who pay fixed terms, such as
subscriptions. It will be most appropriate for customers to pay
the subscription before they receive the magazine.
Partial payment is perceived as less painful. If you are about to
split the price across several payments, the customer will
consider the price as equivalent to the amount in the first
payment. This results in cost being perceived as lower, and the
threshold for buying increases. The comparison of numbers
means that the smaller the parts you can divide the amount into,
the lower the payment seems [→69]. For products that are used
every day, such as vitamins, the retailers often specify the price
per day, in addition to the full price for the whole packet. Other
examples of price division include the cost of each time you use
the product, such as the cost per mile when driving an electric
car.
A question many ask themselves is whether you should
divide prices into a basic price and add secondary costs
thereafter. Examples include shipping and delivery. A meta-
analysis of the last 17 years of research on this [→70] shows that
most customers react more favorably to split prices because this
makes them perceive the basic price as low. But this kind of price
division also leads to less favorable preferences regarding the
additional prices. An airline may therefore have prices with or
without luggage, where the basic price is seen as low if it is
without luggage prices, but customers will perceive the luggage
costs as a major drawback.
Step 4: Use Discounts Correctly

Discounts are challenging because they can change the
customers’ reference price. They have taught customers that a
product can be sold at lower prices. In the review of the various
techniques below, I therefore discuss how you can use discounts
in a better and smarter way.
Endowment effect is a theory that explains how we want to
preserve the existing situation. This is the reason why we go for
offers that promise us free installation or no fees for the first
year, and why it hurts more to get rid of these products
afterwards (therefore those who work in a clothing store should
always try to get customers to try on the clothes, and car dealers
should strive to get customers to test-drive cars).
In a well-known experiment, some researchers tested the
endowment effect [→71]. A group of students each received a
coffee mug worth approximately $5. The students were then
asked about the minimum price they were willing to sell the
coffee mug for. A second group of students, who had not been
offered any coffee mug, were asked how much money they were
willing to receive as compensation for not receiving a coffee
mug. Those who had received coffee mugs gave an average
price of $7.12. Those who did not receive a coffee mug gave an
average price of $3.12. This illustrates how the value of owning a
coffee mug surpasses the price you are willing to pay for the
same product.
Give a reason for the discount. For shops with EDLP (Every Day
Low Prices), customers will react to discounted prices. The
confidence in their price system programs is that they are always
at the lowest limit. Discounts in such systems therefore require
extra explanation so that customers perceive the price system as
credible. This is done by providing customers with a reason: for
example, that the new discounts come from suppliers and are
passed on to the customers [→72]. Such price communication
can also help in specifying how long the price reduction is for:
for example, that it applies to this one batch of goods. Such
exceptions make customers understand that these are
exceptional prices and not a permanent price change.
The less money we have in our account, the higher a price is
perceived. This means a willingness to pay a higher price on the
salary pay date than on the days before. This is a well-known
strategy in the period when the tax money comes – the mailbox
is flooded with offers for everything from new sofas to new beds.
In fact, this tactic has research evidence. Research shows that
the pain of payment is higher the less money you have available
[→73]. Paying $95 for a concert ticket is therefore perceived as
far more expensive in the days before payday than in the days
after. In other words, the more money you have in your account,
the higher the willingness to pay. In the same way, discounts will
be more important on days when you have less money in the
account.
Discounts may harm the long-term sales. Discounts can be
harmful because customers get an expectation of the next
discount. Therefore, when you finish one rebate, this can lead to
customers (a) choosing a competitor’s product, or (b) waiting for
the next discount.
The effects of a discount are strongest for products with high
price sensitivity. For products where the price has little
significance, discounts will have very little effect, and should be
avoided. This is because the discounts on these products do not
affect sales to a large extent [→74], but in fact can lead to more
damage because the customers are taught to focus on prices.
Price changes are perceived differently depending on whether
the prices are set up or down. Studies on the implementation of
discounts provide a clear recommendation on how these should
be performed. The research recommends that you gradually
return to the original price, instead of suddenly ending a
campaign [→75]. This means that the discount ranges, as an
example, from 40 percent to 30 percent, 20 percent, and 10
percent, rather than going from 40 percent to 0 percent. The
reason is that the declining discount acts as a signal effect to
customers. If they wait, the price will return to the original price
Figure 9.9: Leap-over versus Gradual Discount Change.
If you are going to increase the price, do it in many small price

increases. If you want to reduce the price, do it in few and large
intervals. This logic is based on what is called the Weber-Fechner
law, which is derived from physics [→4]. Tiny physical changes
are not noticed, while large jumps are easy to detect. This is also
the case with price changes.
Therefore, as prices change gradually upwards, customers
will not notice the actual price increase to the same extent as if
they took the price increases in larger jumps. A well-known
example is petrol prices, which vary up and down around the
clock, but which also have small price increases over time. At the
same time, petrol prices are rising slowly but surely, without this
feeling as dramatic. Therefore, do not wait too long to set the
price. This also means that if you want to reduce prices, don’t do
this in small intervals as the customers will not notice the cost
reduction to any great extent. Accordingly, the whole effect can
be lost.
This also means that the sale of expensive products, for
example an iPad at $200 that is reduced by 20 percent, should be
communicated with the discounted in $, i.e., $40. For less
expensive products, for example a book at $20, it is advisable to
state the price reduction in percentage, i.e., 20 percent, rather
than the amount of $4. Also, communicating rebates with
precise numbers will be perceived as smaller. Therefore,
rounded prices will be an advantage when communicating
discounts [→52].
Summary
This chapter shows that the perception of whether a price is high
or low, acceptable, or unreasonable is affected by the way the
figures are presented, the surrounding environment, customers’
experiences, psychological processes, the risk around the
purchases, and whether a purchase is a bargain with a deadline.
In this chapter I have shown how the individual perception of a
price, payment, or discount is affected by the number itself, but
also by the visualization, the environment, and the way the price
is combined with other prices. Proper handling of this can have
positive effects on the business, while incorrect handling or
utilization of customers is quite destructive. The chapter started
with a description of the reference price and how customers
focus on transaction benefits rather than the actual price they
pay. A careful review of four steps that describe the use of
psychological pricing has also been carried out.
Chapter 10 E-commerce and Prices
in Digital Markets
Introduction
The boundaries between physical stores and the Internet are
becoming less and less pertinent. Rather than seeing e-
commerce as hard competitors to physical stores, we witness a
development where they reinforce each other with the purpose
of promoting sales experiences. We are in the middle of the
development. Going a few years back in time, we were told the
mantra that the “Internet leads to lower prices!” This was at the
beginning of the e-commerce era. Firms expected a fierce price
competition as well as the death of most of the physical stores.
The argument was that information about prices on the Internet
is freely available. It was assumed that the price increases would
stimulate us all to make rational choices, i.e., choosing the
products with the lowest prices. Research and analysis show a
far more complex picture. In this chapter, I will go through the
attributes of pricing in e-commerce. I have divided this into 10
steps and will discuss each in order. After this I discuss the
development of the prices of e-commerce and digital markets,
followed by a review of global actors in online sales. Finally, I
discuss price robots and price comparison algorithms.
Steps in the Development of Prices in e-

Commerce and Digital Markets
The premise that all information on the Internet is freely
available is not true. The Internet has search friction [→76]. This
means that product options are not available for easy
comparison. E-commerce consists of tens of thousands of
products in huge varieties. The way a company presents, sorts,
and groups lists of products influences customers’ access to
information and thereby their choice sets. Also, the structure of
websites affects customer clicks [→76], i.e., how many products
a customer on average clicks on to get access to additional
information. And not least, the number of clicks affects how
many customers results in actual purchases. Fewer clicks lead to
a higher probability of purchases [→76].
E-commerce has undergone large development since the
start. Customers now want something more than just a large
product range. An example of innovation is real-time online
shopping, where sales consultants in physical stores show the
product selection to the customers via an online link. Other
solutions include artificial intelligence (AI), where the customer
can visualize the products in their reality, for example visualizing
different colors on their wall, or how different furniture fits into
their own living room. Customers also want faster delivery and
haggle-free return on the goods they have ordered [→77]. The
largest network players are experimenting with different
solutions. This can be about cooperation with local distribution
companies and guaranteed delivery of goods within an agreed
time interval, cooperation with actors in the sharing economy
where individuals take on the task of retrieving and delivering
the goods, stations where customers can pick up prepackaged
goods in the store or from physical cabinets/vending machines
located in the neighborhood or along central arterial roads,
supply delivered directly to the trunk of our car that is parked at
our workplace, or unmanned drones that fly packages to your
door within 30 minutes. The requirement for fast delivery puts
new requirements on the logistics, and advanced algorithms
help to estimate demand in specific geographical areas so that
the inventory is continuously optimized.
The development of prices in e-commerce and digital
markets has both similarities and differences with physical trade.
Customer segmentation and value perception are largely based
on the same factors. However, the way prices are presented,
visualized, and framed is an especially important element in
digital markets. This affects sales to a large degree. Research
shows that online customer evaluations reduce customers’ price
sensitivity. This is because the information is perceived as
reliable information about the true product quality. Online
evaluations can thus be used as an indicator of future price
changes as the evaluations reflect customers’ price-benefit
assessments [→78].
Important elements to consider when pricing in e-commerce
and digital markets are described in 10 steps below (see →Figure
10.1).
Figure 10.1: Steps in the Development of Prices in e-Commerce
and Digital Markets.
Step 1: Visible Prices

Customers who must search, register email addresses, or take
other actions to access prices have a greater tendency to drop
out before the purchase is complete. In addition, skepticism
about sharing private information has become much more
prominent. Customers often do not want to leave e-mail
addresses or telephone numbers. If competitors make prices
easily accessible, it is likely that customers will choose this safe
option rather than spend time searching for prices on your
websites.
The digital world demands and expects quick responses. If
you have a solution that requires registration of wishes and
needs on a form, it can take many hours before the customer
receives an answer. By that time the customer has most likely
been lost a long time ago. Transparency about prices signals
confidence in the market. The downside is, of course, that the
competitors also see these prices. But a solid customer
advantage and a healthy cost basis are often to be preferred.
And customers who feel that they have paid too much are
dissatisfied anyway.
In Chapter 9 about psychological pricing, I described how
websites knowingly use psychological effects when they present
prices to customers. This is therefore not repeated here. There is
no doubt that the reference prices are affected by numbers in
the surroundings, including online. In online stores, this can be
used knowing that you are exposing customers to other figures,
including those that do not have a direct connection with the
products sold (see →Figure 10.2).
Figure 10.2: Reference Prices for Online Shopping.
Step 2: Bundling Price Options

Bundling price alternatives follow the same structure as
described for product bundling in Chapter 4 on different prices
for the same products. The combination options are made
available in clear tabular layout so that customers can easily
compare the various package options. Remember that the
variation between the bundles must be based on the different
needs of the customer segments. Give each of the bundles a
name that the customers can easily associate with, and that fits
with the target group’s various needs (see →Figure 10.3).
Figure 10.3: Example of Bundling of Member Levels.
Step 3: Highlight the Best Price Option

It can be difficult for customers to take on board the various
underlying details in product bundles. To help them along the
way it is often smart to highlight one option as the best or most
preferred. This is often done by using a different color and
marking it as the “best option.” Often the best alternative is
placed in the middle. This helps customers make a choice in a
situation with otherwise overwhelming information. The
disadvantage of such a strategy is that those who would
otherwise have chosen the most expensive option might now
prefer the one in the middle.
In Chapter 9 on psychological pricing, we looked at the
anchoring effect on prices. In online stores this can be used by
marking how many others have chosen a particular option
(example: 1,547 customers have chosen this option). This trigger
anchoring effect results in a willingness to pay a higher price
[→79].
Step 4: Visual Design of Pricing Options

It is advantageous to present all the product packages on one
screen page, so that customers do not have to scroll down to get
complete information. Visual elements such as tabular layout,
figures, and the use of color help customers in their decision-
making (see →Figure 10.4). Make sure that only the most
important and necessary information for customers’ decision-
making is included. Everything else should come later so as not
to overwhelm the customer with details.
Figure 10.4: Visual Design of Price Alternatives.
Step 5: Determine Choice Options and Price

Combinations
Some products are more demanding and complex. In these
cases, so-called “election calculators” are a good tool. A
selection calculator includes the most important elements (often
from 5 to 10 elements) that the buyer can select or opt out of
(see →Figure 10.5). By highlighting the options, they
continuously get the final closing price, and the process
becomes transparent. This helps the customer to evaluate only
what they need or what their economy can handle. The
disadvantage is that customers see the partial prices and can
use this information to switch to another supplier.
Figure 10.5: Choice Combinations in Price Calculator.
Step 6: Offers with Subscriptions and Time Limits

Digital online products are often sold with subscription schemes
for specific time intervals. Customers can have options to choose
from. For example, prices may be fixed for a specific period, for
example one year, or vary according to time intervals, for
example per month (see →Figure 10.6). If customers’ willingness
to pay varies, is it most appropriate to give them various options.
This ensures that most customers find an offer that is acceptable
within their needs. However, it is important to calculate the
income effect of giving a fixed price rather than a monthly price,
so that the price combinations do not lead to an actual loss of
income.
Figure 10.6: Subscription Prices and Time Restrictions.
Step 7: The Customer only Buys Value

I return to this point repeatedly in the book. Customers only buy
a product or service based on the value it provides to them, and
not based on the company’s costs. It can be difficult to map
customers’ perception of value and quantify it. But it is
necessary if customers are to feel that they are gaining
something from the purchase. At the beginning of the book I
described practical steps to identify and quantify customer value
(see Chapter 2). Remember, however, that the value for the
customer can also include saved time and spared resources. For
example, online IT support can lead to lower downtime for a
business. Downtime can be quantified through losses in income.
And finally, if you cannot deliver the value you have promised,
you will not be long in the business. Do you have the capacity to
deliver the online IT support system you promised?
Step 8: Combine Different Pricing Models

This point does not apply to everyone who sells in digital
markets. But some, especially those who work in the business
market, may have fewer customers who, due to their goals, have
very specific needs. A company that wants to attach itself to an
occupational health service may, for example, want to do this
either at a fixed business price, or at a price per employee, or at
a price based on the use of the service. This allows the customer
to optimize the contract based on their specific needs. Again, it is
important to create a price plan based on the actual customer
needs and calculate the financial consequences.
Step 9: Map Out Competitors’ Prices

Customers will most likely compare your prices with the prices of
the closest competitors. This does not mean that they
necessarily choose the cheapest alternative, but the competing
prices will form a reference point against which they assess the
prices. If your prices are far above or far below, they will be
perceived as less credible. Competitors may also have other
options and pricing models than the one you use. This provides
important information for you to interpret the market.
Remember, however, that your competitors may have a
completely random pricing policy that is not based on a strategy
or any specific tools. Pure copying can therefore lead to major
damage.
Step 10: Pricing Additional Services

A critical question that many are struggling with is about
whether to charge for additional services, such as technical
support, or whether this should be included in the regular price.
If the additional services have a great value for the customer, it
could form the basis for a new source of income. It also gives the
customer the opportunity to assess whether this is something
they need and want to pay for. On the other hand, customers
might suspect the product has weaknesses and that you want to
exploit this through additional costs. Customers’ perception
about such matters is important to map out before you make a
price division. Beside this, as mentioned previously, customers
mostly prefer a low base price [→23].
Online Sales and Global Players

Large online players such as Amazon.com vary their prices on
average 10 times per hour [→80]. With the volume of products
Amazon has in its portfolio, this amounts to 2.5 million changes
every single day throughout the year. There is, of course, an
extreme exploitation of all the 200 million customers they have
in their big data portfolio that makes this possible. This is
difficult to copy. Their volume outweighs the negative customer
reactions, since the price variation increases sales by 25 percent.
Few online stores can treat customers this way.
Big data provide advantages if they are used correctly. Large
online players have enormous access to big data and an
opportunity to utilize these to estimate customers’ behavior.
Analysis of big data has five attributes: volume – the large
number of data points; variation – the data come from many
different sources and in many different forms; viscosity – the
data have enormous speed; validity – the data are often
incomplete; and value – the data can be linked to purchasing
behavior and value estimates [→81]. Under the precondition
that the data are analyzed based on customers’ capabilities and
limitations, they provide an opportunity to estimate consumer
behavior in detail. An example of such analysis is product
recommendations based on previous web searches. This can
lead to additional sales. Analyzing big data is sometimes
unnecessary, while in other cases it requires specialist expertise
[→81]. The ability to utilize data in analysis with the purpose of
predicting behavior is considered an important investment.
Aliexpress.com is a giant Chinese online player targeting the
consumer goods market. A second player, Alibaba.com, aims
toward the business market. Both players offer products at very
low prices. However, it is important to be aware of replicas, i.e.,
counterfeit and illegal products, of all global online players.
Most well-known global brand companies, such as Gant,
combine many different online players to be present in the
online market. This is everything from your own online store to
major players such as Zalando.com and Boozt.com.
The long tail is an expression that describes the strategy of
new international online businesses that rely on selling very
small volumes to many different customers based on a wide
range of products over time. The term is based on the 80/20
rule, which means that 80 percent of the income comes from 20
percent of the product range. The Internet enables this type of
online sales on a global basis. Online solutions such as Ebay.com
make it easier for independent retailers to offer their products to
many customers. An example of an online store for small private
producers is Etsy.com. Recent research shows that customers are
less price sensitive when they associate the provider with a local
affiliation [→26]. Global players who manage to trigger a local
identity for their brands will therefore experience a lower price
sensitivity.
Price Robots and Price Comparisons
A price robot is an algorithm (computer program) that scans
websites for prices of different products from different players.
There are many free computer programs that enable such web
scraping, including Google extensions. Setting up such web
scraping is not particularly difficult, and several YouTube videos
show you how to do it step by step. Of course, there are
companies that can do it for you. Anyway, the online companies
are often not interested in this type of data collection, and
several now put constraints on their web pages to make it more
difficult to automatically capture their prices. Price robots are
most effective in industries where there are dynamic prices, such
as hotels and air tickets. However, we see that hourly price
variations are also increasing in new industries, such as
electronics.
PriceGrabber and PriceRunner are two of the many actors who
are working on comparing prices on online products. Customers
can click on their web pages and see price comparisons in
various categories and products and click on links to get direct
access to the service provider. A problem with the neutrality of
such price spies is that many of them deliberately highlight
players they have entered into cooperation with. However, the
price comparison companies are often completely open about
these types of priorities, provided you read the small text at the
bottom of the web page.
There are also other price comparison players. Also, some of
the actors base their price comparisons on specific selected
brands, which makes comparison across brands difficult. In
addition, the prices stated on international websites are often
not comparable with the final price paid by the customer.
Examples include the addition of customs, VAT, shipping, and
taxes. Note that the EU imposes the inclusion of the full price
when shopping online.
Summary
This chapter shows that pricing for online sales and digital
products largely follows the same logic as pricing in physical
trade, even though online solutions enable more pricing tools,
such as price calculators. Online sales also have peak load
pricing, which means that the willingness to pay for a product is
higher during special holidays, such as at Christmas. Changing
prices is easy when they are digital. But it comes with an
important warning. A price that is lowered for a short period of
time can be very difficult to raise. This is because customers
have learned that you can sell the products cheaper than you
normally do. Other industries are well known for varying prices
continuously.
Chapter 11 Prices in the Sharing
Economy
Introduction
Everyone knows Airbnb and Uber in the sharing economy. But
did you know that you can also get help to buy organic
vegetables or borrow another family’s dog? In this chapter, I will
go through five steps to work with price in the sharing economy.
This is about determining the customers, knowing the
competitors, mapping the attributes of the products/services,
quantifying customer value, and calculating the total economic
value to the customers.
Sharing Economy and Sharing Platforms

The sharing economy differs from other types of transactions in
that (1) it uses digital platforms that facilitate transaction activity,
(2) the ownership rights to the product or the services are not
transferred (except through the sale of used private products),
and (3) the activity mainly consists of sharing between private
persons [→82]. The main idea is that available resources in
households are made available to others. →Figure 11.1 shows an
excerpt of the possibilities within the sharing economy.
Figure 11.1: List of Various Services within the Sharing
Economy. Retrieved from
→https://www.justpark.com/creative/sharing-economy-index/.
The website has a list of more than 250 services and over 800
players (as of January 2022).
There are several advantages to the sharing economy as seen

from a customer perspective. Because it is based on available
resources, the provider has no capital-intensive investment as a
basis. These reduced costs can be utilized through competitive
lower prices. In addition, since customers must not invest in
capital-intensive goods either, this gives them greater flexibility
in terms of choice and consumption. And not least, many
customers emphasize the sustainability aspect of sharing; it
increases capacity utilization and reduces waste. Studies show
that customers respond positively to such measures, and that
brands are not harmed by this type of price reduction [→42]. As
an example, an analysis shows that a private car is parked as
much as 95 percent of the time, and the popularity of car-
sharing services is growing rapidly [→82]. To analyze the pricing
strategy of the sharing economy, the first step it to identify and
map how it creates customer value, and what competitive
advantage it provides. →Figure 11.2 provides a good overview of
the classification of the sharing economy. The figure has three
axes. It distinguishes between the degree of manual versus
cognitive activities, labor-intensive versus capital-intensive
services, and routine tasks versus nonroutine tasks.
Figure 11.2: Services Provided through Digital Platforms

(Sharing Economy) [→82].
For capital-intensive services, the customer advantage lies in the
fact that customers do not have to tie up capital. By choosing
services through the sharing economy, customers get more
room for maneuver. For labor-intensive services, the customer
advantage is that you can perform smaller work tasks that you
do not otherwise have the time or capability to perform. An
example of this is wedding photography, which requires
personal attendance, the right equipment, and competence to
take memorable photos. For cognitive activities, customers value
the fact that they get help with tasks they cannot perform
themselves, such as personal accounting, learning how to use a
PC, translator help, or homework help for children. This provides
opportunities for students, pensioners, and others with
competence and spare capacity to offer some of their free time
to create income. When it comes to manual activity one can offer
various forms of work, such as assembling furniture, shelves,
cleaning, and gardening. Hobby chefs can sell their knowledge
or ready-made food.
The sharing economy distinguishes between several
different forms of transaction between parties. Here are several
examples:
Rental (e.g., home, cottage, car, bicycles, garden
equipment, tools, etc.) →https://turo.com/
Loans (e.g., garden furniture for a party in the
neighborhood) →https://www.peerby.com
Access and service (e.g., courses and training)
→https://www.khanacademy.org/
Sharing (e.g., Internet, transport) →https://fon.com/
Donations (e.g., surplus products)
→https://energizelives.gridmates.com/
Collaboration (e.g., food sharing) →https://sharecity.ie/
Exchanges (e.g., home exchanges between private
individuals) →https://www.lovehomeswap.com/
A digital platform is a website or an app that is managed by a
professional player, like the URLs on the previous list. The
purpose of digital platforms is twofold: to put buyers and sellers
in touch with each other and to share information about price
and quality. Because we’re not working with professional players
who are regulated by strict legislation, transparency about
previous customers’ experiences is an important element in
reducing transaction uncertainty. An important task for digital
platforms is therefore to share customer experiences with other
users. As far as legislation is concerned, transactions in the
sharing economy are regulated by the same established
consumer protection rules as for other purchases [→82].
Note that transactions in the sharing economy takes place
between individuals. This can affect participants’ knowledge and
ability to manage their responsibilities within the regulations.
Differences between Sharing Economy and

Traditional Economy
An important factor in the sharing economy is the role of
customers in what is called “prosumption.” “Prosumption” is a
term formed from the words “production” and “consumption.”
In other words, customers participate in creating their own
consumption. Examples of “presumption” include the
development of Wikipedia, where users write, edit, update, and
comment on articles. YouTube, Flickr, Pinterest, and blogs are all
created by users who upload videos, pictures, and texts. Virtual
game worlds consist of players who create characters, societies,
and worlds. Facebook, Twitter, and LinkedIn are created by
people who create profiles and share content with others. One
of the biggest challenges in “presumption” is therefore the
quality variations and the quality uncertainty it can entail [→83].
The consequence of “presumption” in the sharing economy
is that instuitions, i.e., businesses or enterprises, are replaced by
customers. This challenges the existing legislation, which must
intend to protect the customer. As an example: For the car
sharing solutions Uber and Lyft, a “prosumer” both consumes
the car and offers services (such as coordinating, collecting,
running, bringing) to those who are riding. The driver gives an
assessment of the customer, and the customer gives an
assessment of the driver. In the traditional economy, a customer
assesses satisfaction with the use of a product. In the sharing
economy, even the users themselves are evaluated.
In the traditional economy, dynamic competitive advantages
create the basis for value creation. In the sharing economy, we
often see that one winner takes large parts of the market. Thus,
the first-to-market advantages are often of far greater
importance in these markets [→83]. The competition in the
sharing economy can in many cases be harder because the
providers compete both internally with each other (cf. Uber and
Lyft) and also with the traditional companies (taxis).
One of the hallmarks of the sharing economy is the way it
creates temporary access to a product or service. This also
affects the pricing strategy, which is often far more dynamic
based on offer and demand in the market. Top load prices are
more common.
Steps to Set Prices in the Sharing Economy

It can be difficult to decide on the prices for services (and
products) in the sharing economy. How much is the spare
capacity for you or your equipment worth? What one must do is
to practically calculate how much benefit a customer will have
from the service. Remember that a customer does not buy
anything based on your available capacity or what costs you
have. They are only concerned with their own value and utility
they get from spending their money. The procedure for
quantifying the price follows the same steps as described
elsewhere in the book (see →Figure 11.3). Simplified, this is as
follows:
Figure 11.3: Steps in VTC Analysis in the Sharing Economy.
Step 1: Determine Customer Group

Decide which customer segment you have the greatest chance
of succeeding with. A common mistake that entrepreneurs and
startup companies make is to assume that their product or
service is so amazing that everyone will want to buy it. This may
be the case, but at the same time there are some customer
segments that are easier to convince and succeed with than
others. These customers are the best (and easiest) to start with,
and then you can take the whole world domination thing step by
step later.

Identify the price of competing services that customers can
choose (both from professional firms and from the actors in the
sharing economy). This means simply asking what customers
would have chosen if your service did not exist.
Step 3: Mapping Differentiation Attributes

Map which attributes of your service are different from attributes
of competing services. This means both where you are better
and where you are worse.
Step 4: Determine Customer Value

Map what value customers attach to these attributes. NB: only
the attributes that are different! Use the Excel analysis to identify
the value of attributes as explained and illustrated in Chapter 3 in
this book.

Add the numbers and estimate the total economic value for the
customers. Use this as a starting point for the maximum price
you can charge in the market. A common mistake one makes in
this process is to forget that the attributes in Step 3 must be
visible, clear, and important for the customers when they make
their purchase decisions.
Disadvantages with the Sharing Economy
One of the disadvantages you have within the price strategy in
the sharing economy is that you do not get any help from the
other product categories. A grocery store may have a low price
on turkey to attract customers to the store. They cover the loss
through additional sales that the customer attraction entails. In
the sharing economy, one seldom has such a product portfolio
to lean on. In addition, the sharing platform makes it difficult to
build loyal customers, which means that each transaction is
often traded individually. The sharing economy also makes it
more difficult to facilitate additional sales. For example, an
Airbnb room will not be able to sell a tour guide as an extra
service. A second effect that applies to services and pricing is
that when customers are exposed to prices during their
experience, this leads to reduced satisfaction. The reason is that
customers’ attention is drawn to the financial aspect of the
transaction in place rather than the experience [→84].
Circular Economy and Price

In the circular economy, the sharing platforms Tise.com and
Ebay.com are widely used for buying and selling used clothes
and interior items. The research of López-Fernández [→85]
shows that the millennial generation is less price sensitive to
product attributes in that they prefer ethical consumption over
low price when factors such as social responsibility are
considered.
Another example is the “Too Good To Go” app, where unsold
food and leftovers are sold at greatly reduced prices in several
major cities in the US and Europe. The purpose is to stop food
waste.
The waste hierarchy is often illustrated through an inverted
triangle (see →Figure 11.4). The lowest level is landfilling
(putting in landfill), followed by energy utilization (burning),
material recycling (making new from used), reuse (using things
again), and waste reduction (producing less waste). Producing
less waste means in practice that one should avoid shopping.
Reuses are the purchase and sale of used clothing, interior
items, electronics, sports equipment, and so on. Equipment
repair is included in this section.
Figure 11.4: The Waste Hierarchy.
Marketing tools can be used to change consumer behavior

towards more sustainable consumption [→86] by moving them
upwards in the triangle. The role of price in such a system is
described by White et al. [→86]. They point out that incentives in
the form of rewards, refunds, gifts, and other external incentives
can promote desirable behavior and create positive habits.
Incentives have been shown to promote sustainable behavior in
terms of waste management and cleanup, energy use, and the
choice of transport. However, they point out that short-term
incentives lead to short-term changes. Even if customers
immediately react positively to the incentives, this disappears
equally fast when the incentives are gone. In addition, it can
harm the intrinsic motivation of involvement. The millennial
generation’s focus on, and motivation for, sustainability can
therefore be damaged by incorrect use of price as an incentive
tool. By this I mean that an excessive emphasis on price
campaigns to stimulate sustainability can have a destructive
effect on the intrinsic motivation.
Summary
The sharing economy is increasing in scope, not least due to the
increased attention to consumption, resource use, reuse, and
multiple use. In this chapter, I have shown how price is
specifically used in the sharing economy. The chapter explains
the difference between the sharing economy and the traditional
economy. Then I highlight five steps that will help the reader
maneuver prices in these sharing markets. Finally, there is a
section on price in the circular economy.
Chapter 12 Pricing Calculations
Introduction
I then go through various pricing strategies at the end and round off
with profitability analysis and price elasticity analysis.
Significance of Costs
Two companies that have completely different cost structures will
experience very similar prices for the products in the market [3]. This is a
clear signal that companies’ costs are of little importance when
customers are making a purchase. One of the most common mistakes
made when you determine a pricing strategy is to start with your
internal costs. As mentioned under value-based pricing, one should
rather start with the value added of the product or service given to the
customers, and on this basis define the costs that can be justified, i.e.,
for materials, processes, production, and distribution. Another mistake
made, especially for new development and innovation, is to calculate
too short a timespan for covering innovation costs. Often a company
seeks to cover its costs as quickly as possible. In addition, incorrect costs
are included in the calculation.
The costs do not affect the price but are important for calculating
whether different production and sales intervals are profitable or not.
To identify costs that have an impact on profitability, it is common to
distinguish between two types of costs, namely variable costs and fixed
costs.
Variable costs are incurred only when the units are manufactured or
sold. These are costs that can be traced directly back to a particular
product. In complex companies, it can be difficult to separate the costs
of the actual production or sales. Examples of variable costs include
hourly wages for production employees, sales bonuses, raw materials,
development costs, packaging, advertising, electricity for production,
and company cars for the salespeople.
Fixed costs do not vary with production. All costs that cannot be
attributed to a particular product or sales are considered fixed costs.
Examples include salaries for the administration, interest and payment
on loans, rent, deduction on machines and equipment, electricity for
office buildings, and insurance.
In periods when the company is working to establish themselves,
they must accept not being able to cover all regular costs. After a time,
these costs must also be covered for the company to be able to continue
their production and sales. Fewer units sold will transfer a large
proportion of the fixed costs of these products, which leads to a need
for higher prices. Costs are affected by volume, and volume is affected
by price. In the long run, of course, all costs must be covered. No
business can survive with long-term losses. At the same time, it is
important to be aware of the costs that can be identified in the market.
Factors that identify the cost picture:
1. What are the costs of existing and new competitors?
2. What are the costs of commercializing the products?
3. What costs do customers have?
Competitor costs, both existing and new, provide insights into their
competitiveness, financial strength, and endurance ability. It also signals
their expansion and innovation opportunities.
Commercialization costs are direct costs related to research and
development, production, and commercialization, including sales,
promotion, launch, and all future costs that are directly related to the
product.
Customers’ costs are identified through an economic value analysis,
as described at the beginning of the book.
Calculation of Profitability Analysis

Calculation of profitability analysis is important for understanding the
consequences of price changes for sales and number of units sold. The
most common profitability calculations are given with example
calculations in →Tables 12.1 and →12.2.
Table 12.1: Profitability Calculations with TV as an Example.
Analysis Formulas Sales of TV
P = Price P = 2 500
V = Volume
V = 1 400
S = Sales
S = 2 500 × 1 400 = 3 500 000
VC = Variable Costs
FC = Fixed Costs VC = 850
FC = 1 200 000
1. Calculate Contribution Margin (CM)

Contribution CM = P − VC CM = 2 500 − 850 = 1 650
Margin (CM) Each TV has $1 650 in contribution margin

means how to cover fixed costs and profits
much each
unit sold
contributes
to covering
fixed costs
(FC) and
profits
2. Calculate Profit Margin (PM)
Profit Marin PM =
( Prof it × 100 )
Prof it = Sales − Total CM − FC
(PM) Sales
is profit as a Total CM = 1 650 × 1 400 = 2 310 000

% of sales
turnover. It
Prof it = 2310 − 1200 = 1 11 0000
tells about
the
company’s PM =
( 1 110 000×100 )
= 31.7
vulnerability
3 500 000
compared
to industry Profit margin are 31,7%
standard
3. Calculate PM with price changes
Price CM =(P + ΔP) − VC CM =(2 500 + 10% ) − 850 = 1 900
increases Contribution margin are $1 900 at a price

with 10% increase of 10%
Price CM =(P − ΔP) − VC CM =(2 500 − 10% ) − 850 = 1 400
reduces Contribution margin are $1 400 at a price

with 10% reduction of 10%
4. Calculate sales change with price changes
How much ΔV = V −
(Prof it × FC) ′
( 1 110 ×1 200 )
′
can the ΔV = 1 400 −

CM at price increase = 184,2
1 900
sales be
reduced to They can sell 185 fewer units to obtain the
have at least same profit with a price increase of 10%
the same
profit at a
price
increase of
10%
Calculate ΔV = V −
(Prof it × FC)
′
( 1 110 +1 200 )
′
ΔV = 1 400 − = 250
how much CM at price decrease 1 400
the sales
must They must sell 250 units more to obtain
increase to the same profit with a price decrease of
have at least 10%
the same
profit at a
price
reduction of
10%
5. Calculate Contribution Margin Ratio (CMR)
Contribution CMR = (CM × 100)
CMR =
( 1 650×100 )
= 66
Margin P 2 500
Ratio (CMR)
is the The Contribution Margin Ratio is 66% at a
percentage sales price of $2 5000
of the price
that is left to
cover fixed
costs and
profits
6. Calculate Contribution Margin Ratio (CMR) at price changes
CMR at a CMR =
(CM new Price × 100)
CMR =
( 1 900×100 )
= 69
+10% Price- new Price 2 750
increase
The Contribution Margin Ratio is 69% at a
sales price of $2 750
CMR at a– CMR =
CMR =
( 1 400×100 )
= 62
10% Price- new Price 2 250
reduction
The Contribution Margin Ratio is 62% at a
sales price of $2 250
7. Calculate Break Even Point (BEP)
Break Even BEP in $ = FC
BEP in $ = 1 200 000
= 1818181
point (BEP) CMR 0.66
identifies Break Even Point is $1 818 181

how much
you need in
sales to
cover all
costs, both
variable and
fixed.
Table 12.2: Profitability Calculations with Coffee Mug as an Example.
Analysis Formulas Sales of coffee mugs
P = Price P = 5
V = Volume
V = 750 000
S = Sales
S = 5 × 750 000 = 3 750 000
VC = Variable Costs
FC = Fixed Costs VC = 2
FC = 2 000 000
1. Calculate Contribution Margin (CM)

Contribution CM = P − VC CM = 5 − 2 = 3
Margin (CM) Each coffee mug has $3 in

means how much contribution margin to cover fixed
each unit sold costs and profits
contributes to
covering fixed
costs (FC) and
profits
2. Calculate Profit Margin (PM)
Profit Marin (PM) PM =
Prof it × 100
Prof it = Sales − Total CM − FC
is profit as a % of Sales
Total CM = 3 × 750
′
= 2 250
′
sales turnover. It
tells about the
′ ′
Prof it = 2 250 − 2 000 = 250 000
company’s PM =
2500 000×100
= 6.66
vulnerability 3 750 000
compared to Profit margin are 6,67%

industry standard
3. Calculate PM with price changes
Price increases CM =(P + ΔP) − VC CM =(5 + 10% ) − 2 = 3.5
with 10% Contribution margin are $ 3.50 at a

price increase of 10%
Price reduces with CM =(P − ΔP) − VC CM =(5 − 10% ) − 2 = 2.5
10% Contribution margin are $ 2.50 at a

price reduction of 10%
4. Calculate sales change with price changes
How much can the ΔV = V − (Prof it × FC)
ΔV = 750000 −
250×2000
= 107142
sales be reduced
3,5
CM at price increase
to have at least
They can sell 107 142 fewer units to
the same profit at
obtain the same profit with a price
a price increase of
increase of 10%
10%
Analysis Formulas Sales of coffee mugs
Calculate how ΔV = V −
(Prof it + FC)
ΔV = 750 000 −
′
250 +2 000
= 150
′
much the sales CM at price decrease 2,5
must increase to
have at least the They must sell 150 000 units more to
same profit at a obtain the same profit with a price
price reduction of decrease of 10%
10%
5. Calculate Contribution Margin Ratio (CMR)
Contribution CMR =
CM × 100
CMR =
3 × 100
= 60
Margin Ratio P 5
(CMR) is the The Contribution Margin Ratio is 60%

percentage of the at a sales price of $5
price that is left to
cover fixed costs
and profits
6. Calculate Contribution Margin Ratio (CMR) at price changes
CMR at a +10% CMR =
CMR =
3,5 × 100
= 63, 6
Price-increase new Price 5,5
The Contribution Margin Ratio is

63,6% at a sales price of $5,5
CMR at a–10% CMR =
CMR =
2,5 × 100
= 55,5
Price-reduction new Price 4,5
The Contribution Margin Ratio is

55,5% at a sales price of $4,5
7. Calculate Break Even Point (BEP)
Break Even Point BEP in $ = FC
BEP in $ = 2 000 000
= 333333
(BEP) identifies CMR 0.60
how much you Break Even Point is $333 333

need in sales to
cover all costs,
both variable and
fixed.
The most common expressions are the following:

Contribution margin (CM) – how much each unit sold contributes to
covering fixed costs (FC) and profits.
Profit margin (PM) – profit as a percentage of sales turnover. Tells
something about the company’s vulnerability and is compared
with industry standards.
Sales change in the event of a price change – how many unit sales
can be changed to achieve at least the same profit as before the
price change.
Contribution margin ratio (CMR) – the percentage of the price that
is left to cover fixed costs and profits.
Breakeven point (BEP) – how much you must have, either in
turnover or selling units, to cover all costs, both variable and fixed.
These calculations often simplify the situation by taking one product as
the basis for the analysis. This is rarely the case in the real world. For
calculations of the breakeven point in $ one often uses the average
number based on the whole range of products. Breakeven point sales in
units are therefore impossible to calculate for more complicated
product ranges.
Each TV has $1,650 as a contribution margin to cover fixed costs
and profit.
They can sell 185 fewer units to achieve the same profit when the
price is increased by 10 percent.
They must sell 250 units more to achieve the same profit when the
price is reduced by 10 percent.
Each coffee mug has $3 as a contribution margin to cover fixed
costs and profit.
They can sell 107,142 units less to achieve the same profit with a
price increase of 10 percent.
They must sell 150,000 more units to achieve the same profit with
a price reduction of 10 percent.
Calculation of Price Elasticity and Cross-Price

Elasticity
Previously in the book, I defined price elasticity as the percentage
change in demand divided by the percentage change in price. Price
elasticity is most often negative: It will say that you buy less of a product
if the price increases.
For substitute products, such as Pepsi Max and Coca-Cola without
sugar, a price change for one product directly affects the sales of other
products. Substitute products are often found within the product
categories. In →Table 12.3 I show calculations of cross-price elasticity for
substitute products and in →Table 12.4 cross-price elasticity for
complementary products.
Table 12.3: Cross-Price Elasticity of Substitute Products.
Analysis of Sales of chocolate cereal Sales of Muesli cereal
substitute
products
P Price per P = 3.59 P = 3.05
unit VC = 2.54 VC = 1.35
VC Variable CM = 3.59 − 2.54 = 1.05 CM = 3.05 − 1.35 = 1.70
costs
CM
Contribution
Margin
CMR
Contribution
Margin
Ratio
1. Calculate Contribution Margin Ratio (CMR) with a price increase of +5% and no cross-
price elasticity (CPE)
CMR CMR =
CM
=
1.05
= 0.29 = 29%
without P 3.59
cross-price
The Contribution Margin Ratio with a price increase of 5% is 29% when there
elasticity
is no cross-price elasticity
2. Calculate Break Even Point (BEP) in % of sales and no cross-price elasticity (CPE)
BEP without ΔBEP =
ΔP
=
-0.5
= -0.147
cross-price (CMR+ ΔP) (29+5)
elasticity
The sales can be reduced with 15% if the price increases with 5% and there is
no substitute cross-price elasticity. If the sales are reduced with more than
15% the company will loose on the price increase.
3. Calculate Break Even Point (BEP) in % of sales when the price increases with 5% and
half of the customers switch product (CPE)
CPE = Cross ΔCM = CM − (CPE x CMsubstitute)= 1.05 − (0.5 x 1.70)= 2.00
Price
Elasticity
CMsubstitute 1.70
ΔCMR = = = 0.47
P 3.59
-ΔP -0.5
ΔBEP = = = -10
(ΔCMR+ ΔP) (47+0.5)
The sales can be reduced with 10% with a 5 % price increase and there are
50% cross price elasticity with substitute products. If the sales are reduced
with more than 10% the company will loose on the price increase
Table 12.4: Cross-Price Elasticity of Complementary Products.
Analysis of complementary products
Rose Flower soil Rose fertilizers
bushes
P Price per P = 49.9 P = 19.9 P = 15.0
unit VC = 25.0 VC = 5.0 VC = 9.0
VC Variable CM = 24.9 CM = 14.9 CM = 6.0
costs
CM
Contribution
Margin
CMR
Contribution
Margin
Ratio
1. Calculate Break Even Point (BEP) with a price reduction of −10% and no cross-price
elasticity (CPR)
BEP without CMR =
CM
=
24.9
= 0.498
cross-price P 49.9
elasticity ΔP
-( -10)
ΔBEP = = = 0.25
CMR+ ΔP) (50+( -10)
The sales must increase with 25% if the price reduces with 10% and there is
no cross-price elasticity of complementary products. If the sales are
increased with less than 25% the company will loose on the price reduction.
2. Calculate Break Even Point (BEP) with a price reduction of −10% and cross-price
elasticity (CPR)
Rose bush Flower soil Rose fertilizers
CPE Cross An average customer buys An average customer buys ½
Price two bags of flower foil per bottle of rose fertilizer per
Elasticity rose bush rose bush
ΔCM ΔCM = CM + (CPE x CMcomplementary)
Contribution ΔCM = 24.9 + (2 x 14.9) + (0.5 x 6.0)= 57.7

Margin
ΔCMR ΔCMR =
CMcomplementary
=
57.7
= 1.15 = 115%
Contribution P 49.9
Margin
Ratio
Analysis of complementary products
Rose Flower soil Rose fertilizers
bushes
ΔBEP Break ΔBEP =
-ΔP
=
-10
= .095
Even Point (ΔCMR+ ΔP) (115+10)
The sales must increase with 10% with a 10% price increase and there is cross
price elasticity among complementary products. If the sales are increased
with less than 10% the company will loose on the price reduction
The average customer buys two bags of flower soil per rose bush.
The average customer buys a bottle of rose fertilizer per rose
bush.
Sales can be reduced by 15 percent if the price is increased by 5
percent when there are no substitute products with cross-price
elasticity.
If the sales reduction is larger than 15 percent, the company will
lose on the price increase.
Sales can be reduced by 10 percent if the price is increased by 5
percent when there are substitute products with cross-price
elasticity.
If the sales reduction is greater than 10 percent, the company will
lose on the price increase.
Sales must be increased by 25 percent if the price is reduced by 10
percent when there are no complementary products with cross-
price elasticity.
If the sales increase is under 25 percent, the company will lose on
the price reduction.
Sales must increase by about 10 percent if the price is reduced by
10 percent when there are complementary products with cross-
price elasticity.
If sales increase by less than 10 percent, the company will lose on
the price reduction.
Summary
This chapter ended the book with a review of the company’s costs and
their significance, and then looked at various profitability analyses, and
price elasticity analyses. All analysis is illustrated using clear numerical
examples.
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About the Author
Professor Ragnhild Silkoset holds a doctoral degree in marketing strategy from BI Norwegian
Business School in Oslo. She has written a well-received textbook on research methodology
used by thousands of students. Her research focuses on pricing strategy, business-to-business
marketing, market-oriented management, and marketing technology. Her research has been
published in reputable international journals such as Journal of Business Venturing, Business-to-
Business Marketing, Journal of Business Ethics, International Journal of Bank Marketing, International
Business Review, and European Journal of Marketing, to mention just a few. She is a well-known
expert in pricing in her home country and is frequently used as an expert witness in court, and
as a pricing expert in national broadcast media. She is the founder and CEO of the consultancy
company Pricing Decisions (see prisbeslutninger.no). She also holds an adjunct professor
position at UiT The Arctic University of Norway, Tromsø.
Index
99 endings
additional sales
additional services
anchoring effect
breakeven point
bundling
circular economy
competitor-based pricing
contribution margin
cost-based pricing
costs
coupon
cross price elasticity
customer compromises
customer preferences
customer segment
customer value
customer-based pricing
dashboard
differentiation attributes
differentiation value
difficult comparison effect
digital markets
digital platforms
digital products
discount
dynamic pricing
economy pricing
emotions
end-benefit effect
endowment effect
Excel
expenditure effect
groceries
International trade
localization
loss leader
loyalty program
market share
measurement
method
new products
objectives
online shopping
optional bundling
peak load pricing
penetration pricing
perceived value
premium pricing
price bundling
price competition
price cooperation
price elasticity
price guarantees
price information
price marketing
price promotion
price range
price robot
price segmentation
price sensitivity
price skimming
price tactics
price war
price-quality effect
pricing policy
pricing strategy
pricing strategy
product bundling
product profiles
product quantity
product variants
profit margin
prospect theory
psychological pricing
reference price effect
regression analysis
regulations
segment
shared cost effect
simulate sensitivity
subscription schemes
subscriptions
substitute effect
switching cost effect
tactical pricing
the grocery industry
the sharing economy
time
total economic value
transaction benefit
unfair price
unique value effect
utility
utility interval
value-added bundling
value-based pricing
volume discount
willingness to pay
yield management

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Ragnhild Silkoset

A Guide to Pricing Decisions

Choice of Pricing Strategy

Figure 1.1: Different Objectives with the Pricing Strategy.

Pricing strategy for new products generally follows two paths,

Price Skimming Strategy

Penetration Pricing Strategy

Economy Pricing Strategy

Premium Pricing Strategy

Development of the Company’s Pricing

Value, Price, and Quality

When the equation is greater than 0, the customer experiences a

Nonmonetary: Time Consequences

Figure 2.1: Water in Many Varieties and Price Ranges.

Steps in VTC Analysis

Figure 2.2: Steps in the VTC Analysis.

Step 1: Determine Customer Segments

Step 3: Map Differentiation Attributes

Step 4: Quantify Customer Value

Step 5: Calculate Total Economic Value

Mistakes Made in Value-Based Pricing

Practical Example of VTC Analysis

Figure 2.3: VTC Analysis Graphical Layout.

Attachment: VTC Analysis for the Case

Figure 2.4: VTC Analysis for “Harmony Cottage Village”.

Measure Price Sensitivity

Figure 3.3: Graphical Pivoting Dialog Box in Excel – Select Spreadsheets.

The Van Westendorp Model for Price Calculations

Steps in the Development and Implementation of the Van

Step 1: Map Customers’ Price Preferences

Step 2: Analyze Customer Responses

Figure 3.8: From Westendorp Figure.

1. the point of marginally too cheap

Step 3: Calculate Price Ranges

Conjoint Price Analysis

Steps in the Development and Implementation of Conjoint

Step 1: Map Customer Preferences

Step 2: Develop Product Profiles

Table 3.2: Example of Fan Profiles.

In our data set, we thus remove the following columns:

Step 3: Analyze Customer Compromises

Step 4: Calculate the Economic Effect

Control Manual Remote –0.7 0 –0.7 – 0 = – 0.7 0.71/7.4 x 100 = 9%

Color White Black 2.0 0 2.0 – 0 = 2.0 2.0/7.4 x 100 = 33%

Benefit in total: 2.0 + 0.71 + 2.0 + 2.7 = 7.4

1We use absolute values to calculate the ratio of benefit in total.

Formula for the Importance of the Attributes

Option = b0 + b1(f an type) + b2(f unction) + b3(color) + b4(price)

Bestchoice =1. 7+2 (pedestalfan) +0 (remotecontrol)

+2 (white) +2. 7 ($39. 90) =8. 4

Worstchoice =1. 7+0 (ceilingfan) + (-0. 7) (manual)

Simulate Market Share

UA = the probability of choosing product A, i.e., the utility estimate

Case: What Should the Price Be on your New Products?

Figure 3.16: Van Westendorp Example.

Attachment: Excel for Conjoint Analysis of the Fan Example

Setting Up Excel for Analysis

Figure 3.17: Adding Analysis Tools to Excel.

Figure 3.20: Find the Analysis Program Already Installed in Excel.