Research Projects in Pricing

Participative Pricing Mechanisms - PWYW

Companies can attempt to differentiate themselves from competitors through their products and services or through their marketing strategy. A key element of the marketing strategy is companies’ pricing strategy. Tellis (1986) discusses various pricing strategies that companies can pursue. The key objective of pricing strategies is maximizing sellers’ profits by capturing consumers’ heterogeneous product valuations and accounting for competition and cannibalization. Furthermore, consumers’ reactions to different pricing strategies may not be purely rational but rather driven by behavioral aspects, such as perceptions and preferences. Therefore, consumers’ perceptions of different pricing models may be an additional opportunity for companies to differentiate themselves from competition (by applying a preferred or innovative pricing mechanism). Participative pricing mechanisms, such as auctions and name your own price (NYOP), can be considered innovative, in the sense of being unconventional, because they involve consumers in the price-setting process. Thus, innovative pricing models can be anything that is different from the usual way of setting the price for a specific product. With the advent of the World Wide Web, auction-based pricing mechanisms have been perceived as innovative in selling small-value items, such as collectibles (Lucking Reiley 2000). Similarly, the NYOP mechanism, in which consumers bid for a product against an undisclosed threshold price set by the seller, can be considered innovative (Amaldoss and Jain 2008; Chernev 2003; Spann and Tellis 2006). Common aspects of these mechanisms are that they allow for differentiated prices accounting for consumer heterogeneity and enable consumers (buyers) to exert some control over the final price for the transaction (i.e., participate in the price-setting process; Spann and Tellis 2006). Chandran and Morwitz (2005) find that participative pricing, and thus the higher perceived control of the buyers, leads to a greater intent to purchase. Moreover, they show that consumers who have experience with participative pricing mechanisms prefer them to predetermined (i.e., posted) prices. In this case, the participative pricing model may attract consumers’ attention, potentially leading to (new) customers. Furthermore, the mechanism may increase a seller’s popularity by word of mouth.

Pay what you want (PWYW) is a participative pricing model in which a buyer’s control over the price setting is at a maximum level; the buyer can set any price above or equal to zero, and the seller cannot reject it. The most prominent, recent example of an application of PWYW is that of the rock band Radiohead. For two months, the band offered fans the chance to download its new album from its Web site and to pay as much as they wanted. The album was downloaded more than two million times, and the band reported afterward that this price format was profitable. Among other online downloads (e.g., www.sheeba.ca, open-source software), PWYW is also applied in areas such as gastronomy and hotel industries.

As part of our research, we

1.       classified PWYW within the participative pricing literature (see JM paper 2009)

2.       analyzed motives for payment at PWYW (see JM paper 2009)

3.       identified drivers of prices Paid (see JM paper 2009)

4.       examined PWYW as a price promotion instrument compared to sampling and rebates (see IJRM paper 2014)

5.       analyzed varying conditions at PWYW (see Marketing Letters paper 2014)

6.       examined long-term impact of PWYW (see Review of MS paper 2012)

Price Optimization at Price Comparison Sites

Market liberalization of the German household electricity market has led to an excessive number of competitors (1,150 electricity providers) and volatile price dynamics on price comparison sites. To date, providers that are struggling to achieve a top ranking on price comparison sites do not appear to implement a consistent or elaborate strategy for attracting customers. We developed a pricing tool, named ECO (Electricity Contract Optimization), that addresses this highly competitive market situation by integrating various available data sources, such as data from price comparison sites, demographic data, and regional sales or cost data. ECO sets regionally varying one-time bonuses to attract new customers on price comparison sites with the goal of optimizing sales and profit targets or optimally allocating sales budgets. Based on two field experiments, we demonstrate that ECO’s optimization procedure reduces ENTEGA’s yearly sales costs for new customer business, on average, by 35% relative to previously used pricing heuristics. ENTEGA uses ECO on a monthly basis to analyze different scenarios or to set prices and one-time bonuses on price comparison sites.

Status: in progress

Price Increase Communication: Framing the deal

In high competitive markets companies struggle to retain the customers. Especially service providers, such as providers in the telecommunication or energy industry, usually face a very competitive situation with homogenous products. Increasing costs of input or tax dynamics exacerbate the situation, thus forcing the managers to pass on the price increase to their customers. Service providers offering long-term contracts additionally suffer from price increases as customers are allowed to leave contracts ahead of time. We show that the communication of price increases, particularly the communication of an additional gain, here loyalty incentives, and the framing of these incentives may help to attenuate the negative effect of price increases. Conducting an online experiment with fourteen different treatments, we find that the use of loyalty incentives may avoid churn, even when the total loss is of same value. Results also suggest that monetary incentives (vs. non-monetary) and a higher number of alternatives to choose from lower churn. Finally, the addition of a third dominated loyalty incentive into an initial choice set of two options may help service providers to enhance the attractiveness of their most cost-efficient and favored incentive.

Status: in progress

Pay-Per-Bid Auctions

Pay-per-bid auctions offered by retailers, such as Quibids, Bidcactus and MadBid, are exciting, fast-paced business-to-consumer online auctions that are attracting significant interest from consumers, popular press and start-up companies. Unlike other well-known auctions sites, such as eBay, pay-per-bid auctions charge a fee for each bid that is placed, regardless of whether one wins the auction. Additionally, a bid placed increases the price by a certain increment that is chosen by the auctioneer. For example, in the case of Quibids, the most popular pay-per-bid auction, bidding begins at €0.00 with no reserve price. Each bid increases the price by an increment, usually €0.01, costs the bidder €0.40 and extends the length of the auction by up to twenty seconds.

At first glance, fee-based bidding does not sound attractive because the bidder encounters the risk of having to pay bidding fees without winning the auction. However, the compelling part of this model is that the bidders who win an auction can potentially save more than 99% off the current retail price (CRP) of the product. For example, on MadBid.com, a new MINI One car was sold for €8.47 rather than its retail price of €15,000. Similarly, a new Kymco scooter, which regularly sells for €1,240, was sold for €0.40.

Popular magazines, newspapers and online blogs are replete with heated discussions regarding this emerging type of auction. Although some commentators are enthusiastic about the attractive deals offered by pay-per-bid auctions and how enjoyable they are, others strongly warn consumers against participating in them. Such commentators point to potentially huge losses for bidders as a result of the high bidding costs, which can easily be in the range of several hundred dollars per auction. However, all commentators have based their conclusions on a fairly limited number of observations, some of which are quite anecdotal.

As part of our research, we

• theoretically and empirically assess the economic effects of different pay-per-bid auction formats. In particular, we compare different price increments (penny vs. ten-cent auctions) of ascending auctions as well as of ascending and descending pay-per-bid auctions (see IJRM paper 2014)
• analyze overpaying as a process across multiple auctions (in progress)