I Phone 11 And The Dark Art Of Psychological Pricin9

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“The iPhone 11 and the dark art of psychological pricin9” Teaching Note Synopsis of the case The case consists of a humorous 4 minute 59 second video discussing…
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“The iPhone 11 and the dark art of psychological pricin9” Teaching Note Synopsis of the case The case consists of a humorous 4 minute 59 second video discussing the Apple iPhone 11, with a focus on its pricing. The video briefly explains different pricing techniques (i.e., charm pricing, penetration pricing, price skimming and anchor pricing) as well as other framing techniques Apple used to have their consumers believe their new iPhone is cheaper than previous models. Teaching objectives Familiarize students with different pricing techniques and push them to think about the ethical implications of pricing. Target learning group While the case fits naturally in any business school course that addresses product pricing and/or marketing issues, it can also be used in courses addressing the business world more generally, as well as those taking a consumer perspective, such as personal finance courses, including at the high school level. Assignment questions 1. Why do you think “charm” prices are so widely adopted? a. From a managerial point of view, what do you think the positive consequences of using such a pricing technique could be? And the negative ones? b. Do you believe psychological pricing is unethical? Why or why not? c. As a consumer, how do you react to charm prices? 2. If you were to change Apple’s price endings, what would you change them to? Why? Please present some references that support your choice. a. Do you believe the numbering* system for iPhones to be misleading? *iPhone XR (entry level / budget product) → iPhone 11 iPhone X (flagship product)→ iPhone 11 Pro b. What could be the positive consequences of doing so for Apple? c. And the negative ones? 3. Can you give other examples of price skimming, penetration pricing or anchor pricing? Look for examples in real life (at the supermarket, online, etc.) and present an example for each pricing technique. 4. Note that this video lasts less than 5 minutes – more specifically, 4 minutes 59 seconds, or 299 seconds. Is such “charm timing” similar to charm pricing? Why or why not? Teaching plan and timing Given that the video is only 5 minutes long, it can either be assigned before class or shown in class. If shown in class, students can be asked to form small groups to discuss the video over the next 10-15 minutes. 1 The teaching plan for a class discussion can be quite flexible and depending on student background and experience could take up from 20 minutes of class time up to an hour or more. Roughly speaking, a minimum of 5 minutes can be spent on each of the first four questions. The final question could lead to a wider-ranging discussion that may be more desirable for an introductory business course than for a more focused marketing one. Using the case as a written homework assignment As an alternative to in-class discussion, it is possible to assign case questions as a take-home essay. If this option is selected, it may be preferable to focus on only one or two questions (e.g. Questions 1 and 5) and limit the essay length to a maximum of the 2 or 3 pages. The fact that the video’s length, tone and presentation style are likely to be similar to entertaining videos students may watch in their leisure time may prompt students to reflect critically on such videos as well, extending the learning process outside the educational setting. Discussion outline 1. Why do you think “charm” prices are so widely adopted? a. From a managerial point of view, what do you think the positive consequences of using such a pricing technique could be? And the negative ones? Charm pricing, also known as odd pricing, can be defined as “the practice of expressing a price so that its ending (i.e. its rightmost digits) causes it to fall just below a round number” (Schindler & Warren, 1988). Price endings can be manipulated independently of the level of the price, so that if we consider, for example, $29.99 vs. $30.00, we are dealing with two prices that are substantially at the same price level, but have different price endings (Schindler, 1991). Several authors have observed that consumers prefer odd prices over non-odd prices. For example, Manning & Sprott (2009) observe that when the subjects of an experiment were asked to choose between a product priced at $2 and another at $2.99, only 55% of participants preferred the lower priced option. However, when they were asked to make a choice between a product at $1.99 and another one at $3, 81% of participants preferred the lower priced option. This preference for odd prices is also observed in a subsequent increase in sales (Anderson & Simester, 2003; Kalyanam & Shively, 1998; Schindler & Kibarian, 1996), which would justify retailers widely adopting this pricing technique. Research also investigates why customers might prefer odd prices. Most authors agree on the fact that odd prices have both an underestimation effect and an image effect. Underestimation effects refer to the cognitive processes that cause a consumer to distort their perception of the price (Coulter, 2001). In particular, the most common belief about odd prices is that they will be perceived as lower than they really are (e.g., $49 could be perceived as “40 something dollars”, which would correspond to a potential underestimation of 9/49=18.4%). Following the standard law of demand, lower prices imply higher demand. Interestingly, previous research finds that for products with typical consumer brand elasticity (reported at 1,76), it would be sufficient for consumers to underestimate odd prices only in 3% of the cases, for this pricing technique to be profitable for retailers (Gedenk & Sattler, 1999). 2 Image effects are “those that cause consumers to believe something about the product, the store or the competition on the basis of the right-hand digits of the price” (Stiving & Winer, 1997). There are mainly two types of image effect, i.e., price and quality image effects (Schindler, 1991). The former refers to the fact that consumers might interpret odd prices as • Low relative to other prices applied to the same item by competitors; • Low with respect to the cost structure of the product; • Indicative of an overall low-price outlet; • Recently reduced or at least not recently increased; • Being on sale, being a discount price (which is different from a low price in that a discount is temporary and expected to go up again). Quality image effects, on the contrary, are connotations of low quality; since odd prices are perceived as discounted prices, customers might perceive that the products they are applied to are leftovers or out-of-date items. This bad-quality connotation can be transferred, by interference, to all products carried by the retailer who uses odd price. Also, some customers, realizing the equivalence of a just-below price and its higher adjacent round price, might perceive that the retailer is being “sneaky” or not entirely honest, in trying to trick the customer into believing they are spending less. To conclude, odd prices can have both positive and negative consequences for the retailer: on the one hand they are perceived as lower prices (positive consequence for the retailer), both according to the underestimation and price image effect, while on the other hand they can have a negative effect on perceived quality. b. Do you believe psychological pricing is unethical? Why or why not? We have seen how 9-ending prices have a low-price connotation. One would therefore expect them to be among the lowest prices available for any given item in the marketplace and would expect the low-price connotation to be a result of customers coming to learn that low prices usually end in -9. Surprisingly, this is not always the case. For example, Schindler (2001) finds that of 1200 prices observed (i.e. 10 price observations for 120 products), only 4,5% of all prices ending in -99 are the lowest in the observed set. Moreover, not only were 99-ending prices less likely to be the lowest prices available for a given item, but also, they were on average the highest prices. Together with the fact that consumers might easily realize the substantive equivalence of an odd price to a slightly higher even price, this paradox of odd prices having low price connotations but being often the highest prices, can contribute to a feeling of deception that the retailer is trying to mislead consumers (Schindler, 2001). This anecdotal evidence can be shared with students to push the discussion on whether this pricing technique is ethical or not. c. As a consumer, how do you react to charm prices? 3 Ask your students to think about how they react, possibly also different circumstances: most of them will say that they are not fooled by this kind of pricing technique, but the instructor can try to complexify the scenario: - What if you are in a hurry at the supermarket? - What if you purchase several items and you are trying to sum up the prices of the items in your basket without a calculator? - What if you look for a product online and you can set filters by price range? (in this case you can make them realize that the fact of using an odd price, will allow certain items to appear within some price ranges) - What if you do not purchase immediately, but you first spend time exploring options for a given product and you come back later to a reduced choice set? - Etc. 2. If you were to change Apple’s price endings, what would you change them to? Why? Please present some references that support your choice. All other digits can be used to end a price, but most prices in the marketplace end in -0, -5 or -9. While no research has ever been conducted on prices ending in -1/-2/-3/-4/-5/-6/-7/-8, some authors highlight that prices ending in -0 (i.e., even or round prices) could be highly beneficial for businesses wanting to signal quality and prestige (Stiving, 2000). Even prices carry the connotations of being • High, full prices (Schindler, 1991) • Convenient, especially when the customer pays in cash (Wieseke, Kolberg, & Schons, 2016) • Set for customers who are above thinking about pennies (i.e., even prices are perceived as more prestigious) (Georgoff, 1972) This pricing technique seems to be most appropriate for brands that are considered premium, i.e., that have high perceived quality that could be damaged by the use of odd prices (Macé, 2012). Which is why even prices might seem more adequate for Apple. 3. Do you believe the numbering* system for iPhones to be misleading? *iPhone XR (entry level / budget product) → iPhone 11 iPhone X (flagship product)→ iPhone 11 Pro a. What could be the positive consequences of doing so for Apple? b. And the negative ones? Up until the penultimate iPhone release, the “budget” version of the iPhone was never the one carrying simply a number as a name. For example, in 2013, Apple released two phones, i.e., the iPhone 5s (flagship product) and iPhone 5C (budget product). In 2016, the iPhone SE was released as a cheaper version of the iPhone 6s. Lastly, in 2018 the iPhone XR was released as a cheaper version of the iPhones XS. The flagship products were, on the contrary, very often only named after a simple number (iPhone 4, 5, 6, 7, 8, X) plus a “s” to indicate the improved model (iPhone 4s, 5s, etc, although it is not clear what the “s” stands for: speed, super, Siri, security? Who knows?). So, with the latest release, customers would tend to believe that the iPhone 11 is the flagship phone (i.e., not the cheap version), while the iPhone 11 Pro would be something 4 even fancier. However, when looking at the technical features of the two products, we realize that the iPhone 11 is the evolution of the iPhone XR, the budget version of the previous release, while the iPhone 11 Pro is the evolution of the iPhone XS. In this sense, Apple is hoping that customers will fall for this “trick”. Many consumers who do not pay attention to the technical features of the products and just base their decision on branding will believe that they are getting a great deal by purchasing the iPhone 11, because they will think that it is substantially cheaper than the previous iPhone XS. In reality, they are simply buying a phone that is less performing, which justifies the price cut. For Apple, the immediate benefits are clear: they will most likely boost their sales in the short run. However, the negative consequences are just around the corner: some consumers will realize that they have been “tricked” into buying a less performing phone. Over the long run, this kind of opportunistic behavior by Apple can result in customer dissatisfaction, feelings of deception and therefore brand dilution. 4. Can you give other examples of price skimming, penetration pricing or anchor pricing? Look for examples in real life (at the supermarket, online, etc.) and present an example for each pricing technique. This is an opportunity for students to draw on their own experience, and could result to a wide variety of thought-provoking examples, especially of students come from a variety of cultures/countries. 5. Note that this video lasts less than 5 minutes – more specifically, 4 minutes 59 seconds, or 299 seconds. Is such “charm timing” similar to charm pricing? Why or why not? This is an opportunity to open a wider discussion, beyond product pricing. Some students may argue that, similarly to how consumer prefer lower prices, viewers are more attracted to shorter videos, and 5 minutes is a common mental cutoff they use. Viewed from this perspective, a video that lasts 4 minutes 59 seconds could be seen as seeking to entice the viewer through the illusion of short length in much the same way as the price of 9.99 creates the illusion of lower cost. Alternatively, one could argue that video length is not the same as product price. For example, you can stop watching the video at any time, whereas a product has to be purchased in its entirety or not at all. Yet another argument could be that this is similar to everyday usage, e.g. someone with 10 years and a few months of experience referring to it as “over a decade of experience”, or an audience of 25 being described as “dozens”. On the other hand, students may argue that such everyday usage is misleading as well. This in turn could lead to an insightful and wide-ranging discussion about the use of “charm” numbers in communication more generally. Supplementary information Beyond charm pricing, in the video we discuss other pricing techniques, such as penetration pricing, price skimming and anchoring. This list is of course far from being exhaustive. Before moving onto other pricing techniques, please notice that anchoring does not only consist in showing a high price and then a lower one, as mentioned in the video, so that the latter looks 5 relatively cheaper and accessible, but it is, in general, the fact of priming individuals with a first piece of information, i.e., the anchor. For example, when the iPhone first came out in 2007, consumers had no idea about how much an iPhone should be worth, simply because it did not exist before then. So, the first iPhone’s price of $499 was an anchor, with which consumers were primed. In other words, once that price scale was accepted (i.e., consumers understood that to get an iPhone they would have to spend several hundreds of dollars), it was only natural to see prices increased with every new iPhone release, since every iPhone is launched as “the best iPhone yet” (e.g., slogans for previous iPhones: 3GS - the fastest yet; 4s - the most amazing yet; 5 - the biggest yet/ the biggest thing to iPhone since iPhone, etc.). To get students to see how anchoring works for themselves, you can split the class in two, and distribute in each group one of the following assignments adapted from: Poundstone, 2011; p:11): o Version A ▪ Is the percentage of African nations in the United Nations higher or lower than 65? ☐ Higher ☐ Lower ▪ What do you think is the percentage of African nations in the United nations? % o Version B ▪ Is the percentage of African nations in the United Nations higher or lower than 10? ☐ Higher ☐ Lower ▪ What do you think is the percentage of African nations in the United nations? % You can then collect the answers and run a simple One-Way ANOVA. Usually, the mean percentage from the group that was anchored with 65% is significantly higher than the mean percentage for the group that was anchored with 10%. This usually makes students realize that whenever consumers are clueless about the value and therefore the price of a good (which happens rather often), marketers can show them an anchor price and largely influence their willingness to pay. In the following paragraphs, we will discuss a few other examples of pricing techniques. Bundling, which consists in selling more than one product in a package with only one price. The advantages of this technique are that the customer’s sensitivity to price is reduced as she will tend to perceive one monetary sacrifice against several received benefits. Also, for some consumers bundled purchases are convenient, because they acquire several goods at once (Urbain & Le-Gall-Ely, 2009). Price discrimination (or price differentiation) exists when sales of identical goods or services are transacted at different prices from the same provider. There are three levels of price discrimination: the first one consists in having each customer negotiate a price to maximize their 6 willingness to pay. The second degree of discrimination sees customers in the same market choosing the offering that carries the price they are willing to pay (e.g., choosing to travel in 1 st vs. 2nd class on a train). Lastly, the third degree enforces discrimination on customers. In this category, we mention different admission fees to museums, time pricing (e.g., lower telephone rates at night/during the weekends), yield management (e.g., variable pricing in the hospitality industry, for airlines, trains, etc.) (Kotler & Keller, 2012). Captive-product pricing consists in pricing a main product relatively cheap with high mark-ups on its supplies. In this category we find for example ink cartridges for printers, capsules for coffee machines, blades for razors, the supplies being the captive products. These can account for a substantial portion of a brand’s sales and profits (Kotler & Armstrong, 2016). The last example we would like to mention is shrinkflation, where the company gradually and often imperceptibly reduces the size of the packaging and therefore the contained quantity of product sold but keeps the same price. In this way, the customer believes the prices are kept constant, while actually the price per product unit is slowly increasing (Poundstone, 2011). Background information on the case and the recording of the video The video was recorded as part of TBS Business School’s Inspiring Guest program. This program focuses on pedagogical innovation through collaboration with a personality outside of business academia who has an interesting and inspiring perspective on the pedagogical process. The program’s inaugural guest, over the week of 16-20 September 2019 was the Los Angeles-based standup comedian, writer, actor, former teacher, and the University of California business and applied mathematics graduate Sammy Obeid. On Wednesday, 18 September, approximately 20 TBS faculty members participated in a workshop focused on learning from Mr. Obeid’s experience in comedy and improvisation as well as teaching, and discussing ways in which the resulting insights can contribute to pedagogical innovation at TBS. As part of the workshop Mr. Obeid asked faculty members to suggest recent news stories from the world of economics and business that illustrate an interesting issue from both practical and academic perspectives. Five topics were short-listed, of which the issue of the iPhone 11 and its pricing received the most faculty votes. The scrip
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