Wednesday, March 4, 2009
Review sheet #2, Short answer question #4
I know that Price Targeting has to do inflating price by convincing customers to pay what they can actually afford for something rather than what it actually costs to make. For example a starbucks cup of espresso. But what does he mean for the second part of the question when he asks, " To what 'LEAKS' is it prone?"
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From Week6.doc:
ReplyDelete"Reality check: can the company plug leaks?
Perhaps you are a company director rubbing your hands with glee as you read this, planning to deploy a range of clever pricetargeting strategies in your own business. Before you get too excited, you'll need to deal with the leaks in your price-targeting system. There are two potentially catastrophic leaks or great holes in an otherwise brilliant marketing scheme. If you don't deal with them, your plans will be in ruins.
The first problem is that supposedly price-insensitive customers may not play the self-targeting game. It's not hard to persuade price-sensitive customers to steer clear of an expensive product, but sometimes it is more difficult to prevent the price-insensitive customers from buying the cheaper one. This is not a problem in the case of small price differences; we have already seen that you can get some customers to pay a modest mark-up in absolute terms (if huge in relative terms), just by wrapping some chillies in a plastic bag, or moving a bag of crisps up onto the top shelf. When it comes to more substantial buying decisions it is not always so easy."
I am not too sure of what is the second "catastrophic leak" is.
The other leak is the TrainCorp example. In the example, TrainCorp actually loses money when it tries to price-target every individual customer. Instead, it has to price-target by groups (elderly, students, businessmen, etc.).
ReplyDeleteIn our handout, it's under the subheading: "When price-targeting is a bad thing". I think that the examples were separated in the book without updating lead up paragraph. Bad editing by Harford. Here is the original article that the examples are pulled from. They are together, towards the end of the piece. http://timharford.com/2005/10/go-figure-an-extract-from-the-undercover-economist-2/