Decision Theory

“Fairness” in Pricing

A recent HBR article titled “Understanding Fairness is the Key to Keeping Customers” caught our eyes this week. From the headline we expected another rant on what a “fair” price is, conflating ethics with price setting. We were relieved to discover it’s actually a more tactical guide to the perception of fairness in pricing. Customer perception of a price, whether it can be described as “fair” or not, is obviously one of the key drivers of elasticity, and is ignored at retailers’ peril.Read More »“Fairness” in Pricing

How NOT to communicate a Price Change

In some sectors changing price isn’t as easy as a new shelf sticker.  But that doesn’t mean it’s acceptable to communicate your price thoughtlessly, as APS did below.  While I’m sure it’s that the power company’s cost structure is changing, blaming conservation efforts is not just artless, it’s bad for business.  And using allowed to implement a new charge” does little except angers customers as they pay their bill.

Read More »How NOT to communicate a Price Change

Game Theory in Pricing

As firms grow in sophistication with their pricing capabilities, at some point they exhaust the opportunities that internal to their company, and start looking outside to explore the dynamics of the industry.  That’s where they first encounter game theory, though many struggle with how to apply it to their strategy.

What is game theory?
In short, it’s the idea that the landscape is made up of rational players, and that they will act on their own and react to your decisions over time.

So how does that apply to pricing?
It’s easiest to start with a thought experiment:  What if they were as smart as you are?  Here’s a case study from a recent engagement.Read More »Game Theory in Pricing