Pricing in theory and practice : combined application of price discrimination and prospect theory compared to an example in practice
Creators: name: Egger, Nicolas
Publisher: name: ZHAW Zürcher Hochschule für Angewandte Wissenschaften
Year: 2017
Subjects: 658.8: Marketingmanagement

description: A carefully considered pricing can effectively influence the success of almost any business. However, entrepreneurs who lack the necessary knowhow often structure pricings in a more intuitive manner. This thesis aims to compare a pricing established
under these circumstances to a specifically designed theory-based pricing, working out differences and reflect on missed business potential. Furthermore, it is discussed if the applied method is applicable in practice.
In order to find out, first an explicit pricing structure is successively created based on the principles of the price discrimination theory and the prospect theory. To reduce the complexity and facilitate objectivity a sequential approach is applied so the reader can follow the investigative procedure step by step. Secondly, the pricing based on theory is presented and compared to an example in practice. The identified differences are critically discussed to answer the formulated research questions. Consequentially, the pricing of a technology-based start-up is used for comparison to exemplify the situation of inexperienced entrepreneurs.
The analysis results in a pricing consisting of a menu of two-part tariffs targeting high and low demand customers. The dynamic pricing aspect of the two-part tariff allows the start-up to not only differentiate and discriminate between the two customer groups but also among individual customers within the respective group. However, as customers can choose the product bundles themselves, the pricing components are designed with a focus on preventing demand transferability. Considering both theories, three product bundles are suggested accompanied by additional measures, which make use of anchoring and framing effects.
The final comparison reveals, that even though the start-up is already successfully price discriminating the current pricing is too complex and lacks a variable aspect linked to the usage of the core product. This can potentially lead to missed profit through demand transferability, lost customer orders or the inability to detect the maximum willingness to pay. Currently, the start-up depends only on the ability of their sales representatives to prevent the mentioned failures from happening. This causes higher costs in terms of staff training as well as a higher dependability on certain employees. Accordingly, the overall potential scalability of the business suffers.
The chosen approach shows on one hand that a pricing designed in practice did not lead to an optimal pricing scheme. Hence, theory can help to better structure and optimize the pricing in practice. On the other hand however the attempt to only focus on theory and not implement a practical perspective would be not optimal either. Contradictions among the chosen theories limit a mere theoretical approach. However, the combination of theory and practice, how it is presented in this thesis, can lead to worthwhile outcomes and could be used as an example for other entrepreneurs.