Question

What is the Loss aversion? Describe in your own words, the asymmetry of expected values for gains and losses. Identify some applications on pricing strategy.

Answer 1

Loss aversion

Loss aversion is a crucial idea related to prospect theory and is encapsulated within the expression “losses loom larger than gains”. it's thought that the pain of losing is psychologically regarding double as powerful because of the pleasure of gaining. As folks are additional willing to require risks to avoid a loss, loss aversion will justify variations in risk-seeking versus aversion.

Applications on pricing strategy

1. evaluation at a Premium
With premium evaluation, businesses set prices more than their competitors. Premium evaluation is commonly best within the early days of a product’s life cycle, and ideal for tiny businesses that sell the distinctive product.

Because customers have to understand the product as being well worth the higher tag, a business should work flat out to make a price perception. together with making a high-quality product, house owners ought to guarantee their selling efforts, the product’s packaging and also the store’s ornament all mix to support the premium value.

2. evaluation for penetration
Penetration ways aim to draw in patrons by giving lower costs on product and services. whereas several new corporations use this method to draw attention removed from their competition, penetration evaluation will tend to lead to AN initial loss of financial gain for the business.

Over time, however, the rise in awareness will drive profits and facilitate tiny businesses to square out from the group. within the long term, when sufficiently penetrating a market, corporations usually finally end up raising their costs to raised mirror the state of their position among the market.

3. Economy pricing
Used by a good vary of companies together with generic food suppliers and discount retailers, economy rating aims to attract the foremost price-conscious of customers. With this strategy, businesses minimize the {prices} related to promoting and production so as to stay product prices down. As a result, customers should buy the products they have without frills.