Pricing Strategy for Second-Hand Laptops to Maximize Fundraising for Student Robotics Club
Abstract: This article explores how to determine the pricing strategy to maximize the funds to be raised from selling second-hand laptops for our robotics club while providing a discounted price to students receiving need-based scholarships. I used the Price Sensitivity Measurement (PSM) model and adopted differentiation strategies to successfully enhance the attractiveness of second-hand laptops and increase the sales proceeds. This article provides detailed steps and verifies its effectiveness through case studies. Keywords: price sensitivity analysis, PSM model, differentiated treatment. Background This year, we started the robotics team in our school, planning to participate in the first robotics competition in March 2024. As we started to understand the robotics competition better, we knew that the technical skills of building the robot were definitely necessary to become more successful in the competition, but we also noticed the significant financial burden of building the robot: purchasing various robot components, buying related tools, and affording all sorts of fees to go to Australia and compete with other teams. Therefore, we have considered many different approaches to raising funds for the club. We have organized our own bake sale and sought sponsorship from our members’ parents, but that’s far from enough. As the leader of the finance department, I have asked the school whether they can sponsor us money because we are representing Keystone Academy. They have agreed to sponsor us second-hand laptops used by students who have left Keystone, and we can sell these laptops to raise funds. Therefore, in this research, I hope to obtain the best price that could maximize our sale of laptops in order to raise more funds for our robotics club. I noted in the news that on November 29, 2023, the market capitalization of PDD Holdings Inc. (“PDD”) exceeded that of Alibaba Group Holdings Ltd. (“Alibaba”) for the first time in history, so I went on researching the development of the two companies, including reading their annual reports. Only two years ago, the market capitalization of PDD was less than 1/3 of that of Alibaba. Founded in 1999, Alibaba is a global leading digital business infrastructure provider, with one of the largest e-commerce platforms in the world and having expanded into cloud computing, digital media and entertainment businesses. Only founded in 2015, PDD is known for offering value-for-money products, often at lower prices than its competitors. In addition, its unique social e-commerce model, which combines online shopping with social media, has resonated well with consumers, particularly in less developed areas where traditional e-commerce penetration is lower, and these consumers are typically more price-sensitive. By focusing on affordable products and discounts, PDD has been able to attract a large user base and drive sales, which growth trend has been further strengthened after three years of Covid-19 pandemic, as people have become much more sensitive to prices and conservative in consumption.
1
As the proceeds from the sales of the second-hand laptops will be used to fund our robotics club, we aim to maximize the sales proceeds and have considered formulating a pricing strategy based on the price-sensitivity analysis of our target customers. At the same time, we would offer discounts to students on need-based scholarships, to make our laptops accessible to a wider range of student population. Analytical Framework To maximize the proceeds our robotics club will receive from selling of these laptops, we need to sell each model close to the willing-to-pay price of each buyer. To achieve this goal, I designed the process into two steps: (a)
Using appropriate pricing model to get a base price which will maximize the number of sales.
(b)
Customize the laptops so that each can be sold at potentially a different price and then use auction to reveal the true willing-to-pay price of each buyer and sell each model at the maximum possible price.
Choice of the Pricing Model I, together with my fellow club members, have studied and analyzed a number of pricing models that are commonly used in the market for price determination: (a)
Cost-plus Pricing is a model involving adding a markup to the cost of production or service delivery to arrive at the final selling price (Kenton 2021). The markup is designed to cover expenses like marketing, administration, and profit. As it was difficult to determine the cost of the laptops to be provided by the school to support our robotics club and the cost-plus model does not reveal the willing-topay prices of the potential buyers, this model is not suitable for us.
(b)
Competitive Pricing is a model used to set prices based on what competitors in the same market are charging (Investopedia 2021). It is common in markets where competition is fierce. In our case, currently we are the only club receiving those laptops and permitted to make a sale out of them. Also, this is more like a charity sale rather than market sale, so we will refer to the market price for second-hand laptops but will not rely on it as the only way for price determination.
(c)
Skimming Pricing involves setting prices high to capture the early adopters or high-value customers in a market (Monash Business School 2021). It is common in industries where there is a high demand for a new or innovative product or service, like the early days of the iPhone. As laptops are quite common nowadays, let alone second-hand ones, and it is not suitable to consider our fellow students as higher or lower-value customers, this model is not suitable for us.
2
We also studied (i) the Penetration Pricing, which involves setting prices low to attract a large number of customers and gain market share, a model commonly used in industries where demand is high, but competition is also fierce, like discount airlines or budget hotels (Dean 1976, 141–153), (ii) the Dynamic Pricing, which involves adjusting prices based on demand, supply, and other market conditions in real time, a model commonly used in industries like airlines, hotels, and ride-hailing services where demands are large but can vary greatly from hour to hour (WhatIs.com 2014), and (iii) the Subscription Pricing, which involves charging a fixed monthly or annual fee for access to a product or service, a model commonly used in industries like software, media, and fitness where access is recurring (Clapp 1931, 199–224), and found these models not suitable in our case. The Value Pricing model, which prices a product or service based on its value to the customer, helps businesses understand how sensitive their target customers are to changes in product prices by examining how customers perceive different price levels and their willingness to pay for a product fits into our scenario quite well (Investopedia Team 2023). Among them, there is one particularly easy and widely used model called the price sensitivity measurement (PSM) model, which was developed by Danish economist Van Westendrop in the 1970s. I first knew this model in a practical problem studied at our Math Club. The PSM model is based on the premise that customers have a certain price range in mind for a particular product, according to their perception of brand or product quality and its relationship with price, and measures consumers’ satisfaction and willingness to pay different prices through continuous price testing scales (Westendorp 1976, chap. NSS Price Sensitivity Measurement). Understanding consumers’ price sensitivity can lead to more effective informed decisions by businesses about pricing strategies, product positioning, and marketing campaigns. In the PSM model, businesses present customers with different price options for a product and observe their reactions. Customers are asked how likely they would be to purchase the product at each price point presented. The data collected from these surveys is then analyzed to determine the optimal price point for the product, which maximizes customer willingness to pay while maintaining a reasonable profit margin for the business. Sell Close to each Customer’s Willing-to-Pay Prices Since our club’s aim was to maximize the proceeds from the sale of these second-hand laptops, once the price was determined to maximize the number of laptops to be sold, we had to think of the ways to push the price to the buyers’ willing-to-pay price points. The biggest obstacle to this was that the laptops provided to us were essentially the same model with more or less similar conditions. It was quite difficult to justify the different prices for similar products even if we know that certain buyers are willing to pay at higher prices. As such, we need to add some customization to each model to appeal to different students’ interests or tastes so that they can have a valid reason to persuade themselves that they are paying different prices from others. Then we put all the customized models in an auction and leverage a bidding process to push the sale price close to buyers’ willingness-to-pay prices.
3
Data Verification We will conduct the process designed above to test our theory by real data. Determine the Price Range In order to determine the price range for the PSM model, I first collected information about the second-hand laptops, including their models, specifications, usage time, appearance, etc., and then references are made to the prices of second-hand laptops of the same models with similar specifications listed Xianyu, China’s largest online trading platform for second-hand goods1. All the laptops we received were A2179 laptops and based on the specifications, the maximum price range found on Xianyu was from RMB2300 to RMB3200. Considering the fact that our laptops were used for a longer period of time, I have lowered our range of prices to RMB2000 to RMB3000. Accordingly, I design the PSM questionnaire as follows (Westendorp 1976, chap. The basic technique):
Price
Priced so cheaply that you would question its quality (“too cheap”)
A great buy for the money (“cheap”)
Expensive enough, so you’d need to think carefully before purchasing (“expensive”)
So expensive that you wouldn’t even consider buying (“too expensive”)
￥2000 ￥2100 ￥2200 ￥2300 ￥2400 ￥2500 ￥2600 ￥2700 ￥2800 ￥2900 ￥3000
Survey the Target Customers We set our fellow students as our target customers. To ensure the results of the surveys being representative, the students being surveyed are selected as follows: (i) 10 students are randomly selected from each of 8-12 grades, and (ii) male and female are equally selected. Then we handed out PSM questionnaires to the students selected to collect their opinions and feedbacks.
1
Please refer to Annex A for the prices of the second-hand laptops listed on Xianyu. 4
Data Analysis In this step, I collated and analyzed the collected data to understand the target customers’ price sensitivity towards second-hand laptops. After collecting the raw data, I created the cumulative frequencies for each price points and then a four-line chart as follows: too cheap cheap expensive too expensive too cheap cheap expensive too expensive (cumulative (cumulative (cumulative (cumulative price too cheap cheap expensive too expensive (cumulative) (cumulative) (cumulative) (cumulative) percentage) percentage) percentage) percentage)
¥2,000 ¥2,100 ¥2,200 ¥2,300 ¥2,400 ¥2,500 ¥2,600 ¥2,700 ¥2,800 ¥2,900 ¥3,000
13 11 9 9 8 0 0 0 0 0 0
0 6 10 8 12 10 4 0 0 0 0
0 0 0 0 1 6 8 18 8 9 0
0 0 0 0 0 1 0 8 12 11 18
50 37 26 17 8 0 0 0 0 0 0
50 50 44 34 26 14 4 0 0 0 0
0 0 0 0 1 7 15 33 41 50 50
0 0 0 0 0 1 1 9 21 32 50
100.0% 74.0% 52.0% 34.0% 16.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
100.0% 100.0% 88.0% 68.0% 52.0% 28.0% 8.0% 0.0% 0.0% 0.0% 0.0%
0.0% 0.0% 0.0% 0.0% 2.0% 14.0% 30.0% 66.0% 82.0% 100.0% 100.0%
The four line intersections are analyzed as follows: l
Point of marginal cheapness (PMC), where the “expensive” and “too cheap” lines cross (Westendorp 1976, chap. Marginal Pricing Points). PMC is the price point above which more people perceive the price as “expensive” than “too cheap.” Charging that price point below is usually counter-productive — more customers would perceive you as too cheap (which is not good; too low prices raise quality concerns) than expensive. 5
0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 2.0% 18.0% 42.0% 64.0% 100.0%
l
Point of marginal expensiveness (PME), where the “cheap” and “too expensive” lines cross (Westendorp 1976, chap. Marginal Pricing Points). PME is the price point where more people start to perceive the price as “too expensive” than “cheap”. Charging above that price point would scare off most of the potential customers.
l
Indifference price point (IPP), where the “expensive” and “cheap” lines cross (Westendorp 1976, chap. Definition of the indifference-price). IPP is the price point that most customers are indifferent to the price and it represents the normal price for a product as viewed by customers.
l
Optimal price point (OPP), where the “too expensive” and “too cheap” lines cross (Westendorp 1976, chap. The optimal pricing point). OPP is the price point where the number of people saying the offering is too cheap (which could raise quality concerns) and too expensive (to even consider) is the same. It is considered as the optimal price point, because charging above this price point and the percentage of customers perceiving the product as too expensive will rapidly grow, and similarly charging below this price point will lead to an increasing number of customers considering the product as too cheap.
Accordingly, in our case, if we set the base price at OPP of RMB2490, we are supposed to sell the maximum number of laptops. Maximize Sales Proceeds Product Customization I, together with my fellow club members, have determined a number of ways to customize the second-hand laptops to make them to be distinguishable from one another: l
Appearance change: clean the laptop case, the keyboards and touchpads, and add a new protective case to give it a new look. The protective cases are easily customized with various appearances.
l
Software optimization: we pre-installed some commonly used free software on certain laptops, to facilitate student use.
l
Personalized customization: we provided personalized options such as multiple colors, stickers, or engraving, allowing students to customize their laptops according to their preferences.
l
Packaging and accessories: We designed an exquisite packaging, with the school’s logo, and add useful accessories with IP model, such as limited edition Disney mouse and keyboard protective film, to increase the add-on value of the product.
6
Auction Process Through the student surveys, we also advertised on the potential sale of the laptops, although we did not officially release the information about the auction process until a week before. The idea of auction was interesting and welcomed by the student community who responded by active participation. Each laptop was meticulously presented, its specifications and the starting price of RMB2490, the OPP. As the bidding began, students raised their paddles with enthusiasm, determined to secure the laptop that met their needs. In the end, the auction was so successful with each laptop, other than the four reserved for sale at a discount to students receiving need-based scholarships, finding a new owner and following is the result of the sale: Laptop
Customization
Quantity
Unit Price Sold (RMB) 2490 (only four sold)
70% new, noticeable scratches
None
5
80% new, a few scratches
With FRC customized stickers
4
2550
90% new, limited scratches
With FRC customized stickers, mouse or laptop cases
8
2600
80% new, limited scratches
With FRC customized stickers, mouse, laptop case, dual operating system (IOS and Windows), and/or pre-installed software
4
2800
Conclusion and Further Action Plans We have successfully completed the sale of the second-hand laptops and realized maximum sales proceeds by applying the price sensitivity measurement (PSM) model and differentiation treatment strategies. Besides, five laptops were sold to students on need-based scholarships at a discounted price of RMB2250, approximately 10% off the OPP of RMB2490. Except for the 10% of the sales proceeds that will be received by school for accounting reasons, all sales proceeds will be used to fund the operation of our robotics club. References 1. 2. 3. 4.
Van Westendorp, P (1976) “NSS-Price Sensitivity Meter (PSM)- A new approach to study consumer perception of price.” Proceedings of the ESOMAR Congress. Annual reports of PDD on Form 20-F filed with www.sec.gov on April 24, 2020, April 30, 2021, April 25, 2022 and April 26, 2023. Annual reports of Alibaba on Form 20-F filed with www.sec.gov on July 9, 2020, July 27, 2021, July 26, 2022 and July 21, 2023. Kenton, Will. “How Variable Cost-Plus Pricing Works”. Investopedia. Retrieved 2021-0426. 7
5.
“Competitive Pricing: Definition, Examples, and Loss Leaders”. Investopedia. Retrieved 2021-01-04. 6. “Market Skimming Pricing”. Monash Business School. Retrieved 2021-04-26 7. J Dean (1976). “Pricing Policies for New Products”. Harvard Business Review. 54 (6): 141–153. 8. “Dynamic Pricing definition”. WhatIs.com. Retrieved April 1, 2014. 9. Clapp, Sarah L. C. (November 1931), “The Beginnings of Subscription Publication in the Seventeenth Century”, Modern Philology, Chicago: The University of Chicago Press, 29 (2): 199–224, doi:10.1086/387957, JSTOR 433632, S2CID 162013335 10. “Value-Based Pricing”. Investopedia. Retrieved 2023-04-22.
8
Annex A Prices of the second-hand laptops listed on Xianyu:
9