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January 17, 2006 Teck H. Ho 1
MBA 267-1: Pricing PolicyOverview and Introduction
I. Economic and Behavioral Foundations of Pricing
II. Innovative Pricing Concepts and Tools
III. Internet Pricing Models
January 17, 2006 Teck H. Ho 2
Two Questions
Why are you here?
What do you expect from this course?
January 17, 2006 Teck H. Ho 3
Class Outline
Course overviewWhy pricing?
Importance of pricingComplexity of pricingFactors affecting pricingFlawed pricing practices
Steps for profitable pricing
January 17, 2006 Teck H. Ho 4
Course Objective
Cover complete spectrum of pricing topics (breath)
Discuss when, why, and how several contemporary pricing practices are used (depth)
Learn ready-to-use mathematic tools necessary for making solid pricing decisions (concrete solution)
Train to analyze complex real-world pricing situations
January 17, 2006 Teck H. Ho 5
Course Information
Course emphasisEconomic and behavioral foundations of pricingInnovative pricing concepts and toolsInternet pricing models
Teaching methodologyLectures and eight case discussionsTwo computer simulation exercises (e.g.,
http://groups.haas.berkeley.edu/simulations ) Two in-class pricing experiments (price matching
and B2B contract design (motivated by HP))Three guest speakers (ProfitLogic/Oracle, Yahoo!)
January 17, 2006 Teck H. Ho 6
Instructor & Contact Information
Professor Teck H Ho (Teck-Hua Ho) A Singaporean native, call me Teck (as in Hi Tech) Work experience: 3 years at Singapore EDB, 2.5 years with Singapore
army Teaching: 3 years at UCLA and 5 years at Wharton Research: Pricing, market research, new product management, strategic
IQ, supply-chain management, managerial decision making Current consulting projects: Autodesk, eBay, Boston Scientific
Contact information Email: [email protected] Tel: 510-643-4272 Office: F687 Office hours: Tuesday 3:00 – 5:00 p.m. or by appointment
January 17, 2006 Teck H. Ho 7
Prices of Used Cars in Singapore
http://www.aas.com.sg/carprice/usedcar.htm
January 17, 2006 Teck H. Ho 8
The Most Famous Fruit in Singapore
Smell like Sh?tTaste Like Heaven
D24 $10/KgD12 $6/KgRegular $3/Kg
http://web.singnet.com.sg/~tonym/durian.html
January 17, 2006 Teck H. Ho 9
Drinks At Eight30, Raffles Place, Caltex House #23-00. Call 62336863.>> Targets: People who enjoy the high life. The newest agency on the block started operations in March and has some 85 members.>> Costs: $680 for 8 dates of your choice. In addition, enjoy a bottle of 2003 Sauvignon Blanc or 2002 Pinot Noir on the house (for this month only).>> How guy meets girl: Clients fill up about 10 pages of forms describing their ideal dates. Agency staff throw in shopping companionship and offer grooming tips to clients for their dates at fine-dining restaurants such as Senso, Fuenti and Le Bistro. There are also wine appreciation yacht cruises.
Two to Tango30, Robinson Road, Robinson Towers #03-01C. Visit www.twototango.com.sg or call 62254465.>> Targets: Executives, entrepreneurs and expatriates. Launched last June, Two to Tango has more than 500 members.>> Costs: $960 for 12 pre-screened dates in a year.>> How guy meets girl: Couples are paired off after screening by the agency. Clients get discounts on various activities. Image consultants also give lessons on grooming and etiquette at discounted rates. There is a Pets Dating Program, where two pet lovers who do not want to leave their pets home alone can double date with pets in tow.
Strait Times, July, 2005
Dating Agencies in Singapore – Revenue Model Design
January 17, 2006 Teck H. Ho 10
Red, White And TrueNagarathar Building, 5, Tank Road #02-03. Visit www.redwhitetrue.net or call 67379239.>> Targets: Anyone yearning for that special someone. Since its opening in January this year, the agency has registered close to 200 members.>> Costs: $55 for each match, no registration fees. From next month, the first date will cost $80 (inclusive of a registration fee of $55), while subsequent dates cost $25 each.>> How guy meets girl: After meeting an agency staff for an assessment, a match is found and phone numbers exchanged. When the company has enough people on the database, it is planning to organize Speed Introduction, singles parties, self-help workshops and seminars.
www.gomoviedate.com>> Targets: Those in their late 20s to early 40s. Set up in November last year, it has more than 900 members today.>> Costs: Free of charge for women. But men have to buy a gold membership at $19.90, $39.90 and $59.90 for three, six and 12 months respectively. The platinum membership costs $39.90, $69.90, and $99.90 for three, six, and 12 months respectively. Those who sign up for the platinum membership have higher chances of finding a match.>> How guy meets girl: Both parties sign up online and are matched by a computer system. The guy invites the girl to a movie. Tickets are hand-delivered to their homes. The couple simply turn up for the movie. Upcoming plans are for bowling dates, swimming dates, clubbing dates and coffee dates.
Dating Agencies in Singapore – Revenue Model Design
January 17, 2006 Teck H. Ho 11
Course Structure
Economic and behavioral foundations of pricing 4 Cs: : Cost, consumer, competition, and constraint Economic foundation: Break-even sales, sensitivity analysis Behavioral foundation: Psychology of reference price Price response function estimation
Innovative pricing concepts Price customization (customer, time, quantity) Product line pricing Price matching B2B Contract Design
Internet pricing models Pricing and search cost Dynamic pricing and auctions Revenue model design (e.g., eBay, Yahoo!)
January 17, 2006 Teck H. Ho 12
Three Modules
I. Economic and Behavioral Foundations of Pricing
II. Innovative Pricing Concepts and Tools
III. Internet Pricing Models
January 17, 2006 Teck H. Ho 13
CASES
No. Name Product/Service
1 Cumberland Metal Industries Cushion Pad
2 Federated Industries Capacitor 3 Biopure Corporation Blood Substitutes 4 Cambridge Software Corporation Engineering Software 5 Burroughs Wellcome and AZT Pharmaceuticals
6 Tweeter etc. Retail - Electronics
7 Computron, Inc. Process Control Systems
8 FreeMarkets Online Industrial Auction Exchange
January 17, 2006 Teck H. Ho 14
Course ExpectationClass participation/preparation (15%)
Attendance, participation, and case discussionIndividual Assignment (15%) (Due: 28th February)
Biopure case write-up (7 double-spaced pages max) NO LATE WORK IS ACCEPTED
Group Project (40%) List of 4 members and project definition (Due: 2nd Feb)Project report (Due: 4th May)
Final Examination (30%)Take-home, open book
January 17, 2006 Teck H. Ho 15
Group ProjectsSurvey of prices in a product category
Hedonic price regressionPrice premium for brand
Estimation of price elasticity (working with a company)Survey or field experimentPrice change recommendations
New product pricingConjoint experimentRevenue estimation and value proposition
January 17, 2006 Teck H. Ho 16
Juan Castro-Zumaeta, Anita Chan, Ritu Chellaramani, Tatyana Zhukovski
DOES BAKING A DIFFERENCE MEAN PRICING A DIFFERNCE?
CONJOINT ANAYLSIS
January 17, 2006 Teck H. Ho 17
Leapfrog
Conjoint Pricing Study
Mari Mielcarski
Kirstin Mitchell
Nicole Puckhaber
Yvonne Roth
Melinda Steinmetz
January 17, 2006 Teck H. Ho 18
Brown Chocolate CompanyNew Product Introduction
May 01, 2005
Florence Dulla ● Joan Lee ● Valerie Skarbek ● Sarah Wang
January 17, 2006 Teck H. Ho 19
St. Supery Pricing Project
Peter Hajdu, J.D, Kritser, Markus Leunig & Katherine Evans
January 17, 2006 Teck H. Ho 20
Revenue Model Equation
Pi * Lci* Cpc
Pi * B
+
Feei * Subi
+ Pi * Aci * Com
+
Friendster Revenue
M = total usersPi = page views per userB = banner ad revenue per page viewLci = 1 if user clicks on link; 0 otherwiseCpc = cost per clickAci = 1 if user clicks on link; 0 otherwiseCom = affiliates or transactional feeFeei = subscription fee for premium serviceSubi = 1 if user subscribes; 0 otherwise
1) Banner Ads
2) Pay per click Ads
3) Affiliates Programs
4) Premium Services
January 17, 2006 Teck H. Ho 21
How to Ace Participation Grade?
Attend class on time and be fully prepared Actively make constructive comments Share your knowledge and experience with the
classA 1-15 grade will be assigned to you at the end of
the semesterParticipation grade plays a vital role
January 17, 2006 Teck H. Ho 22
Course BenefitsInternal Pricing Experts
Improve existing pricing practice and develop innovative pricing models
Evaluate the potential of new internet-based pricing models
Intelligent Suppliers of Pricing Expertise
Consulting (growing!)
EntrepreneurshipRevenue estimation and value proposition
January 17, 2006 Teck H. Ho 23
Key Readings
Textbook: Nagle and Holden’s book (“The Strategy and Tactics of Pricing, Third Edition)
Course readerShort Readings CasesResearch articles
Extra readings for the super-motivated:Monroe, Kent (1990), Pricing: Making Profitable
Decisions, Dolan, Robert J. and Hermann Simon (1996), Power
Pricing
January 17, 2006 Teck H. Ho 24
Do you mind …???
Working with numbers?Linear demand functionFirst-order derivativeSolve for 2 unknowns in 2 linear equations
Doing some work before and after class?Read the textbook and course reader very
carefully Seek help from me if you cannot follow the
numerical examples
January 17, 2006 Teck H. Ho 25
Importance of Pricing
“Number one problem facing marketing.” Marketing News
“Pricing is the only element in the marketing mix that produces revenue; the other elements produce costs.” Kotler
NEED REVOLUTION! Don’t understand and capture the value they created for individual customers. Business Week
It is the piece of the market mix that has the highest potential to turn off your consumers and pi?? off your competitors. Teck Ho
January 17, 2006 Teck H. Ho 26
Teck’s Average Number of Price Encounters Per Week
Grocery shopping = 20Breakfast, lunch, and dinner = 12Miscellaneous (e.g., parking, movies, fuel, etc.)
= 8The average is about 40 per week (assume no
price search)Total life-time price encounters (from 15 to 85)
= 70 x 52 x 40 = 145,600 price encounters If there is price search (a factor of 4), Teck has
582,400 price encounters in his life time
January 17, 2006 Teck H. Ho 27
Test Your Pricing IQ (1)
Pricing decision should be made to cover costs and earn a fair rate of return
The market sets the price and there is really little we can do to influence price
A price cut may be profitable if a firm’s products are attractive to only a relatively small share of the market
January 17, 2006 Teck H. Ho 28
Testing your Pricing IQ (2)
It is always legally allowed to use volume discount to generate more sales
Penetration pricing means charging a lower price than those of competitors when introducing new product
If we know that the price elasticity of a certain product in a certain market equals –1.5, we know that decreasing the price will lead to an increase in profit
January 17, 2006 Teck H. Ho 29
Complexity of Pricing Decision
Profit=Sales Volume x Price - Costs Profit
Revenue Costs
Volume x Price Variable Cost Fixed Cost
Variable Unit Cost x Volume
January 17, 2006 Teck H. Ho 30
What affect pricing strategies?
cost
customer
YOU
government
final discretion
competitor
January 17, 2006 Teck H. Ho 31
4 Cs of Pricing
Cost: floor Relevant cost, break-even analysis
Customer: ceiling Consumer willingness to pay Measuring consumer willingness to pay Psychological aspects of pricing
Competition: outside forces Communicate and influence competitor’s pricing
Constraints: Legal aspects of pricing Institutional constraints
January 17, 2006 Teck H. Ho 32
Flawed Pricing Practices (1)
Cost-plus pricing: Adding a standard markup to the cost of the product, psychologically intuitivePurpose is to “guarantee” a marginProduct average cost price value
customerAdvantages and problems
January 17, 2006 Teck H. Ho 33
Flawed Pricing Practices (2)
Competition based pricing: Setting price based on competitors’ charge for similar products.Reactive pricing: follow competitorsMarket share pricing: setting price based on
existing market share and future market share goals
Advantages and problems
January 17, 2006 Teck H. Ho 34
Developing Profitable Pricing Strategy
Costs Customer Competition
Strategic Objective
Goals
Tactics
Constraints
January 17, 2006 Teck H. Ho 35
What Are Your “Smart” Pricing Tactics?
?
January 17, 2006 Teck H. Ho 36
January 17, 2006 Teck H. Ho 37
Price Customization Strategies
January 17, 2006 Teck H. Ho 38
FRONT OF LINE PASS
January 17, 2006 Teck H. Ho 39
Punch-line
Factors affect pricing strategyCosts, customer, competition, constraints
Flawed pricing strategiesCost-plus pricing Competition-driven pricing
What are the steps for profitable pricing?Set your strategic objective and consider costs,
customer, competition, and constraints simultaneously
