ch13_final

McGraw-Hill/IrwinCopyright©2008byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Chapter13SmartPricing13-213.1IntroductionImplicitassumptionsofarhasbeenthatdemandcannotbeinfluencedInreality,thisisnottrueDemandlevelchangescanbemadethrough:Advertising,displays,andpromotionaltoolsPricing13-3Dell’sPricingStrategyProductpricedifferentbasedontypeofcustomerProductpricevariesovertimePricesofoptionsofferedalsovaryovertime13-4OtherExamplesIBMisinvestigatingsoftwarethatwillallowittoadjustpricesaccordingtodemandNikonCoolpixDigitalCamerasoldforabout$600.Manufacturerprovidesarebateof$100independentlyofwherethecameraispurchasedBoiseCascadeOfficeProductssellsmanyproductson-linePricesforthe12,000itemsorderedmostfrequentlyon-linemightchangeasoftenasdaily13-5QuestionsRelatedtoPricingWhatarethesecompaniesdoing?WhydoesDellchargeadifferentpricefordifferentconsumers?Atdifferenttimes?IfDellcandoit,canitworkforothercompanies?Whatistheimpactofthemail-inrebate?Shouldn’tNikonandSharpjustreducethewholesalepricepaidbytheretailersinsteadofaskingtheconsumertomailinthecoupon?Whatiswrongwithatraditionalfixed-pricepolicy?13-6RevenueManagementPrinciplesAllcompaniestryingtoboostprofitbyusingwhatareknowassmartpricingorrevenuemanagementtechniquesTechniquesfirstpioneeredbytheairline,hotel,andrentalcarindustries.AirlineindustryRevenuemanagementhasincreasedrevenuesignificantlyAmericanAirlines’estimatesofannualincrementalrevenueof$1billionthroughrevenuemanagement13-713.2PriceandDemandAllthingsbeingequalDemandforaproductwilltypicallygoupastheproduct’spricegoesdownCertainproductsmoreorlesssensitivetopricechangesIngeneralthepropertyholdsDownward-slopingdemandcurve13-8Manager’sIssueWhatistheoptimalpriceatwhichrevenueismaximized?NeedtocharacterizetherelationshipbetweenpricinganddemandforeachproductUtilizethischaracterizationtodeterminetheoptimalpriceforeachproductMayinvolvemanycomplexitiesVastquantitiesofdatamayneedtobeanalyzedCompetitors’behaviormayneedtobecapturedManyfirmsdomanagetoatleastapproximatethisrelationship.13-9Example–SingleProductManagementestimatestherelationshipbetweendemand,D,andprice,pD=1,000-0.5pWhenthep=$1,600,D=200Whenthep=$1,200,D=40013-10PricevsRevenueTablePriceDemandRevenue$250875$218,750$500750$375,000$750625$468,750$1,000500$500,000$1,250375$468,750$1,500250$375,000MaximumRevenue=$500,000whenprice=$1,00013-11Demand-PriceCurveFIGURE13-1:Price/DemandcurveforExample13-113-1213.3MarkdownsAssumptioninexample:demandisdeterministicbasedonpriceRealisticpictureDemandisrandomAttheendofasellingseason,theremayberemaininginventoryFirmsfrequentlyemployamarkdownorsaletodisposeexcessinventoryThinkaboutdemandfromthecustomer’sperspective:EachcustomerhasamaximumpricethatheorsheiswillingtopayfortheproductReservationprice13-13MarkdownConceptWhenthep=$1,200,D=400400customershaveareservationpriceatorabove$1200Whenthepriceisbelowtheirreservationprice,theywillbuyThelowertheprice,themorecustomerswithareservationpriceatorabovethatpriceSellproducttocustomerswhosereservationpriceswerebelowtheoriginalprice,butabovethesaleprice.Traditionally,retailershavetriedtoavoidmarkdownsEvidenceofmistakesinpurchasing,pricing,ormarketingLowreservationpricecustomersseenas:lessdesirableorprofitable,usefultogetridoftheexcessinventory13-1413.4PriceDifferentiationCustomerswhoarewillingtobuyatsalespriceweredifferentthanthecustomerswhowerewillingtobuyatoriginalpriceInfashion,somecustomersareveryfashionconsciousEagertobuyatthestartofthesellingseasonWillingtopaymoretohavefashionableitemsfirstOthercustomersarevalue-consciousWillingtowaituntiltheendofthesalesseasonUnwillingtopaythesamehighpricesasthefashionablecustomersDifferentcustomerschargeddifferentpricescanresultinhigherrevenue13-15PriceDifferentiationExampleAccordingtothedemand–pricecurve,theretailerchargesmanycustomerswhoarewillingtopayahigherpriceonly$1000About200customerswillingtopay$1,600About100willingtopay$1,800Bychargingasingleprice,managementisleavingalargeamountofmoneyonthetable13-16Multi-tieredPricingStrategyMoneyleftonthetable=(2,000-1,000)•500/2=250,000ConsideradifferentialorcustomizedpricingstrategyTailorspricingtodifferentmarketsegmentsConsideratwo-pricestrategyinwhichthefirmintroducestwoprices,$1,600and$1,000.Atap=$1,600,thereisdemandfor200itemsAtap=$1,000,thereisdemandfor500itemsTotalrevenueinthiscaseis1,600•200+1,000•(500-200)=620,000$120,000morethaninthesingle-tierstrategyAthree-tierpricingstrategycandoevenbetterAtp=$1,800,D=100;p=$1,600,D=200;p=$1,000,D=500Totalrevenueequals1,800•100+1,600•(200-100)+1,000•(500-200)=640,000$20,000morethanintwo-tierstrategy13-17Three-TierPricingStrategyFIGURE13-3:Three-TierPricingStrategy13-1813.5RevenueManagementSellingtherightinventoryunittotherighttypeofcustomer,attherighttime,andfortherightpriceIntegratespricingandinventorystrategiestoinfluencemarketdemand,ProvidescontrolsforcompaniestoimprovethebottomlineRevenuemanagementtechniqueshavebeentraditionallyappliedintheairline,hotel,andrentalcarin