MBA 267-1: Pricing Policy Overview and Introduction

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 Teck H. Ho

2. Two Questions • Why are you here? • What do you expect from this course? Teck H. Ho

3. Class Outline • Course overview • Why pricing? • Importance of pricing • Complexity of pricing • Factors affecting pricing • Flawed pricing practices • Steps for profitable pricing 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 Teck H. Ho

5. Course Information • Course emphasis • Economic and behavioral foundations of pricing • Innovative pricing concepts and tools • Internet pricing models • Teaching methodology • Lectures and eight case discussions • Two 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!) 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: hoteck@haas.berkeley.edu • Tel: 510-643-4272 • Office: F687 • Office hours: Tuesday 3:00 – 5:00 p.m. or by appointment Teck H. Ho

7. Prices of Used Cars in Singapore http://www.aas.com.sg/carprice/usedcar.htm Teck H. Ho

8. The Most Famous Fruit in Singapore Smell like Sh?t Taste Like Heaven D24 $10/Kg D12 $6/Kg Regular $3/Kg http://web.singnet.com.sg/~tonym/durian.html Teck H. Ho

9. Drinks At Eight 30, 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 Tango 30, 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. Dating Agencies in Singapore – Revenue Model Design Strait Times, July, 2005 Teck H. Ho

10. Red, White And True Nagarathar 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 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!) Teck H. Ho

12. Three Modules • I. Economic and Behavioral • Foundations of Pricing • II. Innovative Pricing • Concepts and Tools • III. Internet Pricing • Models Teck H. Ho

13. CASES Teck H. Ho

14. Course Expectation • Class participation/preparation (15%) • Attendance, participation, and case discussion • Individual 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 Teck H. Ho

15. Group Projects • Survey of prices in a product category • Hedonic price regression • Price premium for brand • Estimation of price elasticity (working with a company) • Survey or field experiment • Price change recommendations • New product pricing • Conjoint experiment • Revenue estimation and value proposition Teck H. Ho

16. DOES BAKING A DIFFERENCE MEAN PRICING A DIFFERNCE? CONJOINT ANAYLSIS Juan Castro-Zumaeta, Anita Chan, Ritu Chellaramani, Tatyana Zhukovski Teck H. Ho

17. Leapfrog Conjoint Pricing Study Mari Mielcarski Kirstin Mitchell Nicole Puckhaber Yvonne Roth Melinda Steinmetz Teck H. Ho

18. Brown Chocolate CompanyNew Product Introduction May 01, 2005Florence Dulla ● Joan Lee ● Valerie Skarbek ● Sarah Wang Teck H. Ho

19. St. Supery Pricing Project Peter Hajdu, J.D, Kritser, Markus Leunig & Katherine Evans Teck H. Ho

20. Revenue Model Equation 1) Banner Ads 2) Pay per click Ads 3) Affiliates Programs 4) Premium Services Pi * B + Pi * Lci* Cpc + Pi * Aci * Com M = total users Pi = page views per user B = banner ad revenue per page view Lci = 1 if user clicks on link; 0 otherwise Cpc = cost per click Aci = 1 if user clicks on link; 0 otherwise Com = affiliates or transactional fee Feei = subscription fee for premium service Subi = 1 if user subscribes; 0 otherwise + Feei * Subi Friendster Revenue 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 class • A 1-15 grade will be assigned to you at the end of the semester • Participation grade plays a vital role Teck H. Ho

22. Course Benefits • Internal 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!) • Entrepreneurship • Revenue estimation and value proposition Teck H. Ho

23. Key Readings • Textbook: Nagle and Holden’s book (“The Strategy and Tactics of Pricing, Third Edition) • Course reader • Short Readings • Cases • Research articles • Extra readings for the super-motivated: • Monroe, Kent (1990), Pricing: Making Profitable Decisions,   • Dolan, Robert J. and Hermann Simon (1996), Power Pricing Teck H. Ho

24. Do you mind …??? • Working with numbers? • Linear demand function • First-order derivative • Solve 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 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 Teck H. Ho

26. Teck’s Average Number of Price Encounters Per Week • Grocery shopping = 20 • Breakfast, lunch, and dinner = 12 • Miscellaneous (e.g., parking, movies, fuel, etc.) = 8 • The 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 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 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 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 Teck H. Ho

30. What affect pricing strategies? government customer competitor final discretion YOU cost 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 Teck H. Ho

32. Flawed Pricing Practices (1) • Cost-plus pricing: Adding a standard markup to the cost of the product, psychologically intuitive • Purpose is to “guarantee” a margin • Product average cost price  value  customer • Advantages and problems Teck H. Ho

33. Flawed Pricing Practices (2) • Competition based pricing: Setting price based on competitors’ charge for similar products. • Reactive pricing: follow competitors • Market share pricing: setting price based on existing market share and future market share goals • Advantages and problems Teck H. Ho

34. Developing Profitable Pricing Strategy Customer Costs Competition Strategic Objective Goals Constraints Tactics Teck H. Ho

35. What Are Your “Smart” Pricing Tactics? ? Teck H. Ho

36. Teck H. Ho

37. Price Customization Strategies Teck H. Ho

38. FRONT OF LINE PASS Teck H. Ho

39. Punch-line • Factors affect pricing strategy • Costs, customer, competition, constraints • Flawed pricing strategies • Cost-plus pricing • Competition-driven pricing • What are the steps for profitable pricing? • Set your strategic objective and consider costs, customer, competition, and constraints simultaneously Teck H. Ho