Smart Pricing

Question 1

What are three examples of companies/industries that use smart pricing? (And how?)

Answer 1

• Dell:
  
  • Same product is sold at a different price to different consumers (private/small or large business/government/academia/health care)
  • Even, price of the same product for the same industry varies
• Airlines and Hotels
  
  • Revenue management
• Nikon, Sharp…
  
  • Mail-In-Rebate (Cash back offers)

Question 2

What are the three pricing strategies?

Answer 2

–Revenue management
–Cash back
–Dynamic pricing

Question 3

•What is revenue management?

Answer 3

–Price differentiation

Question 4

•What is the purpose of it?

Answer 4

–Revenue maximization
–Demand smoothing

Question 5

Explain the basic idea behind revenue management with an example of hotel rooms

Answer 5

•Example:
–Exclusive hotel with 400 identical rooms
–D = 1,000 – 0.5p, D: demand, p=price

•What is the price that the company should charge to maximize revenue?

Simple linear model - how can this be maximised?

Question 6

Without price discrimination, what is the maximum revenue?

–D = 1,000 – 0.5p, D: demand, p=price

Answer 6

Question 7

What is the triangle above the revenue square?

Answer 7

Money on the Table

• What you could have earned if you had been able to seel each hotel room for the highest amount that each individual would be willing to pay

Question 8

How can a share of the money on the table be obtained?

Answer 8

Price discrimination

Question 9

What are the main challenges in regard to reveneu management?

And how can this challenge be overcome?

Answer 9

•Main challenge: Ensuring that those who can pay higher price do not pay lower price

•How can the firm prevent customers from moving
from one class to another?

•Build fences between the various classes

Question 10

Give an example of how to overcome (using the airport industry)

Answer 10

Question 11

What is another benefit ?

Answer 11

Demand smoothing

Question 12

What is an example of cash back?

Answer 12

Mail in rebates

Question 13

What is mail-in rabates?

Answer 13

• Differentiating between customers based on price-sensitivity
• Adding significant hurdles to receive rebate
• However, there is no fence to stop customers (willing to pay more and able to pay more)

Question 14

What are the motivations to use mail in rabates?

Answer 14

• No rebate:
  
  • Retailer: determine the price and order quantity for max profit
  • Manufacturer: profit is related to whole sale price not the price paid by customer
• With rebate:
  
  • Manufacturer influences customer demand
  • So, retailer orders more
  • If managed well, the profit from increase order quantity > compensates for the rebate

Question 15

What happens if everyone returns the coupon?

Answer 15

Then it is the same as a regular discount

(maybe not really, how about administrations cost?)

Question 16

What is dynamic pricing?

Answer 16

• Dynamic Pricing (e.g. retail sales)
  
  • Changing prices over time without necessarily distinguishing between different customers
• Find the optimal trade-off between high price and low demand versus low price and high demand
• Fashion industry: end of the season sales
• Front-end SC executives should have visibility into the back-end of SC