Pricing Course Module in Marketing Management Course Modules help instructors select and sequence material for use as part of a course. Each module represents the thinking of subject matter experts about the best materials to assign and how to organize them to facilitate learning. Each module recommends four to six items. Whenever possible at least one alternative item for each main recommendation is included, as well as suggested supplemental readings that may provide a broader conceptual context. Cases form the core of many modules but we also include readings from Harvard Business Review, background notes, and other course materials.
I. Overview of suggested content (HBS cases unless otherwise noted) Title 1. Module Overview Principles of Pricing (HBS note) and Colonial Homes Supplement: Marketing Analysis Toolkit: Pricing and Profitability Analysis (HBS note) 2. Behavioral Pricing Note on Behavioral Pricing (HBS note) and Tweeter etc. Alternative: Coca-Cola’s New Vending Machine (A): Pricing to Capture Value, or Not? 3. Value-Based Pricing Atlantic Computer: A Bundle of Pricing Options (HBP Brief case) Alternative: Curled Metal Inc. -Engineered Products Division 4.
Pricing Structure Virgin Mobile USA: Pricing for the Very First Time Alternative: XM Satellite Radio (A) American Airlines, Inc. : Revenue Management Dolan & Gourville Bell & Nashem Steenburgh & Avery 506021 190008 511028 2005 1989 2010 10p 8p 8p —Author Product Number Publication Year Pages Teaching Note Gourville Gourville & Wu King & Naraynadas 599114 597028 500068 1999 1997 2000 12p 24p 9p -597082 — Bharadwaj & Gordon Shapiro & Cespedes 2078 709434 2007 2008 10p 14p 2079 709501 McGovern Godes & Ofek 504028 504009 2003 2003 19p 25p 504108 504082 5. Yield Management and Revenue Pricing Dhebar & Brandenburger 190029 1989 13p 190192
Alternative: Priceline. com: Name Your Own Price Supplement 1: How To Reap Higher Profits with Dynamic Pricing (Sloan article) Supplement 2: Pricing and Market Making on the Internet (HBS note) Mars Inc. : Online Procurement (Ivey case) Dolan Sahay 500070 SMR254 2000 2007 12p 10p 501046 — Dolan & Moon 500065 2000 20p — 6. Auctions and Online Procurement Bell 905E04 2005 6p 805E04 II. Rationale for selecting and sequencing the items in this module In Section 1 the Principles of Pricing note, based on the earlier Pricing: A Value-Based Approach (500071), conceptualizes pricing in terms of objective value, perceived value, and costs.
It addresses in detail how to determine objective and perceived value, along with price sensitivity and price customization, before bringing the analysis back into the context of the other 3 P’s and the wider marketing strategy. In the Colonial Homes case, the company in question is presented with an unexpected increase in the cost of raw materials, and must decide how adjusting its price to cover at least some of the increase will affect customer demand and profits, or whether it would be less unprofitable to change suppliers.
For students who are not yet familiar with the necessary mathematics, the suggested supplement Market Analysis Toolkit: Pricing and Profitability Analysis discusses how to draw a demand curve and calculate costs, optimal prices, and profit. In Section 2, Note on Behavioral Pricing extends some remarks at the end of Principles of Pricing concerning ethical and legal factors in pricing. It argues that businesses downplay considerations of fairness when pricing, and pay dearly for it.
One cannot determine customer willingness to pay without attending to behavioral and psychological factors that seem to fall outside of a purely economic calculus. The Tweeter etc. and alternative Coca-Cola’s New Vending Machine cases exhibit the influence of behavioral factors in pricing and mispricing. The cases in Section 3 illustrate value-based pricing. In Atlantic Computer: A Bundle of Pricing Options, a high-end server manufacturer has developed a new server for the basic server market and a software tool that greatly improves its performance for particular applications.
Students are asked to compare the prices derived from cost-plus, competitor-based, and status-quo pricing with that derived from the valuebased pricing model described in the Principles of Pricing note. The case closes by looking at the challenges of implementing value-based pricing, and more specifically, whether 1) the sales staff will be able to persuade customers to buy at the higher value-based price and 2) how the competition might react and respond. In the alternative case, Curled Metal Inc. —Engineered Product Division, a firm has invented a new product (curled metal pile driver pads).
Production costs of each pad are higher than the current pad cost, but they last much longer and perform much better. How much of that improvement can Curled Metal capture for itself in pricing, and how can it use its choice of distribution channel and sales strategy to push the customers’ perceived price towards the objective price? For the two cases in Section 4, Virgin Mobile USA: Pricing for the Very First Time and XM Satellite Radio, pricing structure is as crucial as price itself. Virgin is entering a very crowded mobile telephone pace and has decided to target an underserved market, the young, many of whom have poor credit and uneven usage patterns. Before it can determine the optimal price, it must choose its pricing structure: buffet versus a la carte, prepaid versus postpaid, and whether it will employ the hidden fees and subsidies prevalent in the industry. Pricing structure, it recognizes, is harder to change than the price level, and it will be key to hitting its target market. With its rich market data, students are also asked to make break-even analyses, estimates of customer acquisition cost, and estimates of customer lifetime value.
XM, too, is considering a novel pricing structure, passing on advertising revenues and relying solely on subscription fees. As with the Virgin case, price level presumes pricing structure, and pricing structure follows targeting and segmentation, all informed with market research data. However, the XM case includes other complications, for it will need to establish partnerships with leading electronics manufacturers to provide radio receivers, and thus must consider trading off part of the subscription income to subsidize the manufacturers and lower the entry price for potential customers.
There is also a discussion of some dynamic pricing possibilities. Dynamic pricing is the focus of Section 5. American Airlines, Inc. : Revenue Management, an HBS classic, gives a simple but rigorous introduction to dynamic pricing and revenue management, as it was practiced by the airline industry in 1990, subsequent to the deregulation of 1978. Revenue management is composed of pricing and yield management, and students learn through quantitative assignments that the two must be done in tandem to maximize revenue. The alternative case, Priceline. com: Name Your Own Price, extends airline revenue management into the online era.
Priceline builds an internet-pricing front for the airlines that allows them to shield their brands in a reverse-auction market-making mechanism. Its success encourages it to try to extend its innovation horizontally to other industries, none of which shares all of the characteristics that make its economic logic so applicable to airline travel. The case provides students the opportunity to think through how online markets, and, especially, the “name your own price” model, have different degrees of traction with different types of products, markets, and consumers, and what changes in pricing structure are necessary to make them work.
The supplemental readings in Section 5 provide additional context for the cases. The article “How to Reap Prices with Dynamic Pricing” points out that, historically-speaking, fixed prices are an anomaly, and that with changes in technology and cultural attitudes, businesses can increase revenues and profits with dynamic pricing. It identifies the salient characteristics that make dynamic pricing possible and profitable.
Furthermore, the note Pricing and Market Making on the Internet shows how the three different kinds of market-making mechanisms—set price, buyer/seller negotiation, and horizontal interaction—apply to the Internet, and when adopting a particular market mechanism can work to counteract the downward pressure on prices and margins often associated with e-commerce. The final case, Mars Inc. : Online Procurement, is an introduction to B2B auctions in Section 6. It asks students to construct a model that Mars might use to operate its online procurement auction, given its specific requirements, and to use Excel Solver to determine the winning bid.
The HBSP simulation, Pricing Simulation: Universal Rental Car (#2093) is highly recommended as an integrative exercise, either to introduce or to cap off this module. Students are asked to manage a rental car operation and improve regional performance by developing a pricing strategy. The simulation covers many of the same principles of pricing covered in the notes and in the cases in this module: price elasticity, differences in demand across customer segments, competitive and macroeconomic factors, and pricing mathematics.