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  • The Ohio State University Fisher College of Business Pricing Strategy and Tactics M & L 851 Fall, 2007 Larry M. Robinson 636 Fisher Hall Ph: 292-0680 Office Hours: Monday and Wednesday, 1 pm to 5 pm, Tuesday 3 pm to 5:30 pm, and by appointment Email: robinson_878@cob.osu.edu Course Objectives:  Develop understanding of principles managers follow to make effective pricing decisions  Learn how to do economic value estimation (EVE) for a product or service offered to a specific market or for a specific use  Learn how to perform managerial price sensitivity analysis (MPSA) which identifies factors that influence price sensitivity when making judgments about the importance of price in a buyer’s purchase decision  Recognize the objective of price competition is not to win market share, but to maximize long-term profitability  Become able to analyze pricing concepts related to: new products, pricing changes, bundling/versioning, yield management/revenue management, & price wars  Develop ability to integrate pricing decisions with product, promotion and channel management decisions Textbooks and materials The Price Advantage, by Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, John Wiley & Sons, Inc., Hoboken, New Jersey, 2004. Cases and readings that apply to each class session: Readings are available on the course web site on Carmen under the “articles” tab. The cases are in a course packet at UniPrint (formerly known as CopEZ). Course web site: The course web site on Carmen has the syllabus, articles for outside reading, example course projects, bio sketches and PowerPoint slides for guest lectures, PowerPoint slides for each week, takeaways from cases and readings, and links to additional resources about pricing.
  • PowerPoint presentations for each class session will be posted on the course web site before class. Key takeaways for articles and cases will be posted following class discussion. Guest speaker bio sketches will be posted on the course web site, with PowerPoint presentations for each guest speaker. Course Overview: Professor Raymond Corey at Harvard Business School wrote in the early 1960s that “Pricing is the moment of truth---all of marketing comes to focus in the pricing decision”. This course is intended to provide the knowledge required to make the “moment of truth” be a successful one for the firm. Our emphasis will be on strategies and tactics to set initial prices for a product or service and to react to competitive forces as the product or service goes through its life cycle. But strategic pricing is about much more than just setting prices. It is about targeting markets that can be served profitably, communicating information that justifies price levels, and managing pricing processes and systems to keep prices aligned with value received. Pricing is a multidisciplinary and multifunctional subject. It is the responsibility of senior management to determine the pricing policies and procedures intended to produce optimal sales and profits for the firm. Financial, operational, marketing, and legal considerations are involved in setting and administering pricing strategies and tactics. There are many issues which require attention in arriving at the pricing strategy for a company. Yet, few business managers who participate in setting and implementing pricing strategies have any formal training in this very important business activity. Few business schools offer courses in pricing, but this is changing rapidly (see list on the course web site of top 50 business schools, including the 28 that offer pricing as an elective). Also, businesses have established separate administrative functions for their pricing analysis and decision making in such industries as pharmaceuticals, chemicals, airlines, hotels, car rentals, computer software, waste removal and retail consumer products. Technology to enable and support pricing decisions is widely available from such firms as Manugistics, PROS, Revenue Technologies, The Rubicon Group, Zilliant, Demandtec and many more software companies. The professional practice of pricing management is supported by several organizations and publications. The Pricing Institute founded in 1987 as a division of International Institutes of Research is a firm which specializes in conferences for executives in various functions and industries. The Pricing Institute offers an annual PriceX conference as a mechanism for encouraging new thinking about pricing and for addressing new ideas about pricing issues. The Professional Pricing Society is an excellent source of
  • information and access to experts, conferences and publications, including the Journal of Professional Pricing and The Pricing Advisor newsletter. Another journal that focuses on pricing strategy and management is Journal of Product and Brand Management. Major journals include research on pricing, including Marketing Science, Journal of Marketing, Journal of Marketing Research, Marketing Research, Harvard Business Review, McKinsey Quarterly, Across the Board, Marketing Management Magazine, Journal of Business, and Journal of Business Research. Another source of pricing research and information exchange is The Pricing Center at Fordham University which sponsors conferences and provides financial support for doctoral student research on pricing. These organizations and journals provide evidence that pricing is coming of age as a business discipline. Pricing is about value, including concepts of: perceived value, value differentiation, value delivery, and value communication. This course will provide a framework for developing an economic value estimation (EVE) for a product or service. EVE compares a product to the most readily available substitute. The value differentiations between the EVE and the “reference price” can be examined to determine opportunities to communicate and deliver greater perceived value to the prospective customer. The EVE can be examined by a managerial price sensitivity analysis (MPSA). The MPSA leads to development of a communications/education plan to increase a potential customer’s willingness to pay for the economic value received. We will apply principles which underly effective pricing management from MBA courses on Managerial Economics, Cost Accounting, and Negotiations. Each session will focus on pricing concepts and issues presented in the course text, outside readings, and case studies related to the concepts and issues for the week. We will also have experts in pricing management as guest speakers. The guests will give us additional perspective beyond the text, articles, and case studies. Each student will participate in a team project to develop a pricing strategy for a specific product or service marketed to two market segments. Instructions for this assignment are posted on the course web site. Examples of previous team projects are posted on the course web site to provide templates for review by each team. Each student will also do an individual project which will be an analysis of pricing strategy and tactics for a company of the student’s choice. The analysis will include a description of the transactional, competitor, and industry levels of pricing situation for the company, along with recommendations for the company to pursue higher levels of pricing excellence. Instructions for this assignment are posted on the course web site.
  • Teaching methods:  Class discussion, using PowerPoint slides posted on the course web site in advance of each class session to focus on principles and practices described in the assigned reading  Case studies which focus on pricing principles and issues  Guest speakers--- consultants and executives who are experts in pricing strategy and tactics: 1. Richard Braun, VP, Corporate Strategic Pricing, Parker-Hannifin Corporation, Cleveland, Ohio 2. Harold Peck, VP, Pricing, Cardinal Health 3. Eric V. Roegner, COO, Alcoa Global Engineered Products and co- author of The Price Advantage 4. Jim Stevens, VP, Pricing, Continental Airlines, Houston, Texas 5. Ralph Zuponcic, Senior Partner, PricingPoint Partners, Hudson, Ohio 6. John L. Daly, CEO, Execution Education, Inc. and author of Pricing for Profitability: Activity-based Pricing for Competitive Advantage Grading:  Individual Project (30%): Each student will review the pricing strategy and tactics of a company of his/her choice, including description and analysis of transactional, competitive, and industry level dynamics. The student will analyze the pricing strategy and tactics against the questions asked in Robert Dolan’s article: “How Do You Know When the Price Is Right” to give the company a report card on current pricing processes and policies.  Group Project (20%): Students will form a team of three or four persons to analyze the pricing strategy for a product/service. The analysis will be to determine pricing strategy for two market segments OR two product/service uses. Projects completed by teams in previous pricing classes taught by the instructor are posted on the course web site as examples.  Final Exam: (30%) in class, open book, open notes. The exam will include questions that apply concepts from the course.
  •  Class Contribution: (20%): Students are expected to contribute constructively to class discussion. Class contribution is measured by the instructor for each session. The scoring for each class session is: -1—absent without notice 0---present for class, no contribution 1---present for class, constructive contribution 2—provided insight that: built on discussion, contrasted or extended earlier discussion, and/or showed application of concepts from the readings for the session. Class Schedule: Topics, Readings & Assignments Week 1 Strategic Pricing: Introduction September 25 for evening section; September 19, 24, & 26 for morning section 1. Why pricing is often ineffective 2. Asking the right questions 3. Formulating a profit-driven pricing strategy 4. Role of costs in a pricing strategy 5. Leverage of 1% improvement in realized prices Text: Chapter 1, Introduction to Pricing Fundamentals Chapter 2, Three Levels of Price Management Article: Aimee Stern, “The Pricing Quandary” Across the Board, May 1997, pp 16-22 Article: Timothy Aeppel, “Changing the Formula: Seeking Perfect Prices, CEO Tears Up the Rule Wall Street Journal, March 27, 2007, pp A1, A16. Article: Laura Preslan, “Building the Business Case for Price Management”, The Pricing Advisor, June, 2006, pp 4-5. Guest Speaker: Richard Braun, VP, Corporate Strategic Pricing, Parker Hannifin Corporation, Cleveland, Ohio. Dick will speak about the pricing journey at Parker Hannifin as reported in the March 27, 2007 Wall Street Journal article assigned for reading in preparation for this class session.
  • Week 2: Three Levels of Price Management, October 2 for evening section, October 1 & 3 for morning section 1. The three levels of pricing excellence: transactional, competitor, & industry 2. The pricing waterfall to determine pocket price 3. Pricing bands to determine pricing variability across customers 4. Economic value estimation process 5. Economic value profiles 6. Value equivalence lines with zones of indifference 7. Factors influencing perceptions of value (price sensitivity effects) 8. Effective pricing management 9. Guidelines for better pricing decisions Text: Chapter 3, Exploring Transactions Chapter 4, Exploring Product/Market Strategy Chapter 5, Exploring Industry Strategy Note: Robert J. Dolan, “Pricing—a Value-based Approach”, Harvard Business School Note 9-500-071, November, 2003 Case: Optical Distortion (A) (9-575-072) Week 3: Research Techniques to Measure Value & Price Sensitivity---October 9 for evening section, October 8 & 10 for morning section 1. Research tools to measure perceived price and benefit 2. Review price elasticity concepts 3. Value pricing in a pharmaceutical setting Article: Gerald E. Smith and Thomas T. Nagle, “How Much Are Customers Willing to Pay?” Marketing Research Winter, 2002, pp 20-5 Case: The Medicines Company (9-502-006)
  • Guest Speaker: Harold Peck, VP, Pricing, Cardinal Health, Dublin, Ohio. Mr. Peck will speak about the pricing journey at a Fortune 15 company that distributes millions of products to hospitals and pharmacies. Week 4: Pricing New Products October 16 for evening section, October 15 & 17 for morning section 1. Level of innovation: Revolutionary, evolutionary, me-too 2. Elements of new product pricing 3. How to address cannibalization 4. Product interdependencies: substitutes and complements 5. Pricing the innovation for market introduction 6. Pricing the new product for growth Text: Chapter 6, New Product Pricing Article: George E. Cressman, Jr., “Reaping What You Sow”, Marketing Management, March-April, 2004, pp34-40 Article: Tim Matanovich, “Staying Out of Trouble With Innovation”, Marketing Management, March-April, 2004, pp14-15 Case: Keurig At Home: Managing a New Product Launch (KEL021) Guest Speaker: Eric V. Roegner, COO Alcoa Global Engineered Products. Eric is co-author of The Price Advantage. He is now chief operating officer over eight manufacturing plants and over $1 billion of annual revenues at ALCOA. Week 5: Price Customization & Pricing in the Marketing Mix—Yield Management & Revenue Management, October 23 for evening section, October 22 & 24 for morning section 1. Shortcomings of a single price strategy for all markets 2. Customization of prices by buyer identification 3. Customization of prices by purchase location 4. Customization of prices in the short-term/long-term 5. Customization of prices by purchase quantity 6. Pricing as a promotional tool
  • 7. Principles of yield management 8. Revenue management concepts Article: Hermann Simon and Robert J. Dolan, “Price Customization” Marketing Management, Fall, 1998, pp 11-17. Article: Frederick H. deB. Harris and Peter Peacock, “Hold My Place Please”, Marketing Management, fall, 1995, 34-46 Case: Priceline.com: Name Your Own Price (9-500-070) Guest Speaker: Jim Stevens, VP, Pricing, Continental Airlines, Houston, Texas Week 6: Value-based Sales & Negotiation, October 30 for evening section, October 29 and 31 for morning section 1. Negotiated versus fixed-price policies 2. Guidelines for value-based pricing 3. Negotiation strategies—price buyers, loyal buyers, value buyers 4. Understanding buying center roles 5. Tactics used by buying centers to get price down 6. Preparing competitive bids 7. Managing the sales force toward value-based pricing 8. Pricing based on agreed upon levels of performance Article: Thomas T. Nagle, “How to Pull it Off” Across the Board, March 1999, pp 53-6 Article: Thomas T. Nagle, “Evening the Odds in Price Negotiations” Across the Board, March 1999, pp 56-8 Article: George E. Cressman, Jr., “Fixing Prices” Marketing Management, Sept-Oct 2006, pp 33-37 Article: Benson P. Shapiro, “Performance-based Pricing Is More Than Pricing”, Harvard Business School Note (9-999-007) Case: The Case of the Pricing Predicament (HBR 88205); Carolina Lunker Sauce (KEL215)
  • Guest: Ralph Zuponcic: Senior Partner, PricePoint Partners, Hudson, Ohio. Mr. Zuponcic will discuss his presentation on “Executing Price Increases—How to Improve Sales Force Effectiveness” given at the Professional Pricing Society annual meeting on October 13, 2004 in Chicago Week 7: Competition: Making Moves & Managing Expectations—how to avoid Price Wars, November 6 for evening section, November 5 and November 7 for morning section 1. Pricing as a negative sum game 2. From share of market to share of scarce market profits 3. Boosting the industry IQ 4. How to manage “dumb” competitors 5. Industry supply & demand factors in judging competitive reaction 6. Use of price & other actions to promote industry profitability 7. Your power base: differentiated product, cost advantage, competitor information 8. Questions to consider before reacting to a competitor’s price reduction 9. Options for reacting to price reductions by competitors 10. When to compete on price Text: Chapter 9: Price Wars Article: Akshay R. Rao, Mark E. Bergen and Scott Davis, “How to Fight a Price War” Harvard Business Review March-April 2000, pp 107-16 Article: George E. Cressman, Jr. and Thomas T. Nagle, “How to Manage an Aggressive Competitor”, Business Horizons, March-April 2002, pp23-30. Note: George E. Cressman, Jr. “Dealing with “Dumb” Competitors”, The Pricing Advisor, A Professional Pricing Society Publication, April, 2003, pp 1-2. Case: Federated Industries (A) (9-585-104)
  • Week 8: Bundling & Versioning; Relationship Between Pricing Strategy & Distribution Strategy, November 13 for evening section, November 14 for morning section 1. How to integrate distribution channel policy and pricing strategy 2. Considerations for pricing in direct and indirect channel routes 3. Product pricing as a key factor in choosing a distribution channel 4. Influencing, but not dictating, minimum resale prices 5. Role of price in determining push or pull distribution strategies 6. Managing price through the distribution channel 7. Managing retail pricing strategy 8. Managing price in e-commerce channels 9. Customization of prices by product bundling or versioning Text: Chapter 7, Solutions, Bundles & Other Packaged Offerings Article: Carl Shapiro & Hal R. Varian, “Versioning: the Smart Way to Sell Information”, Harvard Business Review, November-December, 1998, pp106-12 Article: Stewart Schley, “Battle of the Bundles”, MultiChannel News, March, 2005, p4 Article: Faith Keenan, “The Price Is Really Right”, BusinessWeek Online, March 31, 2003 Case: Atlantic Computer: A Bundle of Pricing Options (Harvard Brief Case 2078) Week 9: Ethics & Law: – Putting it All Together – Course Review, November 20 for evening section, November 19 & 21 for morning section 1. Legal framework for pricing decisions 2. Price fixing versus price encouragement 3. Resale price fixing versus resale price encouragement 4. Pricing & promotional discrimination 5. Restraints against restrictions on customers, territories, or products 6. Predatory pricing & price signaling 7. Ethical constraints in pricing 8. Managing price perception 9. Influencing customer behavior
  • 10. The change agenda: fostering understanding & conviction, formal mechanisms, developing talent & skills, role modeling 11. Failure modes—issues in achieving The Price Advantage Text: Chapter 11, Legal Issues, Appendix 2, Antitrust Issues Chapter 12, Pricing Architecture Chapter 13, Driving Pricing Change Article: Robert J. Dolan, “How Do You Know When the Price Is Right?” Harvard Business Review, Sept-Oct 1995, pp 4-11 Article: Hermann Simon, “Pricing—Where Is It Headed?” Note to Professional Pricing Society Members, April, 2004 Video Case: “The Price” film by Commonwealth Films that focuses on a real case of price fixing in the paper industry—allows us to ask “what could the sales manager have done differently to avoid the price fixing issue while still being an effective sales manager.” Case: Price Fixing Vignettes (9-902-068) Guest Speaker: John L. Daly, CEO, Executive Education, Inc. John will speak to us about “Activity-Based Pricing” as described in his book: Pricing for Profitability: Activity-Based Pricing for Competitive Advantage. Week 10 Pricing Project Presentations, November 27 for evening section, November 26 & 28 for morning section Each team will give a presentation summarizing the analysis and recommendations from their course project on pricing strategy for a product/service with two uses OR sold to two market segments. Week 11 Final exam: December 4 for evening section and December 5 for morning section: In-Class, Open Book, Open Notes