Sample Exam Questions
I. Economic and Behavioral
Foundations of Pricing
II. Innovative Pricing
Concepts and Tools
III. Internet Pricing
Models
April 27, 2005
Teck-Hua Ho
1
Example 1: EVC
High-tech Manufacturing has developed a new type of seat belts that is
easier to install and more comfortable to wear than the seat belts
currently in use.
The cost of a standard seat belt to automobile manufacturers is $5.00.
The labor cost to install one belt is $3.00. The new belts take 10% less
time to install with a resulting labor cost of $2.70 per belt.
A marketing research study suggests that car buyers are willing to pay
$50 more for a car equipped with the new and more comfortable belts.
(A typical car requires five seat belts.)
What is the EVC (per car) of the new seat belts to auto manufacturers?
April 27, 2005
Teck-Hua Ho
2
Example 1: EVC
Reference Value = $5 x 5 = $25
Differentiation Value = $0.3 x 5 + $50 = $51.50
EVC = $76.50
April 27, 2005
Teck-Hua Ho
3
Example 2: Ho’s Diagram
Burger King has decided to cut the price for its Original
DOUBLE WHOPPER Sandwich from $2.49 to $1.99.
The unit variable cost is $0.99.
What is the minimal % increase in sales necessary for a
profitable price cut?
= - ($1.99 – $2.49) / ($1.99 – $0.99) = 50%
What is the minimal price elasticity needed for this to be
a profitable price cut?
= 50 % / ( 0.5 / 2.49) x 100%) = 2.5
April 27, 2005
Teck-Hua Ho
4
Example 3: Customer versus
Product Margin (Loss Leader)
 As a pricing analyst for Ho grocery chain, you are asked to prepare the analysis of
a proposal to price frozen chicken low in order to attract shoppers to the Ho store.
The current price for chicken is $1.09 per pound. The proposal is to set a
promotional price of $0.69 per pound. The wholesale cost of the chicken,
prepackaged and ready for sale, is $0.59 per pound.
 By tracking past changes in sales of chicken with changes in sales of other
grocery products, you discover that each one pound change in the sales of
chicken is associated with the following changes in the sales of other products:
Product
Dollar Change
Contribution Margin
Fruits & Vegetables
$0.80
50%
Packaged Groceries
$1.00
20%
Frozen Foods
$0.50
40%
Other Meat including
Chicken Parts
($0.25)
40%
 Assume the above sales relationship holds, by how much must chicken sales
increase (in percentage terms) to make this price promotion profitable?
= - (0.69 – 1.09) / (0.10 + 0.40 + 0.20 + 0.20 – 0.10) = 0.4 / 0.8 = 50%
April 27, 2005
Teck-Hua Ho
5
Example 4: Customize,
Customize, Customize
 Answer the following questions, clearly stating the
price customization variable used in each case. Each
example should be chosen so that the customization
variable involved is different from the other examples.

Pick any bookstore and describe a price customization
strategy that it adopts.

Pick any restaurant and describe a price customization
strategy that it adopts.

Pick any hotel and describe a price customization strategy
that it adopts.
April 27, 2005
Teck-Hua Ho
6
Example 5:
 Explain the differences if any between the following pairs
of pricing policies:
 “Buy One Get One Free” and “50% off”.
 “An in-store price drop of $5 to $20” and “a coupon of $5”
on a product that is regularly priced at $25.
April 27, 2005
Teck-Hua Ho
7
Example 5: Reference Price
 Explain the differences if any between the following pairs
of pricing policies:
 “Buy One Get One Free” and “50% off”.
 “An in-store price drop of $5 to $20” and “a coupon of $5”
on a product that is regularly priced at $25.
April 27, 2005
Teck-Hua Ho
8
Example 6: Revenue Model
Design
Visit www.bizrate.com and describe its revenue model. What are its
revenue levers? Give a specific suggestion to improve the model.
Other interesting websites include:
www.shopping.com
http://personals.yahoo.com/
http://www.cafepress.com/cp/info/
http://www.ubid.com/
April 27, 2005
Teck-Hua Ho
9
BizRate’s Revenue Model in
2003
 Revenue = “research” revenue + “e-commerce”
revenue + “advertising” revenue
NR
Re venue   Research i 
i 1
NC
 Click Fee
j 1
j

NC
 5%  Price
j 1
j

NA
 Banner Fee
j 1
j
Re searchi  $ 20 K to $250 K (Proportio nal to Extent of Analysis)
Click Fee j  $0.4  $2.0 (depending on vendor)
Banner Fee  depends on site traffic
where
April 27, 2005
NR is the number of retailers
NC is the number of “clicks”
NA is the number of banner ads
Teck-Hua Ho
10
Example 7: Conjoint Analysis
Sears Tires is interested in measuring consumers’ tradeoffs
among the following attributes of a tire: Brand (Sears,
Goodyear, Goodrich), Miles (30K, 40K, and 50K), Price ($50,
$60, $70), and Sidewall (White and Black).
A conjoint experiment that involves a group of 50 customers
from a targeted segment was conducted. Respondents rated a
set of 18 product profiles on a 10-point scale and their ratings
were used to construct the segment’s utility equation. Below is
the regression output with the appropriately defined dummy
variables:
April 27, 2005
Teck-Hua Ho
11
Data
Rating
Sears
5.2
7.3
5.7
4.8
7.2
9.3
0.8
3.2
6.4
2.2
8.1
8.3
6.3
7.4
7.3
2.2
4.3
5.7
April 27, 2005
Goodyear
1
1
1
0
0
0
0
0
0
1
1
1
0
0
0
0
0
0
Mile40
0
0
0
1
1
1
0
0
0
0
0
0
1
1
1
0
0
0
Mile50
0
1
0
0
1
0
0
1
0
0
1
0
0
1
0
0
1
0
Price50
0
0
1
0
0
1
0
0
1
0
0
1
0
0
1
0
0
1
Price60
1
0
0
0
0
1
0
1
0
0
1
0
1
0
0
0
0
1
White
0
1
0
1
0
0
0
0
1
0
0
1
0
1
0
1
0
0
1
1
0
0
1
1
1
0
1
0
1
1
1
0
1
1
1
0
Teck-Hua Ho
12
Example 7: Regression Output
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.985140055
R Square
0.970500928
Adjusted R Square 0.949851577
Standard Error
0.527494076
Observations
18
ANOVA
df
Regression
Residual
Total
Intercept
Sears
Goodyear
Miles=40K
Miles=50K
Price=$50
Price=$60
Sidewall=White
April 27, 2005
7
10
17
SS
91.5425
2.7825
94.325
Coefficients Standard Error
-0.18333
0.37299
2.36667
0.30455
3.28333
0.30455
2.66667
0.30455
3.53333
0.30455
1.71667
0.30455
1.48333
0.30455
1.22500
0.26375
MS
F
Significance F
13.0775 46.99910153 7.38702E-07
0.27825
t Stat
-0.49152
7.77106
10.78097
8.75612
11.60186
5.63675
4.87059
4.64460
P-value
Lower 95% Upper 95%
0.633669705 -1.014417322 0.647751
1.51708E-05 1.688089432 3.045244
7.94605E-07 2.604756098 3.961911
5.29382E-06 1.988089432 3.345244
4.00975E-07 2.854756098 4.211911
0.000216381 1.038089432 2.395244
0.000651034 0.804756098 2.161911
0.000915546 0.637334876 1.812665
Teck-Hua Ho
13
Utility Equation
U  0.18 2.37  Sears  3.28  Goodyear [Brand]
April 27, 2005
 2.67  40 K  3.53  50 K
[Miles]
 1.72  $50  1.48  $60
[Price]
 1.23  White
[Color]
Teck-Hua Ho
14
Example 7
Which brand has the highest brand equity?
If the products available in the market are (Sears, 30K, $50, Black),
(Goodyear, 40K, $70, White), and (Goodrich, 30K, $50, Black), which
brand is likely to have the highest market share?
If the market share of a product in the marketplace is predicted by the
following equation (typically we estimate this relationship using historical
data):
Market Share of Product i 
Ui
U j
j
where Ui is the utility of product i and the denominator is the sum of the
utilities of all products available in the marketplace. Compute the market
share for Sears.
April 27, 2005
Teck-Hua Ho
15
Example 7
Sears is considering three price options for a new and
improved product: (Sears, 40K, $50, White), (Sears, 40K,
$60, White) or (Sears, 40K, $70, White). Assume Sears
replaces the old product with the new one.
If the marginal cost is $25 and the total market size is 2
million units per year, which price option should Sears adopt
in order to maximize its annual profits?
How would the above answer change if Goodyear drops its
price to $60 while Goodrich keeps its price unchanged?
April 27, 2005
Teck-Hua Ho
16
Utility Computation
Parameter
Intercept
Sears
Goodyear
Miles=40K
Miles=50K
Price=$50
Price=$60
Sidewall=White
April 27, 2005
Brand
Miles
Price
Color
Product 1
Sears
30,000
$50
Black
Utility
1
1
0
0
0
1
0
0
3.90
Value
-0.18
2.37
3.28
2.67
3.53
1.72
1.48
1.23
Product 2 Product 3 Option 1 Option 2 Option 3
Goodyear Goodrich Sears
Sears
Sears
40,000
30,000
40,000 40,000 40,000
$70
$50
$50
$60
$70
White
Black
White
White
White
1
0
1
1
0
0
0
1
6.99
1
0
0
0
0
1
0
0
1.53
1
1
0
1
0
1
0
1
7.79
1
1
0
1
0
0
1
1
7.56
1
1
0
1
0
0
0
1
6.08
Teck-Hua Ho
17
Market Share Computation
Parameter
Intercept
Sears
Goodyear
Miles=40K
Miles=50K
Price=$50
Price=$60
Sidewall=White
April 27, 2005
Brand
Miles
Price
Color
Product 1
Sears
30,000
$50
Black
Utility
1
1
0
0
0
1
0
0
3.90
1
0
1
1
0
0
0
1
6.99
1
0
0
0
0
1
0
0
1.53
MS
31.39%
56.27%
12.34%
Value
-0.18
2.37
3.28
2.67
3.53
1.72
1.48
1.23
Product 2 Product 3 Option 1 Option 2 Option 3
Goodyear Goodrich Sears
Sears
Sears
40,000
30,000
40,000 40,000 40,000
$70
$50
$50
$60
$70
White
Black
White
White
White
1
1
0
1
0
1
0
1
7.79
1
1
0
1
0
0
1
1
7.56
1
1
0
1
0
0
0
1
6.08
47.75%
46.99%
41.61%
Teck-Hua Ho
18