I. Economic and Behavioral
Foundations of Pricing
II. Innovative Pricing
Concepts and Tools
March 11 2006
III. Internet Pricing
Models
Pricing Policy
Teck-Hua Ho
1


Objectively and subjectively, is Tweeter price competitive?

What is the impact of APP on effective price paid for a product?
How is it designed to alter current buying behavior?

Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective?
March 11 2006 Pricing Policy
Teck-Hua Ho
2

Mean Product Price within Selected Product Categories
Lechmere Circuit City The Wiz Tweeter
27" Color TV
Multiple CD Players
$553
$229
$507
$240
$563
$229
$648
$389
Camcorders
Stereo Speakers
$713
$261
$740
$244
$737
$355
$845
$642

Mean product prices are higher by 1527% for 27” TVs and
Camcorders, by 65% for CD players and by 125% for Stereo speakers
March 11 2006 Pricing Policy
Teck-Hua Ho
3


These higher mean prices do not imply lower price competitiveness for Tweeter because it offers high quality products.

But the 15% to 125% price premium does have an impact on Tweeter’s price image.
“… people would look at our ads and they would look at Lechmere’s ads. Lechmere would advertise a $139 VCR and we would advertise a
$199 VCR. They’d have a $399 camcorder and we’d have a $599 camcorder. … we seemed to be more expensive to the inexperienced consumer.”
March 11 2006 Pricing Policy
Teck-Hua Ho
4

Color TVs (Tweeter carries 14 Models: 11 overlap and 3 are unique to Tweeter)
Competitor
Lechmere Circuit City The Wiz
Competitor's Mean Price $675 $552 $666
Tweeter's Mean Price
Number of Overlapping Models
$668
10
$566
5
$676
9
CD Players (Tweeter carries 20 Models: 7 overlap and 13 are unique to Tweeter)
Competitor
Lechmere Circuit City The Wiz
Competitor's Mean Price $193 $255 $215
Tweeter's Mean Price
Number of Overlapping Models
$180
3
$257
4
$200
4
March 11 2006 Pricing Policy
Teck-Hua Ho
5

Camcorders (Tweeter carries 13 Models: 12 overlap and 1 is unique to Tweeter)
Competitor
Lechmere Circuit City The Wiz
Competitor's Mean Price $893 $875 $805
Tweeter's Mean Price
Number of Overlapping Models
$895
11
$877
11
$806
8
Stereo Speakers (Tweeter carries 23 Models: 1 overlap and 22 are unique to Tweeter)
Competitor
Lechmere Circuit City The Wiz
Competitor's Mean Price N/A N/A $198
Tweeter's Mean Price
Number of Overlapping Models
N/A
0
N/A
0
$200
1
March 11 2006 Pricing Policy
Teck-Hua Ho
6

High-End Products
Small, Upscale
Stores
-
-
APP
+
Past Price
Image
-
-
+
Superior
Customer Service
-
-
EDFP
(Everyday Fair Price)
No Sales
Limited Advertising
It is easy to change prices but it is difficult to change price perception!
Teck-Hua Ho
March 11 2006 Pricing Policy
7


Objectively and subjectively, is Tweeter price competitive?

What is the impact of APP on effective price paid for a product?
How is it designed to alter current buying behavior?

Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective?
March 11 2006 Pricing Policy
Teck-Hua Ho
8

Circuit City Prices
Price
Tweeter EDFP Prices
March 11 2006 Pricing Policy
Time
Teck-Hua Ho
9


Eliminate the need for extensive, price-based search : Consumers indicated that if price were not an issue, they would prefer to buy at Tweeter.
 Break the “wait for a sale” buying mentality : Under APP, consumers have less incentives to wait.
 Convert “potential” or “free-riding” customers : APP eliminates the need to travel to another location.

Smoothes demand over time : APP eliminates the cyclical buying patterns of sale-based retailing.

Creates positive word-of-mouth (since word-of-mouth has a significant impact on buying behavior).
March 11 2006 Pricing Policy
Teck-Hua Ho
10

REVENUE
Consumer
Electronics Industry
1990 1993
Tweeter Same-Store $39.5 m (+3.4%/yr) $43.7 m (+14.5%/yr)
Sales
$23.8 b (+4.5%/yr) $27.2 b (+5.6%/yr)
NET INCOME
MARGIN
- $661K
34.8%
1996
$65.5* m
$32.0 b
$3600K
36.6%
* same-store sales increase by 50% between 1993-1996
March 11 2006 Pricing Policy
Teck-Hua Ho
11

 Tweeter’s customers pay lower prices for products that overlap with its competitors.
 Tweeter’s small stores and higher levels of customer service translate to a higher costs of operations.
 The key to success for Tweeter is the management of their product overlap:
 Sufficient product overlap to make APP a credible promotional strategy in the eyes of the consumers.
 Sufficient product uniqueness to generate the overall customer margins necessary to maintain the business.
March 11 2006 Pricing Policy
Teck-Hua Ho
12

 Cambridge Soundworks (70% of sales come from private-label speakers):
The product overlap between the company and its competitors may be far too low for APP to be a credible price guarantee in the eyes of the consumer.
 Lechmere, Circuit City, and the Wiz: The degree of product overlap for these stores is higher than it is for Tweeter: Lechmere (60% or 58 out of
96), Circuit City (60% or 61 of 101), the Wiz (70% or 55 of 78), and
Tweeter (44% or 32 of 73). So these competitive stores may not carry a sufficient percentage of unique products for APP to prove profitable .
March 11 2006 Pricing Policy
Teck-Hua Ho
13

 It is easy to change prices but difficult to change price image.
 Must coordinate your pricing strategy with other marketing mix activities (e.g., product assortment).
March 11 2006 Pricing Policy
Teck-Hua Ho
14