TEACHING PLAN FOR • PRICING POLICIES 1. Basic description of the course Name of the course: Pricing Policies Profile: Marketing Market Research Academic year: 2013-2014 Term: 1st Degree / Course: Bachelor’s Degree in International Business and Marketing Code: 40114 Number of credits: 4 Total number of hours committed: 100 Teaching language: English Lecturer: Tomislav Rimac Timetable: GROUP 1 (Plenary Session) Mondays, 13.00 – 15.15 GROUP 1A (Seminar Session) Thursdays, 13:00 – 13:55 OFFICE HOURS: Mondays, 12:00 – 13:00 and by appointment 2. Presentation of the course “Pricing is the moment of truth – all of marketing comes to focus in the pricing decision.” (Raymond Corey) Price setting is probably the most crucial of all marketing mix decisions. It involves an understanding of both supply side factors (e.g. costs) and demand side factors (e.g. consumer willingness to pay). While traditional approaches to pricing theory have revolved around an economic and financial framework, a broader and more pragmatic view entails a comprehensive understanding of the demand side; both at the level of individual customer values, and the more aggregate level of price sensitivities of the market. In this course, we will approach the pricing decision as an intersection of economic, strategic and behavioral considerations. Using industries as diverse as wireless communication, pharmaceutical, medical services, industrial products and consumer packaged goods, we will study economic and behavioral approaches to pricing, dynamic of pricing, value pricing, price customization, price bundling and multi-part tariffs, menu costs and price 1 stickiness, price presentation strategies, sales promotions, and the effect of pricing formats on consumption and customer value. The prerequisites for this course are solid knowledge of basic marketing, microeconomics, managerial accounting, and managerial finance concepts acquired in the Business Marketing and Microeconomics courses or in equivalent courses. Students are expected to be familiar with topics such as laws of demand and supply, fixed and variable costs, price elasticity, net present value, etc. Although many of these topics will not be officially discussed during the class, students will be provided with refresher power point slides that they can review in the preparation for the classes. Familiarity with some advanced managerial finance (e.g., options) and competitive strategy (e.g., game theory) concepts is beneficial, though not obligatory. Although this course has a significant QUANTITATIVE component, required mathematical skills do not go beyond basic calculus (e.g., derivative of a linear function). However, solid control of the basic algebra is mandatory. Fluency in use of EXCEL software application is mandatory. Students MUST bring their laptops to every class. 3. Competences to be achieved in the course General competences: Instrumental competences G.I.2. Ability to relate concepts and knowledge from different areas. G.I.3. Ability to organize and plan. G.I.5. Ability to take decisions in complex and changing situations. G.I.8. Oral and written competence in communicating in English. General personal competences G.P.1. Ability to adapt and work in and lead international, multicultural, interdisciplinary, competitive, changing and complex groups. Generic systemic competences G.S.4. Entrepreneurial ability. G.S.7. Promotion of and respect toward multicultural values: respect, equality, solidarity, commitment. G.S.8. Promotion and respect for gender, environmental and safety at work issues. Specific competences: Disciplinary competences E.D.8. Analyze the organization of businesses based on economic principles that make it possible to identify the most determining factors in results. Professional competences E.P.2. Ability to analyze economic and market indicators when taking decisions within the organization. E.P.5. Ability to take strategic business decisions that take into account economic, cultural, social, and political determinants specific to each area. E.P.7. Illustrate the reality of business by using activities such as visits and lectures given by executives or by preparing case studies. E.P.8. Be able to take functional decisions within an organization with international activity. E.P.17. Be able to express oneself and 2 Competences for applicability G.A.4. Ability to understand and apply the network concept. understand spoken and written communication in English at an advanced level to apply it to the international business area. The above abilities interrelated with the basic abilities set out in Royal Decree 1393/2007, namely: a. Competence to understand knowledge, on the basis of general secondary education b. Competence to apply knowledge to day-to-day work in international management and marketing, in particular, the ability to develop and defend arguments and to solve problems c. Competence to gather and interpret relevant data, making it possible to issue reflective judgments on economic and social reality d. Competence to communicate and transmit information (ideas, problems, solutions) to a specialized and non-specialized public e. Competence to develop learning activities in a relatively autonomous manner. Thus, the competences developed in the subject are structured into those that are seen as a development or specification of basic competences and those that define the professional profile of the graduate, with respect to general and specific competences. Basic competence: understanding of knowledge General competence: G.I.3 Specific competences: E.D.8 Basic competence: application of knowledge General competences: E.P.2 Basic competence: communicate and transform information General competences: G.I.8 Specific competences: E.P.17 Basic competences: develop learning activities General competences: G.I.3 Competences that define the professional profile which are not included under basic competences In general, these competences combine the following key elements for professionalizing students in the area of international business and marketing: a. Provide students with the capacity to adapt to dynamic teams and environments b. Provide students with the capacity to create their own integral vision of the operation of a business or international marketing project c. Provide students with the capacity to take complex decisions and carry out negotiation processes General competences: G.I.5, G.P.1, G.S.4, G.S.7, G.S.8, G.A.4 Specific competences: E.P.5, E.P.7, E.P. 8 3 Own competences of the subject Understanding the fundamentals of how prices are set and the relationship of pricing process with other functional business activities. 4. Contents 1. Costs 2. CVP Analysis 3. Markets and willingness to pay 4. Pricing discrimination 5. Pricing strategies 6. Value and pricing 7. Pricing psychology 8. Pricing over the product lifecycle 9. Competitive pricing 10. Ethical and legal issues in pricing 5. Assessment Regular Term Evaluation During the regular term you will be evaluated as indicated in the table below. Assessm ent element s Type of assessment Assessment agent Grouping Wei ght Lec Indi Oblig Option Group (%) tur Self 360◦ vidu atory al (#) er al CONTINUOUS EVALUATION (Minimum 5.0 on simulation and 4.0 on overall continuous evaluation grade required to be allowed to take the final exam) Applicati on Quizzes 2 X X Overall X 20% underst anding Applicati on X Concept Simulati 1 (min. X X X ual X 3/group 20% on 50%) Overall underst anding Analysis Applicati Seminar on preparat Concept ion and 9 X X X X X 20% ual participa Overall tion underst anding Frequ ency Type of activity FINAL EXAM (Minimum 4.0 required to pass the course) Final exam 1 x (min. 40% ) X Applica tion and synthe X 40% 4 sis BONUS EVALUATION (default 0.0 maximum 1.0) Participa tion bonus grade Ongoin g X X X X Analysis and applicatio n ≤10 % bonu s X a. Each assessment element (the first column) is scored with a grade between 0 and 10 with one decimal point precision. Zero is the lowest grade and ten is the highest grade. b. The final grade for the course is calculated by adding grades obtained in each element multiplied by their assigned weights (the last column). c. The final grade of the course is reported on the scale from 0 to 10 with one decimal point precision. The course will be considered as “passed” if the final grade is equal to or greater than 5.0. d. In addition to numeric final grades, you are also given descriptive grades: No presentat 0.0 – 4.9 Suspens 5.0 – 6.9 Aprovat 7.0 – 8.9 Notable 9.0 – 10.0 Excel.lent e. Frequency column in the table indicates the number of times assessment element is evaluated during the term. f. The assessment elements that have “x” in the “Obligatory” column must be completed with the grade that is equal or greater to indicated grade in order to obtain a passing course grade. The assessment elements that have “x” in the “Optional” column don’t require a minimum passing grade in order to obtain a passing final grade. Nevertheless, those “Optional” assessment elements that are not completed still count towards your final course grade. g. International students: Please DO NOT BOOK tickets for your flights home in December before the dates for the final exams are announced (usually at the end of the week 5). Even if you have a ticket and a valid reason, ESCI will NOT PROVIDE ALTERNATIVE DATES for the final exam. h. To be allowed to take the final exam your continuous evaluation grade (quizzes + simulation + seminar preparation and participation) must be 4.0 or greater AND your simulation grade must be 5.0 or greater. If any on these two conditions is not met, you will not be allowed to take the final exam and the lower of the two grades becomes the final course grade. i. In order to pass the course, you must take the final exam. If you do not take the final exam, your final course grade will be “No presentat” (“No show”), irrespective of your grades in other evaluation elements. j. To obtain a passing course grade, you must obtain the final exam grade that is equal to or greater than 4.0. If the final exam grade is less than 4.0, the final exam grade becomes the course final grade irrespective of other grades. k. The final exam is cumulative – it covers all material covered during the term. Quiz 1 includes only material covered before the Quiz 1. Quiz 2 includes only material covered between Quiz 1 and Quiz 2. 5 l. m. n. o. p. q. Seminar preparation and participation grading element evaluates your preparation for the seminars. In addition to quality of your deliverables it evaluates the level of your preparation. Missing seminars or coming unprepared to classes will lower your grade for this evaluation element. Each student is entitled to one “joker seminar” when a student is allowed to miss the class or attend the class unprepared, AS LONG AS I am informed in writing about this ahead of the class. The first time you come to a seminar class unprepared without prior notification or you do this after using your “joker seminar” the maximum grade for the seminar preparation and participation element will be lowered by 25%; the 2nd time by 50%, and zero thereafter. Thus, if your actual grade for this evaluation element is 7 and I determine that in addition to one “joker seminar” you came to 2 seminars unprepared or that you came to 2 seminars unprepared without claiming in writing your “joker seminar,” your recorded grade for this evaluation element will be 20*0.5*0.7 = 7. If you fail to submit any of your assignments by the given deadline, and you are late between 0 and 24 hours, your maximum assignment grade will be reduced by 20%. If you are late more than 24 hours, the assignment will not be accepted and your grade will be zero. For instance, if you submit your assignment 10 hours late, your maximum possible assignment grade becomes 8. Thus, if your actual assignment grade is 7, your recorded assignment grade is 0.7*8 = 5.6. There will be neither individual make-up work nor extra credit work assigned if you fail any of obligatory grading elements, you are unable to attend the final exam or quizzes, or if you obtain a grade below your expectations. All students in a group receive the same grade for any group work. However, during the final exam, you will have to perform 360-degree evaluation that will be used to adjust group grades for individuals who have contributed more than their fair share of work (their grades will be higher than the grade given to the rest of the group members) and those who didn’t contribute their fair share of work (their grades will be lower than the grade given to the rest of the group members). Participation in this course is evaluated as an extra credit that can contribute up to 10% of your final grade (default is zero). If you don’t say a word during the classes or you have irregular attendance (below 80%), your participation grade will be zero. However, you still may obtain a maximum final course grade. Participation grade is based exclusively on your CONTRIBUTION during class discussions. My experience is that in the courses that are evaluated on the continuous basis like this one, it is hard to fail but it is also hard to obtain a very high mark. So, if you are concerned with your average grade, take this element seriously as it can compensate for losses of grades in other elements. Furthermore, do not think of this grade as an entitlement or a gift – it has to be EARNED. Finally, do not confuse attendance with participation. A student can have a perfect attendance record and still have zero participation mark. Some of the behaviors that contribute to effective class participation are captured in the questions that follow: 1. Is the participant a good listener? 2. Are the points that are made relevant to the discussion? Are they linked to the comments of others? 3. Do the comments add to our understanding of the situation? 4. Do the comments show evidence of analysis of the case? 6 5. Does the participant distinguish among different kinds of data (that is, facts, opinions, beliefs, concepts, etc.)? 6. Is there a willingness to share? 7. Is there a willingness to test new ideas, or are all comments "safe"? (For example, repetition of case facts without analysis and conclusions or a comment already made by a colleague.) 8. Is the participant willing to interact with other class members? 9. Do comments clarify and highlight the important aspects of earlier comments and lead to a clearer statement of the concepts being covered? The questions above deal with both the process of class participation and (of equal or greater concern) the content of what you say. Please trust that both quality and frequency are important, but that quantity never can make up for low quality. Supplementary Evaluation For those students who were allowed to take the final exam and during the regular term evaluation have obtained a final grade below 5.0, there will be a supplementary evaluation according to the ESCI calendar and academic regulations. Only final exam can be retaken during this session. All other grades stay unchanged and cannot be compensated by extra work. To pass the supplementary evaluation exam, a student must obtain supplementary exam grade that is equal or greater than 4.0. If a student obtains a passing supplementary exam evaluation grade, the final grade will be determined using the regular course assessment rules as outlined above. If a student obtains the supplementary exam grade below 4.0, the supplementary exam grade becomes the final course grade. Bonus participation grade is set to zero if a student has to take supplementary evaluation. Evaluation of the competences: G.I.2. G.I.3. G.I.8. E.D.8. E.P.2. E.P.17. Profile X X X X X Class Participation X Simulation X X X X X X X Seminar preparation & participation X X X X X X X Quizzes X X X X Final exam X X X X X X 7 6. Bibliography and teaching resources • Basic bibliography o Nagle T., Hogan, J., and Zale, J. (2010). “The Strategy and Tactics of Pricing: A Guide to Growing More Profitably” (5th Ed.) Upper Saddle River, NJ: Prentice Hall • Supplementary bibliography o Baker, R. J. (2006). “Pricing on Purpose: Creating and Capturing Value.” Hoboken, New Jersey: John Wiley & Sons o Dolan, R. and Simon H. (1997). “Power Pricing: How Managing Price Transforms the Bottom Line.” New York, NY: The Free Press [Dolan & Simon] o Wilson R. (1997). “Nonlinear Pricing.” New York, NY: Oxford University • Teaching resources: Posted on the course Intranet site: o Supplementary teaching cases o Power point slides o Supplementary articles Other: o Supplementary video cases (web link provided when possible) o Pricing simulation software (web link provided) Students are required to read all assigned cases and articles. Although the course will loosely follow Nagle and Holden’s book listed in the bibliography section, there is no required text book for this course. Above, listed are some of the books that you might want to refer to during the course or after for further reading on the topics covered during the class. Nevertheless, you will not need to buy or borrow any of these books to successfully complete the course. 7. Methodology The course is composed of a mixture of lectures, tutorials, seminars, simulations and case discussions. The purpose of the lectures is to present and discuss theories, concepts, analytical techniques and empirical findings. We will supplement lectures with tutorials that will allow us to practice the analytical techniques introduced during the lectures. Furthermore, we will discuss a number of comprehensive business cases. The goal of the case discussion is to apply the concepts to the context provided by the case and to make decisions based on both qualitative and quantitative analysis. These teaching methods require intensive students’ involvement and therefore it is important that students read the assigned material prior to each class. As the class is offered in English, all reading material will be provided in English only. Students 8 will be provided with the cases, readings, exercises and power point presentations either before or after the class via the Intranet site (“Aula”). Face-to-face (in the classroom) - Lectures - Tutorials - Discussion of cases and articles - - Participation in discussions - Quizzes - Final exam - Directed (outside the classroom) Professor Prepare classes Prepare tutorials Prepare cases and articles Student Prepare seminars Prepare cases and articles Play simulation Independent (outside the classroom) - Class preparation and readings - Independent study - Exam preparation MY EXPECTATIONS: Class Preparation: I expect you to come to classes prepared. This includes reading of the assigned cases, articles, reviewing of the power point slides and exercises. Your preparation will make a significant part of your marks in participation and seminar preparation and participation evaluation elements. While participation during the classes is predominantly voluntary, I also practice “cold calling”. This means that anyone can be asked to answer any question. Fear of public speaking will not be accepted as an excuse. Punctuality and Deadlines: I expect you to be on time for classes. I understand that due to unforeseen circumstances, you may be occasionally late. If possible, please let me know in advance if you are going to be late. Being habitually late is a good way of losing goodwill. Deadlines will always be strictly enforced and no exceptions of any kind will be made without prior approval. Attendance: I expect you to attend classes regularly. I understand that due to unforeseen circumstances, you may be occasionally absent. If possible, please let me know in advance if you are going to be absent. Being habitually absent and/or being absent without a valid reason is a good way of losing goodwill. Being absent does not excuse you from the deadlines. It is your responsibility to ensure that I receive required material by the given deadline, in the specified format, even if you are not present. If your attendance is below 80% (more than 4 absences), your bonus participation mark is set to zero independent of your actual participation. Class Discipline: It is of utmost importance that you respect your classmates and the professor by allowing them to work and study in a professional environment. Private conversations among students during the class will not be tolerated. 9 According to ESCI rules, the professor may ask student(s) to leave the classroom. If you are asked to leave the classroom, your attendance sheet will be marked as ‘expelled’ (counts as two unjustified absences) and you will be asked to meet with the program coordinator. Intranet (“Aula”): It is students’ responsibility to ensure timely access to the Aula.1 International students: please talk to exchange program coordinators at your school and at ESCI in order to obtain Aula access as soon as possible. Until you obtain the access please ask one of your local classmates for the access to print or copy the class materials. Not having the access to the Aula will not be accepted as an excuse for not doing required course work. Internet Enabled Devices: Students MUST bring some type of Internet Enabled Device (e.g., laptop, tablet, or smart phone) to the class when instructed. Class materials (cases, articles, and PP slides), quizzes and the simulation will be available exclusively on-line. For the remainder of the class use of any of these devices is allowed ONLY for the class related activities (e.g., taking notes). If you are found to use these devices for any other purpose, especially for activities that distract your classmates, you may be asked to leave the classroom. YOUR EXPECTATIONS: Responsiveness and Feedback: You should expect that questions and concerns that you raise with me would be answered, addressed and responded to. Besides formal feedback mechanisms, feel free to jot me an e-mail with any question or feedback. I will try my best to respond as speedily as I possibly can. If you need to talk to me, you can send me an e-mail requesting to meet during the office hour or at other time. I will schedule time to sit and talk to you. Although I am usually available before and after the class for impromptu questions and consultations, unless you previously request to meet, you need to be prepared for the possibility that I may ask you to postpone the conversation for another day due to my previously scheduled obligations. Punctuality: You should expect me to start and finish classes on time. If we need extra time to cover materials, or need to organize an extra session, I will only do so if the majority of the class agrees. Preparation and Rigor: You should expect the most up-to-date and rigorous materials to be covered in class. Guidelines and Expectations: For all assignments, exams and other course materials, I will state my expectations as clearly as possible. If either of us finds that the other party has been violating expectations, it is our duty to inform the other party as promptly, and in as fair a manner as possible. 1 https://aula.esci.upf.edu/login/index.php?lang=en 10 8. Scheduling activities Note: Seminars are starting on Thursday, October 03, 2013 Week Week 0 Week 1 Week 2 Hours Sessions Date Class Preparation Time In Class Time After Class Time Lecture 0 Monday, Sep. 23 NA 0 No class 0 NA 0 Seminar 0 Thursday, Sep. 26 NA 0 No class 0 NA 0 0 Presentation 1: Course introduction Lecture 1: Costs 2 Review PP slides Review your notes Independent study 1 1 Review your notes Independent study 2 Review PP slides Review your notes Independent study 0 Lecture 1 Monday, Sep. 30 NA Seminar 1 Thursday, Oct. 03 Read and prepare the case Monday, Oct. 07 Review PP slides Read tutorial questions 5 7.5 Lecture 2 0.5 1 Case 1: Beauregard Textile Company (HBS 191-058) - Cost contribution analysis - Competitive pricing Lecture 2: CVP Analysis Tutorial 1 0.5 1 11 Week 3 Seminar 2 Thursday, Oct. 10 Read and prepare the case Lecture 3 Monday, Oct. 14 Review PP slides Read tutorial questions 2 1 7 Seminar 3 Thursday, Oct. 17 Read and prepare the case 1.5 Case 2: Heinz Ketchup Pricing the product line (UV5142) - Margins (regular and promoted manufacturer margins, regular and promoted retail margins) - Consumption-adjusted margin - Retail pass-through Tutorial 2 Case 3: Metabical - Pricing, packaging, and demand forecasting for a new weightloss drug (HBS Brief Case 4183) - Pricing approaches (costbased pricing, demandoriented pricing, competitive-oriented pricing, target return pricing) - Product packaging alternatives, fit with consumer data, and possible pricing strategies 1 Review your notes Independent study 0.5 2 Review your notes Independent study 1 1 Review your notes Independent study 0.5 12 - Product pricing and packaging decisions for a new product when demand and consumer behavior are uncertain - Forecasting demand of a new product and estimating profitability Lecture 4 Week 4 Week 5 Monday, Oct. 21 Review PP slides Read tutorial questions 1 7 8.5 Seminar 4 Thursday, Oct. 24 Read and prepare the case 1.5 Lecture 5 Monday, Oct. 28 Review PP slides Read tutorial questions 1 Tutorial 3 Case 4: Culinarian Cookware: Pondering price promotion (HBS Brief Case 4057) - Risks and opportunities of price promotion as a strategic and tactical marketing tool - Valuating the financial impact of a price promotion using different cost and sales assumptions - Developing price promotion policy consistent with overall marketing objectives Lecture 3: Market and willingness to pay: Demand, supply, and elasticity 2 Review your notes Independent study 1 1 Review your notes Independent study 0.5 2 Review PP slides Review your notes 2 13 Tutorial 4 Seminar 5 Lecture 6 Week 6 Thursday, Oct. 31 Monday, Nov. 04 Read and prepare the case Prepare for the quiz Review PP slides 2 6 Case 5: Pepita Disco PPM – Margins and elasticity (KEL692) - Calculating and explaining changes in net margin - Calculating price and volume changes for a given price elasticity Quiz 1 Lecture 4: Pricing discrimination Independent study Familiarize yourself with the simulation 1 Review your notes Independent study 2 Review PP slides Review your notes Independent study Play the simulation 1 Review your notes Independent study 0.5 4 15 Seminar 6 Thursday, Nov. 07 Read and prepare the case 1.5 Case 6: The Springfield Nor’easters: Maximizing Revenues in the Minor Leagues (HBS Brief case 2510) - Design, implementation, and interpretation of research surveys 0.5 14 - Using quantitative analysis methods to develop a “scaled” pricing strategy for a perishable service - Impact on sales of auxiliary products Lecture 7 Week 7 Review PP slides Read tutorial questions 1 Tutorial 5 Lecture 5: Pricing strategies 2.5 Case 7: Virgin Mobile USA Pricing for the very first time (HBS 504-028) - Pricing when entering new markets - Pricing and customer relationship management (CRM) 2 1 Review your notes Independent study 2 Review PP slides Review your notes Independent study Write simulation report 4 11 Seminar 7 Week 8 Monday, Nov. 11 Review PP slides Review your notes Independent study Play the simulation 8 Lecture 8 Thursday, Nov. 14 Monday, Nov. 18 Read and prepare the case Review PP slides 1 Lecture 5: Pricing strategies Lecture 6: Value and pricing 0.5 2 15 Seminar 8 Lecture 9 Week 9 Monday, Nov. 25 Read and prepare the case Review PP slides 1.5 1 8 Seminar 9 Week 10 Thursday, Nov. 21 Thursday, Nov. 28 Read and prepare the case Lecture 10 Monday, Dec. 02 Prepare for the quiz Review PP slides Read and prepare the case NA NA NA 11 2.5 Case 8: Atlantic Computer – A bundle of pricing options (HBS Brief Case 2078) - Value-in-use pricing Lecture 7: Pricing psychology Lecture 8: Pricing and product lifecycle Case 9: XM Satellite Radio A (HBS 504-009) - Skimming vs. penetrating pricing - Pricing complementary products - Reacting to competitive pricing - Price promotions 1 Review your notes Independent study 2 Review PP slides Review your notes Independent study 1 Review your notes Independent study 2 Review PP slides Review your notes Independent study 1 0 NA 0 Quiz 2 Lecture 9: Auctions 8 0 Case 10: Biopure Corporation (HBS 599-094) Going to market - Relative market potential - Reference pricing NA 0.5 1 0.5 16 Exam Week 12 Total Hours 100 Exam TBD Prepare for the final exam 10 Exam 46.5 2 NA 31 0 22.5 Last updated: August 11, 2013 9. Case preparation questions Below you may find a list of cases with matching preparation questions. Once you read the case use these questions for seminar preparation that you can do either individually or in groups of three. Unless explicitly indicated before the seminar class you don-t have to submit anything in writing. Case 1: Beauregard Textile Company (HBS 191-058) 1. Should BTC announce a price of $3.00 or $4.00 per yard for T-30? Why? Calculate it! To answer this question you will have to perform relevant cost analysis and demand analysis from the BTC’s and C&P’s perspective. Please follow the instructions: a) of the costs identified in the case decide which ones are relevant b) do the analysis for the following pricing scenarios – prices, production quantity in yards, relevant costs, contribution margin per yard, and profit (these should be rows in your table) Cas e BTC @ $4.00 BTC @ $3.00 BTC when both @ $4.00 C&P @ $3.00 C&P when both @ $4.00 C&P when both @ $3.00 2. C&P is presumably showing a loss at $3.00. Why it is not increasing price? 3. How can BTC persuade C&P to raise its price without violating the antitrust laws which prohibit collusion on pricing between competitors? 17 Case 2: Heinz Ketchup - Pricing the product line (UV5142) 1. How profitable are the current SKUs in the product line for both Heinz and for retailers? Consider the profitability of both regular and promotional prices on a dollar and percentage basis. 2. What is the current retail pass-through for Heinz’s 24- and 36-oz. sizes? Do these numbers surprise you? (“Retail passthrough” is a measure of how the dollars that manufacturers allocate for trade promotions are converted into retail promotional dollars. This measure is often expressed as a percentage of trade promotional dollars. For example, if a manufacturer reduces the unit price of an item by $1.00 during a trade promotion, and the retailer then reduces its price by $0.50 during the promotional period, “retail pass-through” is said to be 50%.) 3. What are the consumption-adjusted margins, both for Heinz and for retailers, of the SKUs currently offered? Consider both regular and promotional prices. (Consumption-adjusted margins are dollar margins that reflect the fact that different package sizes of the same product may influence the rate at which customers consume the product. A natural question that arises from this phenomenon is how product managers should adjust their understanding of product profitability to reflect this possibility. Here is one simple way: Suppose a manufacturer makes $0.20 on a 10-oz. can of soup and $0.40 on a 20-oz. can of soup. In either case, the manufacturer makes $0.02 per ounce. But in this case, the larger size causes consumers to increase their consumption of soup by 30%, so the consumptionadjusted margins per ounce of the 20-oz. size can be calculated as ($0.40 × 1.3) ÷ 20 = $0.026, where the term in parentheses adjusts the dollar margin up to reflect the consumption expansion, and then that adjusted margin is divided by the number of ounces in the package size. This per-ounce margin is now directly comparable to the per-ounce margin of the 10-oz. size: $0.02. In this case, Heinz is making more money on the larger package size.) 4. How did consideration of consumption expansion inform your pricing and promotional plan? (A natural thing to do is to consider what we would need to do in terms of trade dealing to make customer purchases of larger sizes make sense for retailers and make sense for Heinz. Start by considering the 46-oz. size. What level of trade dealing would be best given your beliefs about retail pass-through and an analysis of the margins and consumption-adjusted margins for Heinz as well as for retailers? What about the 64-oz. size?) 5. Are there other sizes we should consider promoting? 6. Are there SKUs we should consider adding or removing from the current ketchup product line? 7. Beyond price, how would you promote this new pricing and product mix strategy to retailers and to consumers? Case 3: Metabical - Pricing, packaging, and demand forecasting for a new weight-loss drug (HBS Brief Case 4183) 18 1. How does Metabical compare to current weight-loss options? 2. What are the pros and cons of the forecasting methods presented by Printup? If you had to estimate demand for this product, how would you go about it? What would your demand (unit) forecast look like for the first five years? 3. What considerations should be taken into account when making decisions about the package count? What package size would you recommend? 4. What pricing strategy approaches would you suggest Printup explore? What are the advantages and disadvantages of each strategy? What price would you recommend? 5. What impact does your pricing decision have on profitability? What is the ROI over the first five years for each of the pricing strategies identified? Case 4: Culinarian Cookware: Pondering price promotion (HBS Brief Case 4057) 1. Describe consumer behavior in the cookware market. How is cookware bought? How is it sold? What are the implications for Culinarian’s marketing strategy? 2. What are Culinarian’s strengths and weaknesses? Why has the company been successful? 3. Was the 2004 promotion profitable? Calculate the profitability using Brown’s logic and then calculate profitability using the consultant’s model. How would you calculate profitability? 4. Should Culinarian run a 2007 price promotion? If so, what should be the specifics of such a promotion (e.g., product scope, discount rate, timing, communication)? If a price promotion is not suitable, think about another type of sales promotion (e.g., manufacturer rebate program, gift with purchase, sweepstakes, product placement, etc.) to recommend. Case 5: Pepita Disco PPM – Margins and elasticity (KEL692) 1. What would be the absolute and percentage changes in net margin if Pepita Disco were to: a) Reduce research and development 10%? 19 b) Reduce marketing and advertising 10%? c) Reduce all fixed costs 10%? d) Reduce all variable costs 10%? e) Get its salespeople to sell 10% more? f) Raise its price 10%? g) Lower its price 10%? h) Reduce research and development 10% and, as a result, unit sales decreased 5%? i) Reduce marketing and advertising 10% and, as a result, unit sales decreased 5%? j) Reduce variable costs per unit 10% and, as a result, unit sales decreased 10%? k) Motivate its manufacturing staff and salespeople by paying them 10% more and, as a result, unit sales increased 10%? l) Raise its price 10% with an elasticity of -1.7? m) Lower its price 10% with an elasticity of -1.7? 2. What would be the absolute and percentage effect on net margin if Yuckles were to: a) Raise its price 10% with an elasticity of -1.7? b) Lower its price 10% with an elasticity of -1.7? Case 6: The Springfield Nor’easters: Maximizing Revenues in the Minor Leagues (HBS Brief case 2510) 1. Evaluate the research survey undertaken by the League Sports Association and by Larry Buckingham, Nor’easters’ marketing director. Consider each step in the process that led to the findings of the survey. 2. What do you consider to be the key findings of the research survey? Comment on what Buckingham learned about a prospective customer profile, pricing, and single-ticket versus season-ticket packages. 3. What considerations should the Nor’easters take into account in establishing a pricing policy? 4. Design a ticket pricing plan for the Nor’easters’ first season. Be very specific, and be prepared to explain the assumptions—especially assumptions of cause and effect—that underlie your strategy. Should Buckingham offer more than one type of season package? How, if at all, should ticket pricing vary by package type? How, if at all, can Buckingham take advantage of consumer interest in grandstand seating? 5. Using the pricing plan you have designed and given Buckingham’s assumptions about concession sales, will the team reach breakeven in the first year? If not, what options does Buckingham have to reach his target? 20 Case 7: Virgin Mobile USA - Pricing for the very first time (HBS 504-028) 1. Which of the offered pricing options would you chose and why? You need to use numbers from the case in the calculations below in order to justify your answer. a) How big is industry’s annual churn rate with and without contract? b) What are the components of the industry’s acquisition cost and how big they are? c) How big is industry’s ARPU? d) Assuming that the industry’s acquisition cost is $740, how long does it take to break even? e) What is industry customer’s LTV with and without contract assuming that interest rate is 10%? Exhibit 11 gives you the formula you need to use. Use acquisition cost of $185. Other numbers you need you may find in the case. 2. What would be the industry’s break even time and LTV with and without contract if the hidden costs would be eliminated? 3. What is Virgin’s most likely acquisition cost and customer LTV (assume interest rate 5% and monthly revenue and monthly cost to serve equal to its competitors)? 4. There is very little loyalty in the cellular industry. What do you think is the source of this dissatisfaction? Why haven’t the big carriers responded more aggressively to customer dissatisfaction? 5. How do major carriers make money in this industry? Is there a financial logic underlying their pricing strategy? 6. What do you think of Virgin Mobile’s value proposition (the VirginXtras, etc.)? 7. What do you think of its channels and merchandising strategy? 8. Do you agree with Virgin Mobile’s target market selection? What are the risks associated with targeting this segment? Why have the major carriers been slow to target this segment? 9. What price per minute should Virgin charge? What assumptions you need to make to answer this question? Case 8: Atlantic Computer – A bundle of pricing options (HBS Brief Case 2078) 1. What price should Jowers charge DayTraderJournal.com for the Atlantic Bundle (i.e., Tronn servers+PESA software tool)? 2. Think broadly about the top-line revenue implications from each of the four alternative pricing strategies. Approximately how much money over the next three years will be “left on the table” if the firm were to give away the software tool away for free (i.e., status quo pricing) versus utilizing one of the other pricing approaches? 21 3. How is Matzer likely to react to your recommendation? a) How is Cadena’s sales force likely to react to your recommendation? b) What can Jowers recommend to get Cadena’s hardware-oriented sales force to understand and sell the value of the PESA software effectively? 4. How are customers in your target market likely to react to your recommended pricing strategy? What response can be provided to overcome any objections? 5. How is Ontario Zink’s senior management team likely to react to the Atlantic Bundle? Case 9: XM Satellite Radio A (HBS 504-009) 1. What is the vale proposition of XM to different consumer segments? Who should be the primary target market for XM? 2. What aspects need to be considered in pricing the radio receiver and subscription fee? What is the optimal price for monthly subscription? Assume a five-year lifetime for a customer. How would you answer change if the lifetime was longer or shorter? 3. How should the price of the service change over time? Should you price high initially and then decrease it over time? Should you price low initially and then increase it over time? 4. What aspects need to be considered in allowing advertising to run on XM’s service? How does the fact that the firm could also earn money on advertising affect the optimal subscription price? 5. What are the implications of the expected launch plans for XM’s rival Sirius? 6. What revenue models should Robert Acker recommend that XM pursue to capture value from satellite radio? 7. Given the business model selected, what should the marketing plan for launching the XM service be? (Communication strategy, channel design, pricing and incentives). Case 10: Biopure Corporation (HBS 599-094) 1. What would you do? Give at least three reasons for launching and three for not launching Oxyglobin now. 2. Estimate the size of animal market potential (in units and in dollars). Calculations are expected. 3. Assuming that the Biopure decides to launch the Oxyglobin immediately, what price would you suggest and why? Calculations are expected. 22