Course Outline
RSM 455 H1F
Pricing
Fall 2012
Course meets: L0101 Thursdays 9-11 a.m. (WW 121) / L0201 Thursdays 11-1 p.m. (WW 119)
Instructor:
E-Mail:
Webpage:
Phone:
Office Hours:
Markus Christen (RT 5078)
markus.christen@insead.edu
Through Blackboard
416-946-3124
Tuesday 2:00-3:00 p.m.
Course Scope and Mission
Price setting is probably the most crucial of all marketing mix decisions. It is the only element
that makes a positive contribution to a firm’s bottom line; it is the most potent weapon to steal
market share from a competitor; it can be a signal of superior quality; it frequently strains the
relations with the best customers; and it is a common source of conflict within a company
between those concerned with costs and customer contact people.
Profitable pricing involves an understanding of both demand-side factors (e.g., consumer
willingness to pay) and supply side factors (e.g., costs). While traditional approaches have
revolved around an economic and financial framework, a broader and more pragmatic view
entails a comprehensive understanding of customer and competitor behavior—both at the level
of individual actors and the aggregate level of price sensitivities of the market.
In this course, we will approach the pricing decision as an intersection of economic, strategic,
and behavioural considerations using product categories as diverse as financial services,
healthcare, industrial products and consumer packaged goods. You will learn how to make proactive, value-based and profit-oriented pricing decisions, which requires learning how to
integrate different components to calculate profit-maximizing prices. More specifically, you will
understand:
1. the importance of the demand curve and customer value and willingness-to-pay in pricing
strategy and become familiar with methods of estimating them;
2. relevant costs in determining prices;
3. the impact of competition on pricing and learn how to anticipate actions and reactions;
4. the effect of non-price factors on price image and perceived value and become sensitive
to consumer behavior factors that play a large role in pricing effectiveness;
5. the impact of a distribution channel on pricing decisions;
6. different, innovative pricing strategies to customize prices; and
7. how to apply the concepts in a variety of business contexts.
Course Prerequisites
Principles of Marketing (RSM250)/MGT252H is the prerequisite course. It is recommended that
students be familiar with the material in introductory courses in economics and statistics.
Course Exclusions
RSM 351H
Required Readings
A required course packet with cases and readings is available at the bookstore. There might
also be some web-based readings, so check the portal (i.e., Blackboard).
Evaluation and Grades
Grades are a measure of the performance of a student in individual courses. Each student shall
be judged on the basis of how well he or she has command of the course materials.
Work
Class Participation
Case Write-up
In-class Presentation
Final Exam
Weight
10%
20%
25%
45%
Due Date
Ongoing
October 25, 2012
Different for each group (November 22 or 29, 2012)
During Faculty of Arts & Science final exam period
COURSE FORMAT AND EXPECTATIONS
1. Class Participation
Participation grades exist to reward those of you who add insights into the class discussion. All
students begin the year with an 8/10 in participation. This grade can increase (up to 10) when
students consistently make statements that enhance the classroom discussion. It can decrease
when students make statements that disrupt the discussion, or that repeat what is already
known. Unexplained and/or frequent absences from class will also reduce the grade. My
expectation is that the vast majority of the class receives 8/10, with a handful of exceptional
students above that and a smaller handful of others below.
I need to know who you are to give you credit for your contributions, so be sure to keep a name
card in front of you at all times. I encourage you to make yourself known to me by visiting my
office briefly for an informal introduction. Your task is to enhance my memory for you as an
intellectual and relevant contributor.
2. Case Write-Up
The purpose of the group project is to consolidate the ideas from the three cases. Each group
should answer the following three questions:
1. For The Medicines Company, we argued that a value-based pricing approach is superior
to price Angiomax. When is a cost-based pricing approach appropriate? (7 points)
2. In what ways do each of Virgin Mobile’s three pricing plans relate to cost and valuebased pricing? (6 points)
3. How do Virgin Mobile’s cost and value vary by customer segment? Link this to ideas in
the class discussions so far. (7 points)
The optimal group size for this assignment is 3 to 5 students. Write-ups are expected to be no
more than 7 pages including all tables, graphs, and figures; double-spaced, 12 point font, 1
inch margins. Please hand the project in as BOTH a hard copy and electronically through
blackboard.
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Please note that clear, concise, and correct writing will be considered in the evaluation of the
group case write-up. That is, you may lose points for writing that impedes communication: poor
organization, weak paragraph development, excessive wordiness, hard-to-follow sentence
structure, spelling mistakes and grammatical errors. Students who require additional support
and/or tutoring with respect to their writing skills are encouraged to visit the Academic Success
Centre
(www.asc.utoronto.ca)
or
one
of
the
College
Writing
Centres
(www.writing.utoronto.ca/writing-centres). These centres are teaching facilities – not editing
services, where trained staff can assist students in developing their academic writing skills.
There is no charge for the instruction and support.
3. In-Class Presentation
In groups of two or three, students will give a presentation to the class on a pricing topic of
their choice. You can choose a topic from the list below or pick your own. I will provide readings
and sources where appropriate. The presentation will be timed using a stopwatch and should
take no more than six minutes. The presentations will be on November 22 and November 29.
You are required to hand in the slide deck in hard copy of the day of your presentation.
Possible topics include: Competing with Wal-Mart, the “long tail”, grey markets, counterfeiting,
auctions, Google’s AdWords, luxury goods, holiday pricing, pricing open source products,
competitive bidding, pricing consulting services, pricing mutual funds, competing with iPhone,
pricing CPUs, pricing and network externalities, Farmville, Angry Birds, wikis, and the price of
advertising.
4. Final Exam
The final exam will test knowledge of all ideas covered in class. It will also involve applying the
class concepts to a particular pricing problem. Date and time of the exam will be provided by the
Registrar’s Office later in the semester. I will provide several sample questions and past exams
to help you study. We will have an optional exam review session (date TBA).
Both the case write-up and the in-class presentations require students to work in teams. When
working as a team, students are reminded of the following expectations with respect to their
behavior and contributions to the project:
Each team member is expected to:
•
•
•
•
•
Treat other members with courtesy and respect;
Establish a positive and productive team dynamic;
Contribute substantially and proportionally to the final project;
Ensure enough familiarity with the entire contents of the group project/assignment so as
to be able to sign off on it as originalw ork;
Meet the project timeline as established by the team. Learning to work together in teams is an important aspect of your education and preparation for
your future careers. Project work is often new to students; conflicts can - and do - occur.
Teams are collectively expected to resolve disputes or misunderstandings as soon as they
arise (and prior to submission of the final project). In cases where teams are unable to reach a
mutually agreeable solution, the entire team must meet with the Rotman Commerce Team
Coach** as soon as possible. The Coach will listen to the team and help develop options for
improving the team process. All members of the project team must commit to, and, utilize their
action plans.
**The Rotman Commerce Team Coach, Nikoleta Vlamis, may be reached via email
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at nikoleta@nikoletaandassociates.com for an appointment. Nikoleta is an expert in team
dynamics and facilitation. Note that Nikoleta’s role is to provide guidance, support and advice on
team matters – not to formally evaluate or assess teamwork for academic purposes.
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Weekly Schedule
Session
Date
Topic
Preparation
1
Sep
13
Course Introduction and Pricing
Fundamentals
R&Z Introduction
2
Sep
20
Demand Curves and Price
Elasticity
Exercise: Price Promotion Effects
D&S Chapter 3
3
Sep
27
Customer Value and WillingnessTo-Pay
Exercise: Adios Junk Mail
4
Oct
4
Perceived Value and Pricing
Psychology
Coca-Cola Vending Machine (NYT)
5
Oct
11
New Product Pricing
Case: The Medicines Company
6
Oct
18
Cost-Based Pricing
Smith & Nagle (1994)
Netessine & Shumsky (2002)
7
Oct
25
Competitive Pricing
Case: Virgin Mobile USA
8
Nov
1
Competitive Bidding
9
Nov
8
Product-line Pricing and Bundling
Exercise: Cambridge Software Co.
10
Nov
15
Retail Pricing Strategies
Case: Tweeter etc.
11
Nov
22
Project Presentations
–
12
Nov
29
Project Presentations
–
TBA
Exam Review Session
Final
Exam
TBA
by
FAS
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SESSION DESCRIPTIONS
Session 1: Course Introduction and Pricing Fundamentals
Economic analysis typically focuses on two extreme competitive conditions: monopoly and
perfect competition. Real pricing decisions occur in-between these two conditions, where there is
no simple price formula. Profitable pricing is more than finding the amount of money to charge a
customer for the exchange of a good, a number that is high enough to cover costs and low
enough to induce the buyer into buying. We develop the key steps of a systematic pricing
process to transform information about all relevant drivers into profitable pricing decisions.
Reading: Raju J and Zhang ZJ (2010), “Introduction: Fingerprints of the Invisible Hand,” Smart
Pricing, pp. 1–18, Wharton School Publishing.
Session 2: Demand Curve and Price Elasticity
A demand function summarizes how at an aggregate level, i.e., over many customers and
purchases the quantity demanded of a product changes as a function of different variables, most
notably price. A key factor of pricing decisions is the amount of quantity change in response to a
price change, which is expressed as price elasticity. We evaluate different challenges in
estimating price elasticity—for a category and for a brand.
Reading: Dolan RJ and Simon H (1996), “Price Response Estimation,” Chapter 3 in Power
Pricing, pp. 42–78, Free Press.
Exercise: Measuring Price Promotion Effects (INSEAD 506-054-1) – Data available through
Blackboard.
Session 3: Customer Value and Willingness-To-Pay
Instead of evaluating the overall demand, pricing decisions can also be made by evaluating the
value and the willingness-to-pay (WTP) of individual customers. This is particularly important in
business markets and for new product, where data are limited to estimate a demand function.
Value pricing seems everywhere today. But do customers actually know value and WTP and are
the willing to tell? We evaluate different methods to measure them.
Exercise: Adios Junk Mail (UV0317) – Data available through Blackboard.
Session 4: Perceived Value and Pricing Psychology
Value is as much a psychological concept as it is an economic factor, which is why it is the core
of thinking strategically about pricing. Value pricing assumes that the price follows from the value
that the firm creates for a customer. Often when customers are unable to assess the value or
quality of a product or service, they use price as a signal of quality. In other words, value follows
from price. To develop a pricing strategy, we need to take into account the way numbers and
prices are evaluated, i.e., we need to understand mental accounting.
Reading: Hays CL (1999), “Coke Tests Vending Unit That Can Hike Prices in Hot Weather,” New
York Times, October 28.
1. List arguments in favor of selling Coke through an interactive vending machine. Also list
arguments against it.
2. When, how, and for whom does this technology create value? Destroy value? Think
about segments within the soft drink market while answering this question.
3. Are there any non-economic pricing issues that can damage a firm?
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Session 5: New Product Pricing
Determining the price of a new product or service is particularly challenging. Usually, new
product pricing must be done with very little information about the drivers of pricing decisions.
The more unique the new product is, the greater the pricing challenge. Cost-plus pricing can
look conservative because cost information appears more reliable. A low price may be chosen to
ensure more sales because customer persuasion seems easier. We will apply different tools and
concepts developed so far in the course.
Case: The Medicines Company (HBS 9-502-006)
1. What is the value of Angiomax to a hospital?
2. What price should the Medicines Company charge for a dose of Angiomax? Why?
3. What do you think the adoption profile will look like for Angiomax? Will this be an easy
sell or a tough sell? Why?
Session 6: Cost-Based Pricing
For a ‘cost-plus’ pricing strategy, you still need to use the correct cost figures. There are many
different costs associated with developing, producing, marketing and selling a product or service.
A typical classification groups theses costs into variable and fixed costs. Some argue that the
latter should not affect a pricing decision and advocate the use of marginal costing; others argue
for full costing. Who is right? Why? If your costs are all fixed, should costs not be considered for
pricing decisions?
Readings: Smith GE and Nagle TT (1994), “Financial Analysis for Profit-Driven Pricing,” Sloan
Management Review, Spring, pp. 71–84.
Netessine S and Shumsky R (2002), “Introduction to the Theory and Practice of Yield
Management,” INFORMS Transactions on Education, 3(1).
Session 7: Competitive Pricing
Competition is another critical driver for pricing decisions. A price should not only be above a
firm’s relevant costs and below customer value; it must also be competitive. In other words, at
least some customers need to be better off with the firm’s offer than with other alternatives. As a
later entrant, Virgin Mobile must find a way to differentiate its offer to attract customers and be
profitable.
Case: Virgin Mobile USA: Pricing For The First Time (HBS 9-504-028)
1. Given Virgin Mobile’s target market (14-24 year olds), how should it structure its pricing?
The case lays out three options. Which option would you choose and why?
2. How confident are you that your plan will be profitable?
3. How do the major carriers make money in this industry? Is there a financial logic
underlying their pricing approach? 7 of 10
Session 8: Competitive Bidding
Price is a very potent marketing weapon. The problem is that competitors have access to the
same weaponry. So, an advantage gained by dropping prices can be rather short-lived because
any price decrease can easily be matched. When products are commoditized, customers often
use competitive bidding, which aims at obtaining goods and services at the lowest by stimulating
such competition. We evaluate how to use game theory to anticipate competitive reactions and
read signals.
Session 9: Product-Line Pricing and Bundling
Most firms sell multiple products with different quality levels and product features and thus
different prices. Since these products are related, individual prices cannot be set without
considering the effects, cannibalization, on other products in the line. Determining the length of
a product line and the different prices is a real challenge but a couple of simple principles help
improve these decisions. When products are complementary, a firm can choose to sell such
products as a bundle as well as individual components. Again, bundle price and individual prices
must be coordinated to yield higher profits.
Exercise: Cambridge Software Corporation (HBS 9-191-072)
1. If Cambridge Software Corporation offers only one version of Modeler, which version
should it offer? At what price?
2. Should the firm offer more than one version of Modeler? If so, which versions should it
offer? At what prices?
Session 10: Retail Pricing Strategies
The pricing challenges for retailers are much different than for manufacturers. For one, a retailer
must set prices of thousands different products or shop keeping units (SKUs). Moreover,
switching stores is much easier than switching products or services. In the face of much more
direct competition, price, promotions, and price-matching guarantees are often the weapon of
choice to increase store traffic. Some retailers use frequent price promotions (HI-LO) to attract
and retain customers; others like Walmart have adopted an everyday-low-price (EDLP) strategy.
Tweeter wants to reduce promotions. To remain price competitive and assure customers, it
offers a very unique price protection plan: automatic price protection (APP).
Case: Tweeter etc. (HBS 9-597-028)
1. Is Tweeter price competitive? Why or why not?
2. Who are Tweeter’s core customers and who are Tweeter’s competitors for these
customers? Are these the right target customers?
3. Has APP proven effective for Tweeter? How does APP fit with the buying behavior of
Tweeter’s customers?
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POLICY AND PROCEDURE
Missed Tests and Assignments (including midterm examinations)
Students who miss a test or assignment for reasons entirely beyond their control (e.g. illness)
may submit a request for special consideration. Provided that notification and documentation are
provided in a timely manner, and that the request is subsequently approved, no academic
penalty will be applied.
In such cases, students must notify Rotman Commerce on the date of the missed test (or due
date in the case of course work) and submit supporting documentation (e.g. a medical
certificate) to the Rotman Commerce Program Office within one week of the originally scheduled
test or due date. Students who do not provide Rotman Commerce or the instructor with
appropriate or sufficient supporting documentation will be given a grade of 0 (zero).
Note that the physician’s report must establish that the patient was examined and
diagnosed at the time of illness, not after the fact. Rotman Commerce will not accept a
statement that merely confirms a report of illness made by the student and documented
by the physician.
If students miss any assignment, the score on the final exam will count toward that portion of the
grade.
Late Assignments
All assignments are due at the beginning of class on the date specified in the course outline.
Late submissions will normally be penalized by 10% if the assignment is not received on the
specified date, at the specified time. A further penalty of 5% will be applied to each subsequent
day.
Students who, for reasons beyond their control, are unable to submit an assignment by its
deadline must obtain approval from the instructor for an extension. Supporting documentation
will be required as per the policy on missed tests and assignments.
Accessibility Needs
The University of Toronto is committed to accessibility. If you require accommodations for a
disability, or have any accessibility concerns about the course, the classroom or course
materials, please contact Accessibility Services as soon as
possible: disability.services@utoronto.ca or http://www.accessibility.utoronto.ca/.
Academic Integrity
Academic Integrity is a fundamental value essential to the pursuit of learning and scholarships at
the University of Toronto. Participating honestly, respectively, responsibly, and fairly in this
academic community ensures that the UofT degree that you earn will continue to be valued and
respected as a true signifier of a student's individual work and academic achievement. As a
result, the University treats cases of academic misconduct very seriously.
The University of Toronto’s Code of Behaviour on Academic Matters
http://www.governingcouncil.utoronto.ca/policies/behaveac.htm outlines the behaviours that
constitute academic misconduct, the process for addressing academic offences, and the
penalties that may be imposed. You are expected to be familiar with the contents of this
document. Potential offences include, but are not limited to:
In papers and assignments:
• Using someone else's ideas or words without appropriate acknowledgement.
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•
•
•
Submitting your own work in more than one course without the permission of the
instructor.
Making up sources or facts.
Obtaining or providing unauthorized assistance on any assignment (this includes
collaborating with others on assignments that are supposed to be completed individually).
On test and exams:
• Using or possessing any unauthorized aid, including a cell phone.
• Looking at someone else's answers
• Misrepresenting your identity.
• Submitting an altered test for re-grading.
Misrepresentation:
• Falsifying institutional documents or grades.
• Falsifying or altering any documentation required by the University, including (but not
limited to), medical notes.
All suspected cases of academic dishonesty will be investigated by the following procedures
outlined in the Code of Behaviour on Academic Matters. If you have any question about what is
or is not permitted in the course, please do not hesitate to contact the course instructor. If you
have any questions about appropriate research and citation methods, you are expected to seek
out additional information from the instructor or other UofT resources such as College Writing
Centres or the Academic Success Centre.
Email
At times, the course instructor may decide to communicate important course information by
email. As such, all UofT students are required to have a valid UTmail+ email address. You are
responsible for ensuring that your UTmail+ email address is set up AND properly entered on the
ROSI system. For more information please visit http://help.ic.utoronto.ca/category/3/utmail.html
Forwarding your utoronto.ca email to a Hotmail, Gmail, Yahoo or other type of email account is
not advisable. In some cases, messages from utoronto.ca addresses sent to Hotmail, Gmail or
Yahoo accounts are filtered as junk mail, which means that important messages from your
course instructor may end up in your spam or junk mail folder.
Blackboard and the Course Page
The online course page for this course is accessed through Blackboard. To access the course
page, go to the UofT Portal login at https://portal.utoronto.ca/ and log in using your UTORid and
password. Once you have logged in, look for the My Courses module where you’ll find the link to
all your course websites. If you don’t see the course listed here but you are properly registered
for the course in ROSI, wait 48 hours. If the course does not appear, go to the Information
Commons Help Desk in Robarts Library, 1st floor, for help, or explore the Portal Information and
Help at www.portalinfo.utoronto.ca/students and review the Frequently Asked Questions.
Recording Lectures
Lectures and course materials prepared by the instructor are considered by the University to be
an instructor’s intellectual property covered by the Canadian Copyright Act. Students wishing to
record a lecture or other course material in any way are required to ask the instructor’s explicit
permission, and may not do so unless permission is granted (note: students who have been
previously granted permission to record lectures as an accommodation for a disability are, of
course, excepted). This includes tape recording, filming, photographing PowerPoint slides,
Blackboard materials, etc.
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If permission is granted by the instructor (or via Accessibility Services), it is intended for the
individual student’s own study purposes and does not include permission to “publish” them in
anyway. It is absolutely forbidden for a student to publish an instructor’s notes to a website or
sell them in any other form without formal permission.
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