《供应链系统设计与管理》课程授课教案（讲义）Chapter 13（Lecture 12）Smart Pricing

全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter13(Lecture12)SmartPricingOBJECTIVES() Understand what are firms trying to achieve by controlling pricing(2) Grasp several strategies for charging different prices for the same or similarproducts(3)Understand thebenefits of dynamic pricingfor thefirms.TEACHINGCONTENT13.1IntroductionWe've always implicitly assumed that the demand is beyond thefirm's control.Inreality, this is far from true. Advertising, displays, and promotional tools all can beused to change the demand level to some extent.Most importantly,pricing is animportant tool to impact demand.Indeed, progressive companies use pricing as animportant lever to effectively manage the supply chain by managing the demandlevel.Dell's Pricing Strategy:Product pricedifferentbased ontypeofcustomer·Product price varies over time.Prices ofoptionsoffered alsovaryovertimeIBM is investigating software that will allow it to adjust prices according todemand.13.2PriceandDemandAll things being equal, demand for a product will typically go up as the product'sprice goes down. There are exceptions to this rule (in the case where consumersconsider price a signal of quality,for example), but these are few and far between.Ofcourse, certain products might be more or less sensitive to price change depending ontheir particular characteristics, but this general decrease in demand with increasingprice,thepropertyknown as the“downward-sloping demand curve,almost alwaysholds.e0

全英文课《Designing and Managin1g Supply Chain System》 授课教案 Chapter 13(Lecture 12) Smart Pricing OBJECTIVES (1) Understand what are firms trying to achieve by controlling pricing. (2) Grasp several strategies for charging different prices for the same or similar products. (3) Understand the benefits of dynamic pricing for the firms. TEACHING CONTENT 13.1 Introduction We've always implicitly assumed that the demand is beyond the firm's control. In reality, this is far from true. Advertising, displays, and promotional tools all can be used to change the demand level to some extent. Most importantly, pricing is an important tool to impact demand. Indeed, progressive companies use pricing as an important lever to effectively manage the supply chain by managing the demand level.Dell’s Pricing Strategy: • Product price different based on type of customer. • Product price varies over time • Prices of options offered also vary over time IBM is investigating software that will allow it to adjust prices according to demand. 13.2 Price and Demand All things being equal, demand for a product will typically go up as the product's price goes down. There are exceptions to this rule (in the case where consumers consider price a signal of quality, for example), but these are few and far between. Of course, certain products might be more or less sensitive to price change depending on their particular characteristics, but this general decrease in demand with increasing price, the property known as the “downward-sloping demand curve,” almost always holds

全英文课《DesigningandManagingSupplyChainSystem》授课教案13.2.1Example-SingleProductConsider a retailer selling a single item. Based on past experience, managementestimates the relationshipbetween demand,D, and price,p,by the linear function D=1,000-0.5p.This implies thatwhen theprice is $1,600,there isdemandfor200ofthe items.whileif the price is $1,200,there is demand for 400 of the items.Noticethat revenue equals price times demand at that price.Thus, the revenue at differentprice levels can be calculated, and is displayed in Table 13-1.Thus, when items are priced at a level of $1,000, revenue equalsl,000 × 500 x500,000,themaximumrevenue.Figure13-1depictsthedemand-pricecurve,wherethe shaded area represents total revenue.Table13-1PriceVersus RevenueDemandPriceRevenue$250875$218,750$500750$375,000625$750$468,750500$1,000$500,000375$1,250$468,750250$1,500$375,000P=1,000D-500Nunber of tensFigure13-1Demand-pricecurve13.3MarkdownsIn most cases, demand is random, and, we need to set inventory levels based onestimates of future demand.This implies that sometimes at the end of a selling season,there is remaining inventory.Thus, firms frequently employ a markdown, or sale, todispose of this excess inventory.To understand the concept of a markdown,demandneeds to be viewed in a slightly different way. Rather than considering aggregatedemand, which, as we know, decreases as price increases, think of the individualcustomers that make up that aggregate demand.Each of these customers has amaximum price that he or she is willing to pay for the productthis is known as thereservationprice

全英文课《Designing and Managin2g Supply Chain System》 授课教案 13.2.1 Example – Single Product Consider a retailer selling a single item. Based on past experience, management estimates the relationship between demand, D, and price, p, by the linear function D = 1,000 - 0.5p. This implies that when the price is $1,600, there is demand for 200 of the items, while if the price is $1,200, there is demand for 400 of the items. Notice that revenue equals price times demand at that price. Thus, the revenue at different price levels can be calculated, and is displayed in Table 13-1. Thus, when items are priced at a level of $1,000, revenue equals1,000 × 500 × 500,000, the maximum revenue. Figure 13-1 depicts the demand–price curve, where the shaded area represents total revenue. Table 13-1 Price Versus Revenue Figure 13-1 Demand-price curve 13.3 Markdowns In most cases, demand is random, and, we need to set inventory levels based on estimates of future demand. This implies that sometimes at the end of a selling season, there is remaining inventory. Thus, firms frequently employ a markdown, or sale, to dispose of this excess inventory. To understand the concept of a markdown, demand needs to be viewed in a slightly different way. Rather than considering aggregate demand, which, as we know, decreases as price increases, think of the individual customers that make up that aggregate demand. Each of these customers has a maximum price that he or she is willing to pay for the product—this is known as the reservation price

全英文课《DesigningandManagingSupplyChainSystem》授课教案13.3.1Markdown ConceptWhen thep=s1200,D=400,400 customers haveareservationpriceat or above$1200.When theprice isbelowtheir reservation price,theywill buy.The lowertheprice, the more customers with a reservation price at or above that price.Sell product to customers whose reservation prices were below the original price,but above the sale price.Traditionally,retailers have tried to avoid markdowns.Evidence of mistakes inpurchasing, pricing, or marketing.Low reservation price customers seen as:less desirable or profitable,useful toget rid of the excess inventory.13.4Price DifferentiationCustomers who are willing to buy at sales price were different than thecustomers who were willing to buy at original price. In fashion, some customers arevery fashion conscious, Eager to buy at the start of the selling season. Willing to paymore to have fashionable items first. Other customers are value-conscious, Willing towait until the end of the sales season. Unwilling to pay the same high prices as thefashionable customers.Different customers charged different prices can result inhigher revenue.13.5Revenue ManagementRevenue management has been described as “selling the right inventory unit tothe right type of customer, at the right time, and for the right priceRevenuemanagement techniques have been traditionally applied in the airline, hotel, and rentalcar industries.Anumberof characteristics are common to all these applications.Theseinclude:1.The existence of perishable products, that is,products that expire or areirrelevant after a certain date.2.Fluctuating demand.3.Fixed capacity of the system.4. Segmentation of the market based, for instance, on sensitivity to price orservicetime5.Products sold inadvance13.5.1CustomerSegments inAirlineIndustryLeisure travelers:Highly sensitive to priceNot generally sensitive to theduration of the trip· Willing to book non-refundable tickets far ahead of timeBusiness travelers:·Not particularly price-sensitiveHighly sensitive to trip duration.Need high flexibility to adjust their travel plans as needed

全英文课《Designing and Managin3g Supply Chain System》 授课教案 13.3.1 Markdown Concept When the p=$1,200, D=400, 400 customers have a reservation price at or above $1200. When the price is below their reservation price, they will buy. The lower the price, the more customers with a reservation price at or above that price. Sell product to customers whose reservation prices were below the original price, but above the sale price. Traditionally, retailers have tried to avoid markdowns. Evidence of mistakes in purchasing, pricing, or marketing. Low reservation price customers seen as: less desirable or profitable, useful to get rid of the excess inventory. 13.4 Price Differentiation Customers who are willing to buy at sales price were different than the customers who were willing to buy at original price. In fashion, some customers are very fashion conscious, Eager to buy at the start of the selling season. Willing to pay more to have fashionable items first. Other customers are value-conscious, Willing to wait until the end of the sales season. Unwilling to pay the same high prices as the fashionable customers. Different customers charged different prices can result in higher revenue. 13.5 Revenue Management Revenue management has been described as “selling the right inventory unit to the right type of customer, at the right time, and for the right price”. Revenue management techniques have been traditionally applied in the airline, hotel, and rental car industries. A number of characteristics are common to all these applications. These include: 1. The existence of perishable products, that is, products that expire or are irrelevant after a certain date. 2. Fluctuating demand. 3. Fixed capacity of the system. 4. Segmentation of the market based, for instance, on sensitivity to price or service time. 5. Products sold in advance. 13.5.1 Customer Segments in Airline Industry Leisure travelers: • Highly sensitive to price • Not generally sensitive to the duration of the trip • Willing to book non-refundable tickets far ahead of time Business travelers: • Not particularly price-sensitive • Highly sensitive to trip duration • Need high flexibility to adjust their travel plans as needed

全英文课《DesigningandManagingSupplyChainSystem》授课教案SensittvitytodurationSensitivirytoflexibiliryLoNoLeisuretravelersdemandNoBusinessoffertravelersHighSensttivitytopriceLowHighFigure 13-2 Customer differentiation in the airline industryOnce these distinctions have been made, revenue management strategies focuson determining howmany of eachtype of ticketto offer,and howmuch to priceforeach ticket.For historical reasons, this decision is divided into two parts. Since the1960s,airlines have used computerized reservation systems to book flights.Whenrevenue management was introduced, it was designed so that it could be used withtheserelativelyinflexiblesystems.For this to be possible, revenue management at airlines has two key steps:1.Market segmentation.For a specific time and flight (origin to destination),different products are designed and priced to target different market segments.Theseproducts feature different restrictions; they may be,for example,nonrefundable, oronly availableup to21 days before the flight.2.Booking control. Given products and prices, the booking control systemallocates available seats to fare classes,ingeneral by setting limits on the number ofseats that can be allocated to lower fare classes13.6SmartPricingIndeed, the pricing strategies applied by Dell, Nikon, Sharp, and Boise CascadeOfficeProducts haveonething in common.Thesecompanies usepriceasatool toinfluence customer demand and, hence, they apply the underlying principles ofrevenue management techniquesto their respective industries.As in airline revenue management, various firms employ two different butrelated fundamental approaches: charging different prices to different customers,differential pricing, and charging different prices over time, dynamic pricing13.6.1Differential PricingIf all customers arechargeda singleprice,thencustomers whowerewillingtopay a higher price for a product will end up paying a lowerprice than they wouldhavethe objective of differential pricing is to charge different customers differentprices according to their price sensitivity. Dell does this by distinguishing betweenprivate consumers, small or large businesses, government agencies, and health careproviders. Of course, it is frequently difficult to do this. Robert Philips identifiesseveral strategies for charging different prices for the same or similar products:

全英文课《Designing and Managin4g Supply Chain System》 授课教案 Figure 13-2 Customer differentiation in the airline industry Once these distinctions have been made, revenue management strategies focus on determining how many of each type of ticket to offer, and how much to price for each ticket. For historical reasons, this decision is divided into two parts. Since the 1960s, airlines have used computerized reservation systems to book flights. When revenue management was introduced, it was designed so that it could be used with these relatively inflexible systems. For this to be possible, revenue management at airlines has two key steps: 1. Market segmentation. For a specific time and flight (origin to destination), different products are designed and priced to target different market segments. These products feature different restrictions; they may be, for example, nonrefundable, or only available up to 21 days before the flight. 2. Booking control. Given products and prices, the booking control system allocates available seats to fare classes, in general by setting limits on the number of seats that can be allocated to lower fare classes. 13.6 Smart Pricing Indeed, the pricing strategies applied by Dell, Nikon, Sharp, and Boise Cascade Office Products have one thing in common. These companies use price as a tool to influence customer demand and, hence, they apply the underlying principles of revenue management techniques to their respective industries. As in airline revenue management, various firms employ two different but related fundamental approaches: charging different prices to different customers, differential pricing, and charging different prices over time, dynamic pricing. 13.6.1 Differential Pricing If all customers are charged a single price, then customers who were willing to pay a higher price for a product will end up paying a lower price than they would have—the objective of differential pricing is to charge different customers different prices according to their price sensitivity. Dell does this by distinguishing between private consumers, small or large businesses, government agencies, and health care providers. Of course, it is frequently difficult to do this. Robert Philips identifies several strategies for charging different prices for the same or similar products:

全英文课《DesigningandManaginSupplyChainSystem》授课教案Group pricing.The practice of giving discounts to specific groups of customersis very common in many industries.Senior citizen discounts at diners, softwarediscounts to universities, student discounts at movie theaters, and “ladies night"atbars are all examples of grouppricing.Of course,thesetypes of discounts will workonlyfor groups in which thereis a correlation between group members and pricesensitivity.Channel pricing.This is the practice of charging different prices for the sameproduct sold through different channels. For example, many firms sell certainproducts at different prices on their Web sites and in their retail stores. Airlines maysell tickets at different prices on their Web sites versus through travel agents. Again,this will work only if customers who use different channels have different pricesensitivities.Regional pricing.This is the practice of exploiting different price sensitivities atdifferent locations.For example, beer is muchmore expensive in a typical stadiumthan in a bar, yet beer sells very well at baseball games. Similarly, many supermarketscharge different prices at different locations, and brandname retailers operate outletmallsinrelativelyinconvenientlocationswithsignificantlylowerprices.Time-based differentiation. Otherwise similar products can be differentiatedbased on time. For example, Amazon.com charges different rates for different deliverytimes. It is likely that this difference in delivery price is different than Amazon's costit is a techniquefor segmenting price-sensitive customers and customers who aremore delivery-time sensitive.Similarly,Dell charges different prices for repaircontracts that complete repairs in different amounts of time (overnight versus within aweek,forexample).Product versioning.If it is impossible to offer differential pricing for identicalproducts, it is common to offer slightly different products in order to differentiatebetween customers with different price sensitivities. This may take the form ofbranding. Similarly, nationally known brand-name manufacturers also may sellproducts to consumers under house or generic brands. Manufacturers may createproduct lines, selling inferior and superior products to consumers of different pricesensitivities even though the difference in cost of the products is substantially lessthan the price difference. Home appliance and electronics manufacturers frequentlycreate product lines of related goods, where additional features are added to productsat the higher end of the line. High-end buyers are inclined to buy the higher-endproducts in the line,even though they may cost significantlymore than the lower-endproducts although they cost verylittle more to manufacture.Coupons and rebates.Many firms use coupons and rebates to distinguishbetween customers that place a high value on time or flexibility and those who arewilling to spend the time to get a lower price by using a coupon or submitting a rebateform.Retailers and manufacturers offer couponsthrough newspapers ormagazinesand advertise mail-in rebates at the point of sale. This is done by adding a significanthurdletothebuyingprocess,to receivetherebate,you haveto complete andmail thecoupon to the manufacturer. The assumption is that those customers willing to pay thehigher price will not necessarily send the coupon. Of course, the problem with that

全英文课《Designing and Managin5g Supply Chain System》 授课教案 Group pricing. The practice of giving discounts to specific groups of customers is very common in many industries. Senior citizen discounts at diners, software discounts to universities, student discounts at movie theaters, and “ladies night” at bars are all examples of group pricing. Of course, these types of discounts will work only for groups in which there is a correlation between group members and price sensitivity. Channel pricing. This is the practice of charging different prices for the same product sold through different channels. For example, many firms sell certain products at different prices on their Web sites and in their retail stores. Airlines may sell tickets at different prices on their Web sites versus through travel agents. Again, this will work only if customers who use different channels have different price sensitivities. Regional pricing. This is the practice of exploiting different price sensitivities at different locations. For example, beer is much more expensive in a typical stadium than in a bar, yet beer sells very well at baseball games. Similarly, many supermarkets charge different prices at different locations, and brandname retailers operate outlet malls in relatively inconvenient locations with significantly lower prices. Time-based differentiation. Otherwise similar products can be differentiated based on time. For example, Amazon.com charges different rates for different delivery times. It is likely that this difference in delivery price is different than Amazon's cost —it is a technique for segmenting price-sensitive customers and customers who are more delivery-time sensitive. Similarly, Dell charges different prices for repair contracts that complete repairs in different amounts of time (overnight versus within a week,for example). Product versioning. If it is impossible to offer differential pricing for identical products, it is common to offer slightly different products in order to differentiate between customers with different price sensitivities. This may take the form of branding. Similarly, nationally known brand-name manufacturers also may sell products to consumers under house or generic brands. Manufacturers may create product lines, selling inferior and superior products to consumers of different price sensitivities even though the difference in cost of the products is substantially less than the price difference. Home appliance and electronics manufacturers frequently create product lines of related goods, where additional features are added to products at the higher end of the line. High-end buyers are inclined to buy the higher-end products in the line, even though they may cost significantly more than the lower-end products although they cost very little more to manufacture. Coupons and rebates. Many firms use coupons and rebates to distinguish between customers that place a high value on time or flexibility and those who are willing to spend the time to get a lower price by using a coupon or submitting a rebate form. Retailers and manufacturers offer coupons through newspapers or magazines and advertise mail-in rebates at the point of sale. This is done by adding a significant hurdle to the buying process; to receive the rebate, you have to complete and mail the coupon to the manufacturer. The assumption is that those customers willing to pay the higher price will not necessarily send the coupon. Of course, the problem with that

全英文课《DesigningandManagingSupplyChainSystem》授课教案assumption is that, unlike traditional revenue management techniques,mail-in rebatesdo not incorporate fences that will prevent customers willing and able to pay thehigher price from sending their coupon back and claiming the discount. Thus, mail-inrebates require a more detailed analysis.QUESTIONS1. Consider a retailer selling a single item. Based on past experience, managementestimates the relationshipbetween demand, D,and price,p, by the linearfunctionD2,000 -0.6p.At what price is revenue maximized.What if the retailer can charge twodifferent prices? Can you find a set of prices that will increase profit in this case?2.Find a specific example of each of the following.Explain the benefit to thefirm ineach case:a.Group pricingb.Channel pricingc.Regional pricingd.Time-based differentiatione.Productversioningf.Couponsandrebates3.In this chapter,we discussed the success of revenuemanagement in theairlineindustry.If this is the case, why are so many airlines in financial trouble?4.Consider dynamic pricing strategies and theirimpact on profit.Explain whydynamic pricing provides significant profit benefit over (the best)fixed-price strategyasa.Available capacity decreasesb.Demanduncertaintyincreasesc.Seasonalityindemandpatternincreases5. Identify two companies for whom regular sales might make sense. Identify two forwhom an everyday-lowprice strategy might be more sensible.Explain your choices.6.Discuss why it is not necessarily correct to consider a retailer markdown indicativeofanorderingmistakebytheretailer.7.Consider a bicycle retailer. When might it make sense for the retailer to lowerprices, and when might it make sense to raise prices? Why?8.Consider the strategy that Coca-Cola was considering employing to dynamicallychange prices based on external temperature. Discuss the advantages anddisadvantages of this strategy.If Coke decided to adopt this strategy,how might theybestgoabout overcomingconsumerresistance?

全英文课《Designing and Managin6g Supply Chain System》 授课教案 assumption is that, unlike traditional revenue management techniques, mail-in rebates do not incorporate fences that will prevent customers willing and able to pay the higher price from sending their coupon back and claiming the discount. Thus, mail-in rebates require a more detailed analysis. QUESTIONS 1. Consider a retailer selling a single item. Based on past experience, management estimates the relationship between demand, D, and price, p, by the linear function D 2,000 - 0.6p. At what price is revenue maximized. What if the retailer can charge two different prices? Can you find a set of prices that will increase profit in this case? 2. Find a specific example of each of the following. Explain the benefit to the firm in each case: a. Group pricing b. Channel pricing c. Regional pricing d. Time-based differentiation e. Product versioning f. Coupons and rebates 3. In this chapter, we discussed the success of revenue management in the airline industry. If this is the case, why are so many airlines in financial trouble? 4. Consider dynamic pricing strategies and their impact on profit. Explain why dynamic pricing provides significant profit benefit over (the best) fixed-price strategy as a. Available capacity decreases. b. Demand uncertainty increases. c. Seasonality in demand pattern increases. 5. Identify two companies for whom regular sales might make sense. Identify two for whom an everyday-lowprice strategy might be more sensible. Explain your choices. 6. Discuss why it is not necessarily correct to consider a retailer markdown indicative of an ordering mistake by the retailer. 7. Consider a bicycle retailer. When might it make sense for the retailer to lower prices, and when might it make sense to raise prices? Why? 8. Consider the strategy that Coca-Cola was considering employing to dynamically change prices based on external temperature. Discuss the advantages and disadvantages of this strategy. If Coke decided to adopt this strategy, how might they best go about overcoming consumer resistance?