Syllabus ITRN 734
Jack High
School of Public Policy, GMU Spring Semester 2001
Commerce Hall 261 Thursday 7:20-10:00
Telephone: (703) 993-1864 ARL 269
Electronic mail: highdj@mindspring.com
Objective: To learn the principles and techniques of pricing that will enable your organization to effectively pursue its mission.
Texts: The Strategy and Tactics of Pricing by T. Nagle and R. Holden (Prentice Hall, 2002); various cases and readings as enumerated below.
Grades: Grades will be determined by a mid-term examination(35%), on-line and in-class discussion (35%), and a team-written paper on pricing (30%).
Office Hours: Thursdays, 5:00 – 6:00 p.m. and by appointment.
Schedule:*
|
WEEK |
SUBJECT |
CASE |
CASE# |
TEXT |
|
Aug 29 |
Elements of Strategy |
Pricing in New Order |
9-999-003 |
Chapter 1 |
|
Sep 5 |
Pricing & Costs |
ACE Manufacturing |
On-line |
Chapter 2 |
|
Sep 12 |
Pricing & Finance |
Swing vs. Steady |
On-line |
Chapter 3 |
|
Sep 19 |
Pricing & Customers |
Cumberland Metals |
9-580-104 |
Chapter 4 |
|
Sep 26 |
Pricing & Competition |
Pricing Game |
In-class |
Chapter 5 |
|
Oct 3 |
Strategic Pricing |
Marlboro Friday |
9-596-001 |
Chapter 6 |
|
Oct 10 |
Mid-term |
|
|
|
|
Oct 17 |
Life Cycle Pricing |
Deere & Company |
9-577-112 |
Chapter 7 |
|
Oct 24 |
Pricing Across Borders |
Xanadu |
Handout |
|
|
Nov 7 |
Customer Negotiation |
Charlestown Chemical |
9-590-024 |
Chapter 8 |
|
Nov 14 |
Segmented Pricing |
Genvet Pharmaceutical |
In-class |
Chapter 9 |
|
Nov 21 |
Price in Marketing Mix |
Chicken Loss Leader |
In-class |
Chapter 10 |
|
Nov 28 |
Thanksgiving |
|
|
|
|
Dec 5 |
Legal Issues in Pricing |
The Price |
video |
Chapter 14 |
|
Dec 12 |
Review |
|
|
|
|
Dec 19 |
Papers Due |
|
|
|
*This schedule is subject to minor change. In particular, the cases in the last half of the course are likely to be changed. I will post the final cases we will use by the first day of class.
#1 Nagle and Holden, Chapter 1: Strategic Pricing.
Questions. The solvents division of the Somerset Corporation is one of many producers of a popular industrial solvent. During this past year they priced this product at $8 per bottle. They arrived at this price by applying the directive from the corporate office that the solvents division should earn a net profit of at least $80,000 to their projection that 100,000 units would be sold during the year. Their thinking can be summarized as follows:
Projected unit sales 100,000
Revenue $800,000 ($8/unit x 100,000 units)
Variable Costs -300,000 ($3/unit x 100,000 units)
Fixed Costs -420,000
Net profit 80,000
However, unit sales for the year were only 80,000, so instead of making $80,000 in net profits, the division lost $20,000. The president of the solvents division is now making the pricing decision for the upcoming year. His current thinking is summarized in the following quotation: “This past year’s problem is that we did not do a good job of predicting sales. Now that we know we can sell 80,000 units, we can price this product so that we can make the $80,000 net profit that corporate headquarters wants.”
a) Compute the price per unit that is implied by the president’s current thinking. (Assume that fixed and variable costs will be the same this year as last.)
b) Do you agree with the president’s current thinking? Why or why not?
#2 Nagle and Holden, Chapter 2: Costs.
Ace Manufacturing (on-line). Ace Manufacturing has an opportunity to use its existing plant to make additional parts, which the competition will force them to sell at a low price.
a. What is Ace’s relevant unit cost for making its pricing decision?
b. Is the business sufficiently profitable to make bidding worthwhile?
#3 Nagle and Holden, Chapter 3 (including appendices): Financial Analysis
Cheesie Pizza is currently selling 1500 pizzas per week at a price of $8. Cheesie’s average variable costs, which are constant, are $2.60/pizza. Non incremental fixed costs are 40% of current revenue. Cheesie’s management believes that demand would be stimulated by a 5% price decrease, but is hesitating to implement this price cut; if sales were to exceed 1500 per week they would need to buy a additional pizza oven and expand the shop to make room for it. The new oven would increase production capacity by 750 pizzas per week. All of the costs of the new oven (expansion, interest, depreciation, maintenance, etc.) would add $140/week to the shop’s fixed costs. Cheesie’s owners call you in as a consultant to help them with this decision.
a) Prepare a break-even table for sales changes from 0% to 20% at 5% intervals.
b) Write a clear, concise explanation to Cheesie’s management about how to use the table.
Swing vs. Steady (on-line). Swing and Steady, two manufacturing companies with different cost structures, share the market for widgets and charge the same price. Each is considering lowering its price to capture an additional 40% of industry sales. We will use the contribution margins of each company to evaluate the advisability of various pricing tactics.
#4 Nagle and Holden, Chapter 4: Customers.
1. Find and photocopy a print advertisement. Be prepared to show the ad (make an overhead transparency) and to explain how it is trying to influence price sensitivity.
2. Despite higher rates for commercial space and hired help, big cities often offer lower prices for stereo equipment, clothing, and many other products than small towns. Can you explain this?
Cumberland Metals. Cumberland Metal Industries had 1979 net sales of $18.5 million, down 10% from 1978. Net income had declined 39% and prompted the firm to pursue new applications of its curled metal fabrication technology. The company has apparently discovered a cure for its ills with a new product, curled metal pile driver pads. Two field tests show that the pads offer customer benefits many times the company’s cost. Management believes that a successful introduction will double sales. Thomas Simpson, group manager of the Mechanical Products Group, is responsible for the development of a marketing plan to introduce the new product. Of particular concern is the price to charge for the pads in light of the benefits provided.
1. What price do you recommend for the curled metal pads? Why?
2. Is it more important to earn high returns or go for market share?
3. How are you going to market these pads?
#5 Nagle and Holden, Chapter 5: Competition.
We will play several rounds of Win As Much As You Can, a pricing game intended to illustrate the principles we have studied in chapter 5 of Nagle and Holden.
1. A company can gain a substantial market share advantage with lower prices in a price sensitive market. Why then would any company in such a market choose to price cooperatively?
2. The management of We Are Chicken, a local fast food company, believes that the high prices charged by the company and its competitors are hurting the company and the industry. As a result, the company is planning to cut its prices by 10%. However, management is concerned that their action will start a price war among competing fast food stores. Should management be concerned about a price war? What are the likely effects on the company? What steps can management take to prevent one?
#6 Nagle and Holden, Chapter 6: Strategy.
1. How would you characterize the pricing strategies for the following products and retailers?
Pepperidge Farm Cookies Verizon Cellular Telephone
CITGO Gasoline Nexxus Shampoo
Land O’ Lakes Butter Dell Computers
Windows Operating System T. J. Maxx Clothing
Kodak Film Bloomingdales
2. Safe Seat Manufacturing has developed a new type of seat belt that is easier to install and more comfortable to wear than seat belts now in use. Standard seat belts sell to automobile manufacturers for $5.00 each; the labor costs to install them is $3.00 each. The new belts take 10% less time to install, resulting in a labor cost of $2.70 per belt. Safe Seat’s marketing research has discovered that car buyers would be willing to pay $50.00 more for a car equipped with the new belts. Since car manufacturers normally earn a 50% mark-up, this equals an added profit of $25.00 per car. The cost to Safe Seat of the new belt is $10.00 per car and the current strategy calls for a price of $15.00 each. A typical car requires 5 seat belts.
a) What is the economic value of the new seat belt to automobile manufacturers?
b) Which pricing strategy does Safe Seat appear to have adopted? Is it a sound strategy?
#7 Mid Term Examination
#8 Nagle and Holden, Chapter 7: Life Cycle Pricing.
1. What are the four phases of the product life cycle? Do all products follow the same pattern? Why does consumer price sensitivity change over the product life cycle? At what stage is the consumer the least price sensitive? The most? Does this hold true for all products? Explain.
2. Although consumers may be relatively price insensitive toward an innovative product, manufacturers will offer a low price to the distributors and retailers. Why?
Deere and Company. In November 1976, Robert Gerstenberger, vice president for Industrial Equipment Operations, needed to set a price for his crawler tractor line with particular emphasis on the about-to-be-introduced JD750. The JD750 is considerably larger than Deere’s other tractors and represents a major competitive attack on Caterpillar, an exceedingly strong and able competitor.
1. What is Deere’s general pricing strategy?
2. What price would you choose for the JD750? (Be prepared to fully justify the price you recommend.)
#9 Dolan and Simon, Chapter 6: International Pricing
American Bio-research, a U.S. pharmaceutical company, began marketing a new over-the-counter pain reliever, Xanadu, in both the U.S. and Mexico in January of 1994. The firm priced Xanadu at $4.49 to the trade (i.e., to drugstores) in the U.S. and 33.67 pesos in Mexico for 100 tablets. American Bio’s variable cost for 100 tablets was $2.00. The exchange rate at the time was 7.5 pesos per dollar. In late December of 1995 the exchange rate began to fall and by January it had reached 9 pesos to the dollar.
a) Calculate break-even sales figures for 10% and 20% price increases in 1994.
b) In January 1995, how much would it cost a drugstore in the U.S. to purchase 1,000,000 tablets (a typical order) in the U.S.? In Mexico?
c) American Bio noticed that its Mexican sales of Xanadu rose about 25%, from 8 million units to 10.4 million units, in early 1995. Simultaneously, its sales in the western U.S. dropped by an almost identical amount. The company attributed this to the gray market. Calculate the break-even sales figures for 10% and 20% increases in the Mexican market in March 1995. What course of action would you recommend to American Bio? Why?
#10 Nagle and Holden, Chapter 8: Customer Negotiation.
1. What is the buying center and what are the various roles within it? What influence does each member of the buying center have over the purchase decision? What are some possible job titles for each member of the buying center?
Charlestown Chemical. 9-590-024. William Todd, director of purchasing for Charlestown Chemical, has been informed, quite unexpectedly, of a 36% price increase on muriatic acid. This essential production item is being sourced from a single company, Puritan Chemicals, and Todd has no comparable supplier as a potential second source. Todd spends three months negotiating a price reduction.
1. When the price increase was announced on June 15th, what were the strengths and weaknesses of Puritan’s position? Of Charlestown Chemical’s?
2. What are the strengths and weaknesses of these negotiating positions as of September? Evaluate Lee Chemical’s position.
3. Evaluate Todd’s negotiating strategy.
4.
#11 Nagle and Holden, Chapter 9: Segmented Pricing
1. For one company in one of the following industries, determine the different prices that it charges for a similar product or service. Then answer the following questions:
Among which segments is the company distinguishing?
What tactic does the company use to accomplish its segmentation?
Which factor--cost, price sensitivity, or competition--makes it profitable to segment these markets?
a) car rental companies b) hotels c) beauty salons d) health spas e) restaurants f) stereo component retailers g) bowling alleys
Pricing at Genvet Pharmaceuticals, an on-line case.
#12 Nagle and Holden, Chapter 10: Pricing in the Marketing Mix.
1. Other than those in the text, give some examples of goods that are substitutes. Complements.
2. For many years, IBM used legal threats to prevent mail order retailers from selling its line of personal computers. IBM earns the same wholesale price regardless of whether its products are sold by a mail order or by a full-service computer retailer. Why then would IBM want to discourage mail order sales?
Is Chicken a Good Loss Leader? (on-line case)
#13 Thanksgiving
#14 Nagle and Holden, Chapter 14: The Law and Ethics of Pricing.
1. Your company might face situations similar to the following. Explain whether the practice is legal, illegal, or gray, meaning it may or may not be legal depending on the circumstances.
a) The price of your product varies according to a quantity discount schedule. The schedule is unrelated to costs, reflecting simply the greater price sensitivity of customers who buy in larger quantities.
b) A mail order company has begun to sell your prestige luggage at a 30% discount. The department stores that sell your luggage at list price complain to you. You refuse to fill the mail order company’s next order, explaining that you no longer wish to have that company sell your product.
c) You have developed a new letter-quality printer that you intend to sell for only $199, a price that includes very little profit. You plan to profit handsomely, however, from the sale of ink cartridges for the printer, which you have priced at $60, even though it costs just under $10 to make them.
The Price. (In-class video.)
#15 Course Review
#16 Projects Due