PRICING STRATEGY AND POLICY MK-814 Professor Gerald Smith Introduction

Profitable pricing is the harvest of a companys efforts to create value for the customer. In surveys of marketing executives, pricing was named as the most critical pressure point that they faced. Knowledge of pricing is in high demand from those seeking careers in product management, financial management, and for those who plan to operate their own businesses. It is also valuable for those pursuing careers in new product development, advertising, and marketing research. This course focuses on the practical needs of the marketing manager. You will learn the techniques of strategic analysis necessary to price more profitably by: Evaluating the price sensitivity of buyers; Determining the relevant costs for a pricing decision; Anticipating and influencing competitors pricing; Formulating pricing strategies appropriate for the market.

You will also learn tactics required to implement pricing strategies, such as: Segmentation pricing, i.e., pricing differently to different market segments; Perceptual pricing, i.e., using price to enhance the perception of the products value; Coordinating pricing with other elements of the marketing mix.

The course will involve case analysis and numerous real-world pricing problems that show how to apply the techniques developed in the class lectures and discussions. Some of the cases and readings are classics that must be known. They provide a foundation of pricing knowledge. Others highlight current pricing issues from the service and network economies.

Course Policies
PREREQUISITES: An understanding of basic principles of marketing management. It will be helpful to know the fundamentals of cost accounting, but is not required.

TEXT:

Nagle and Hogan, The Strategy and Tactics of Pricing: A Guide to Profitable Decision-Making, 4th edition, PrenticeHall, 2006. A packet of cases, notes, and articles is available at the BC Bookstore and should be purchased as well. Regular class attendance is essential to develop a mastery of this subject. While you can read about the principles of pricing in the book, case analysis and class discussions are essential to master them. Approximately half of the class time will be devoted to these discussions, which will usually complement what is in the book. Everyone will be called on during case discussions. I particularly want you to be familiar with the evidence presented in the case, usually found in exhibits and tables. I am not impressed with simply rattling off some random piece of information found in some part of the text of the case.

OTHER MATERIALS:

CLASS PARTICIPATION:

EVALUATION:

Written homework exercises (2) Written case analyses (2) Financial Analysis Spreadsheet Model Class Participation

10% 45% 25% 20%

WRITTEN ASSIGS:

Because homework exercises and the written case analysis are discussed on the evenings they are due, no late papers will be accepted and there is no way to make up a missed assignment. Case writeups and assignments must be delivered to me in hard copy form; no email versions or email attachments. If you cannot attend a class meeting when a case writeup is due, ask someone else to bring it in a sealed envelope or mail it to me. If mailing from a long distance, please use Priority Mail or an air express service.

OFFICE HOURS:

My mailing address is: Dr. Gerald E. Smith 450A Fulton Hall Carroll School of Management Boston College Chestnut Hill, MA 02467

Please make sure that I have your email address so that we can communicate during the semester as necessary. My email address is: gerald.smith@bc.edu If you need to speak with me about matters relating to the class, you may contact me at my office number (617) 5520427. My office hours will be Monday 6-7 PM, or by appointment.

MK-814 SYLLABUS Fall 2006

DATE CLASS DISCUSSION TOPICS READINGS FOR CLASS (numbers in parentheses are page numbers)

Sep 11

STRATEGIC MANAGEMENT OF PRICING

Chapter 1 Basic Pricing Markup Formulas (17) Shapiro, Precision Pricing for Profit (9-32) Chapters 2 and 3 Medi-Cult Case (35-47)

Sep 18

VALUE CREATION AND ESTIMATION Determining Economic Value for a New Pharmaceutical (In-Class Exercise)

Determining Economic Value for a New Pharmaceutical (49) Medi-Cult: Pricing A Radical Innovation: Anderson and Narus, Business Prepare to discuss the following for in-class Marketing: Understand What discussion: (1) What are the features, Customers Value (51-61) benefits, and sources of value for IVM? (2) Forbis and Mehta, Value-based On what market segments should MediStrategies for . . . (63-77) Cult focus its efforts? (3) What is the Smith and Nagle, Pricing the economic value of IVM? (4) What price Differential (79-83) should Medi-Cult charge? Why? Smith Segmenting B2B Markets (85-89) Sep 25 PRICE STRUCTURE AND SEGMENTED PRICING Pricing at GENVET Pharmaceuticals (Prepare for in-class discussion) Is Chicken A Good Loss Leader (In-Class Exercise) Chapter 4

Pricing at GENVET Pharmaceuticals (91-92) Is Chicken A Good Loss (93) Harmer, Strategies for Segmented Pricing (95-100) Marn and Rosiello, Managing Price, Gaining Profit (101-114) Marn, Roegner, Zawada The Power of Pricing (115-127) Baker, Marn, and Zawada, "Price

Smarter on the Net" (129-134) Harris and Peacock, Hold My Place, Please (135-148) Simon and Dolan, Price Customization (149-155) Oct 2 PRICING POLICY, NEGOTIATED PRICING (SOVNOP) Deere & Company Industrial Equipment Operations: Prepare a 3 page written case analysis (+ exhibits no limit), and be ready to discuss the following question in class: How should Deere price the new JD750? You should be prepared to suggest a specific number and to defend your suggestions with reference to at least 3 areas of analysis: costs, customers, and competitive response. This is a very rich case. Do NOT get bogged down in related issues such as whether Deere should be entering this market at all, or whether its internal system for pricing is appropriate. Focus simply upon the immediate problem of how this new product should be priced and how the market will respond. Oct 16 COSTING FOR PRICING DECISIONS Case Discussion: Destin Brass Products. Do costing for 4 methods, all identified in the case: Standard Cost Accounting, Revised Standard Cost Accounting, Activity-Based Costing, and ContributionMargin Accounting (see Alfords comments on case page 4). Which method is right for pricing? Why? Chapter 6 Deere & Company: Industrial Equipment Operations (157-172) Karr, The Case of the Pricing Predicament (173-176) Nagle, How to Pull It Off (177180) Nagle, Evening the Odds in Price Negotiation (181-183) Abele, et al, Fighting for your price (185-193) Written Case Analysis Due: Deere & Company Industrial Equipment Operations Case

Chapter 8 Destin Brass Products Case (195204)

Cooper and Kaplan, Measure Costs Right (205-215) Cooper, The Rise of Activity Based Costing--Part 1 (217-226), for personal reference-skim) Kaplan and Anderson, TimeDriven Activity Based Costing Science Library, Inc.: Follow the assignment (227-234) as given in this exercise. Written Exercise Due: Science Library, Inc. (235-238) Oct 23 FINANCIAL ANALYSIS OF PRICING Chapter 9

DECISIONS Healthy Springs Water Company (Homework due for in-class discussion) Calibrated Manufacturing II (In-Class Exercise) Swing Versus Steady due next week

Smith and Nagle, Financial Analysis for Profit (239-254) Kiewell and Roegner, The CFO Guide to Better Pricing (255260) Healthy Springs Water (261-264) Calibrated Manufacturing II (265267) A Graphic Illustration of Calibrated Manufacturing (Handout) Note: Bring calculators and text.

Oct 30

PRICING STRATEGY Harper Chemical The Case of the Pricing Predicament

Chapter 7 Harper Chemical Company Case (269-294)

Nagle and Cressman Dont Just Set Please read these cases and prepare to explain Prices, Manage Them (295-299) during class discussion how you would deal Nagle, A Tale of Two Prices with these situations. (300-301) Shapiro, Performance-Based Pricing is More than Pricing (303-306) Swing Versus Steady due (307308) Nov 6 MANAGING PRICE COMPETITION An in-class exercise will be conducted in lieu of a case. Please be sure to arrive on time to avoid being excluded from this exercise, around which the remaining class discussion will revolve. Chapter 10 Nagle, Managing Price Competition (309-319) Brandenburger & Nalebuff, The Right Game: Use Game Theory to Shape Strategy (321-335) Rao, Bergen, Davis How to Fight a Price War (337-346) Smith, Euphoric Competitive Pricing and the Irrational Rush for Sales (347-348) Federated Industries (351-365) Written Case Analysis Due:

Nov 13

COMPETITIVE ADVANTAGE AND TRANSFER PRICING

 Federated Industries (A): Read the case and prepare a 3 page, double-spaced written case analysis of the following. Evaluate Federateds past management of this situation. What might Federated have done to manage the situation more effectively? If you were put in charge now, what would you do? Be explicit. How would you bid on the next round at TVA? Would you seek to increase market share, accept a loss in market share, or withdraw altogether? Do not waste space and time by reiterating the facts of the case or stating obvious platitudes. What I want to know is what you think about the situation this company faces and how you would deal with it. Nov 20

Federated Industries (A)

PRICING IN DISTRIBUTION CHANNELS Chapter 11 Arrow Electronics, Inc. (367-387) Arrow Case: What are the margins for Arrows different customer segments? Do Smith, Value-Based Pricing in they make sense? If you did a profit pools Marketing Distribution Channels analysis, which customer segment would [handout] offer the best leverage to increase profits by changing prices? What are key drivers or sources of value for each segment? What is the frame of reference and metrics in which value is realized? Which customers are high or low cost to serve? Why? Which customers are high price sensitive or low price sensitive? Why? For one segment recommend segmented pricing, including the following: product prices, service prices, line prices, brand prices, and cost to serve strategies. PRICING OVER THE LIFE CYCLE AND NEW PRODUCT PRICING American Airlines Case Discussion. Prepare to discuss the following: (1) How impressed are you with Crandalls new pricing initiative? (2) How well are different market segments targeted by it, Chapter 12 American Airlines Value Pricing (A) Case (389-413) Anderson and Narus, "Capturing the Value of Supplement (415-423) Bundschuh, et. al., How to Make After-Sales Services Pay Off

Nov 27

and how well does it properly use price to address the differing needs of these segments? (3) What are the drivers of price sensitivity for the different market segments? (4) What should Crandall do next?

(425-435) Marn, et. al., Pricing New Products (437-446) Beauregard Textile Company (447452): Financial Analysis and Spreadsheet Model Due Chapter 5 Marketing Antidepressants Case: Prozac and Paxil (453-480) Anderson and Simester, Mind Your Pricing Ques (481-489) Pricing and the Psychology of Consumption (491-496) Note on Behavioral Pricing (497508) Berry and Yadav, Capture and Communicate Value in the Pricing of Services (509-519) Chapter 14

Dec 4

VALUE COMMUNICATION AND THE PSYCHOLOGY OF PRICING Marketing Antidepressants Case: What is the value of Prozac and Paxil, and to whom is it valuable? How much should customers be willing to pay for these medications? For different customer segments think about how willingness to pay differs. How are firms able to charge different prices to different customer segments for the same product? What drivers of price sensitivity are involved?

Dec 11

LEGAL AND ETHICAL ISSUES IN PRICING Reprise: Beauregard Financial Analysis Spreadsheet Model Presentations