Win through service & pricing strategy

 JWI 515 Managerial Economics Week8 Summary, 12/2/12
************************************************

This was one of the most important weeks of learning for me as I recognize that the financial impact of following these principles can be huge for the firm. I will apply these concepts gainfully especially as I move through broader leadership roles.

Key economic concepts and practices in pricing strategy were discussed this week. Through the Jack Welch videos we learned the down side of price regulation and the importance of competing on true value proposition. We also learned how small companies can survive price wars by differentiating through value added service. Mark up pricing and price discrimination scenarios to maximize profits were explored.

I learned how important it is to watch for and guard against stupid pricing and financial decisions. Through the training in this class, I understand what I can do to guide a firm to profits with right pricing models.

The way I fill gas will never be the same again for me. The DQ helped me understand the market structure and various factors affecting gas prices.

Dr DP

JWI 515 Managerial Economics Week8 Summary, 12/2/12
*************************************************

I. Price Regulation  (Jack Welch video, week8)
***********************
Pricing controls on the down side are outrageously crazy. They do not give consumers or citizens the benefits of latest technology, goods at a value price. The idea of putting phony prices in place is plain wrong. It is not free market behavior. It stifles innovation.
It protects people. A price umbrella over a product for a sloppy provider charging too much with low productivity does not make sense. You don't want that to happen. You want people competing all the time on price to win your business. Get a value, a buy, exciting to get something that is a true value proposition - that is exactly what companies have to offer.

II. Price wars  (Jack Welch video, week8)
****************
Price wars are something you don't like to be in business eg book business.There are Price wars in any market segments with new entrants, people that have fallen behind offer lower price to keep up with market share. The idea here is you have to find something else ***different*** to offer eg. Service !

Small independent drug stores can compete with big chains through innovative service. They hold on through innovative service - they are open 24x7, and know the customers intimately ! Independent book sellers work this way - when new releases come, the owners call customer base over phone, knowing what customers will like - they got an intimacy that is so different. You gotta offer a value added service that is ***different** than price tag at outside of the book or toothbrush. Small independents do this to stay alive.
It is a tougher game to stay alive. Some people ignore the service. When done correctly, small independents can own the customer by treasuring the customer relationships; they won't give it up to the big bullies with the price wars.

III. Pricing Practices, Week8 Lecture1
*******************************************
(1) Profit maximization:
***************************
Competitive markets: P = MR = MC
Imperfect markets: Downward facing demand curve; P>MR; Maximum profit achieved at Price Pmax = MC/(1+1/Ep)
(2) Markup pricing done to achieve profit maximization
***********************
(3a) Price discrimination
*****************************
Price discrimination occurs when consumers who purchase and consume the product under different circumstances pay different prices (Dhewar, 2000). Different customers are charged different markups for the same product with the objective to capture consumer surplus for the seller.

(3b) For successful price discrimination to be successful
****************************************************************
(i) company must be able to segment the market
(ii) different segments must have different price elasticities
(iii) markets must be kept separate by time, distance or nature of use
(iv) there must be no leakage between two markets - consumers cannot resell at a higher price
(v) then assign markups to each segment
(vi) not violate antitrust laws (http://www.ftc.gov/bc/antitrust/price_discrimination.shtm)

(3c) First degree price discrimination: seller's market
*************************************************************
charge highest price buyers are willing to pay; seller attempts to capture all consumer surplus
(3d) Second degree price discrimination: quantity discounts
***********************************************
(3e)Third degree price discrimination: charge different prices for different groups of consumers
*******************************************

(3f) Various products are differentiated by their
********************************************
- physical, functional or performance characteristics
- place and/or time of purchase, duration between purchase and consumption, quantity purchased, restrictions on consumption

(4) Ways to charge different prices
****************************************
(4a) depending on store
****************************
Super market vs mom & pop:                   
Costs: Qty discount from suppliers;lower unit variable costs; efficient operations; lower spoilage; inventory-carrying costs; overheads;cheaper land
Convenience: Location; Time savings; lower risk from shorter travel

(4b) depending on location
*******************************
Spatial price discrimination: Charge a different price depending on Location
Business Environment factors: exchange rates, transportation costs, rents, qty discounts, overhead costs, competition
Demand variation: consumers in different geo markets have different preferences, needs, incomes, budgets, willingness to pay

(4c) Bundling
****************
series ticket concerts,sports,theater,suits vs pair of trousers and a jacket,airfare + hotel travel packages,fully loaded cars,fully applianced kitchens
special deals for camera with lenses, computer with monitor and software

(4d) Vary price over time - skimming
******************************************
experience curve - Price drops with Higher cum volume
competitive pressures
some will wait while some will pay premium for immediate consumption

(4e) Peak load pricing
**************************
customer segments - residential, commercial, industrial
somewhat elastic, inelastic, elastic
charge more for peak demand
Demand curves are different
Demand is higher during peak times; higher number of consumers with willingness to pay

(4f)Two part pricing - charge upfront + the charge usage fee
***********************

(4g) Bundle pricing - get customer to buy more with added value offerings
***********************

(5) Price based on Quantity consumed
*********************************************
Change charges based on total number of customers serviced; Volume of product consumed