The Ohio State University
Fisher College of Business
Pricing Strategy and Tactics
M & L 851
Fall, 2008
Larry M. Robinson
636 Fisher Hall
Ph: 292-0680
Office Hours: Monday and Wednesday, 10 to 2 pm to 5 pm, Tuesday 3 pm to 5:30 pm, and by appointment
Email: [email protected]
Course Objectives:
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Develop understanding of principles managers follow to make effective pricing decisions
Learn how to do economic value estimation (EVE) for a product or service offered to a specific market or
for a specific use
Learn how to perform managerial price sensitivity analysis (MPSA) which identifies factors that
influence price sensitivity when making judgments about the importance of price in a buyer’s purchase
decision
Recognize the objective of price competition is not to win market share, but to maximize long-term
profitability
Become able to analyze pricing concepts related to: new products, pricing changes, bundling/versioning,
yield management/revenue management, & price wars
Develop ability to integrate pricing decisions with product, promotion and channel management decisions
Textbooks and materials
The Price Advantage, by Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, John Wiley & Sons, Inc.,
Hoboken, New Jersey, 2004.
Cases and readings that apply to each class session: Readings are available on the course web site on Carmen
under the “articles” tab. The cases are in a course packet at UniPrint.
Course web site: The course web site on Carmen has the syllabus, articles for outside reading, example course
projects, bio sketches and PowerPoint slides for guest lectures, PowerPoint slides for each week, takeaways from
cases, reading list of pricing resources, and links to additional resources about pricing.
PowerPoint presentations for each class session will be posted on the course web site before class.
Guest speaker bio sketches will be posted on the course web site, along with PowerPoint presentations for
each guest speaker.
Course Overview:
Professor Raymond Corey at Harvard Business School wrote in the early 1960s that “Pricing is the moment of
truth---all of marketing comes to focus in the pricing decision”. This course is intended to provide the
knowledge required to make the “moment of truth” be a successful one for the firm. Our emphasis will be on
strategies and tactics to set initial prices for a product or service and to react to competitive forces as the product
or service goes through its life cycle.
But strategic pricing is about much more than just setting prices. It is about targeting markets that can be served
profitably, communicating information that justifies price levels, and managing pricing processes and systems to
keep prices aligned with value received.
Pricing is a multidisciplinary and multifunctional subject. Financial, operational, marketing, and legal
considerations are involved in setting and administering pricing strategies and tactics. It is the responsibility of
senior management to determine the pricing policies and procedures intended to produce optimal sales and profits
for the firm.
There are many issues which require attention in arriving at the pricing strategy and tactics for a company. Few
business managers who participate in setting and implementing pricing strategies have any formal training in this
very important business activity. Many business schools offer courses in pricing. As of 2008, 32 of the 50 United
States business schools ever ranked in the top 30 by Business Week, USNews & World Report, or Financial
Times offer pricing as an elective in MBA programs. Also, many major businesses have established separate
administrative functions for their pricing analysis and decision making. Pricing departments are common in such
industries as pharmaceuticals, chemicals, airlines, hotels, car rentals, computer software, waste removal and retail
consumer products markets. Technology to enable and support pricing decisions is widely available from such
firms as Manugistics, PROS, Revenue Technologies, The Rubicon Group, Zilliant, and Demandtec. Pricing
consulting is a major area of consulting engagements at McKinsey, Deloitte, and other major consultancies. A list
of pricing consultants and pricing software companies can be found at www.pricingsociety.com .
The professional practice of pricing management is supported by several organizations and publications. The
Pricing Institute founded in 1987 as a division of International Institutes of Research is a firm which specializes
in conferences for executives in various functions and industries. The Pricing Institute offers an annual PriceX
conference as a mechanism for encouraging new thinking about pricing and for addressing new ideas about
pricing issues. The Professional Pricing Society is an excellent source of information and access to experts,
conferences, webinars, blogs, white papers, books, article reviews, quarterly Journal of Professional Pricing and
monthly The Pricing Advisor newsletter. The Professional Pricing Society sponsors three major conferences
each year, and has developed the CPP (Certified Pricing Professional).
Journals that focus on pricing strategy and management include Journal of Product and Brand Management,
Marketing Science, Journal of Marketing, Journal of Marketing Research, Marketing Research, Harvard
Business Review, McKinsey Quarterly, Across the Board, Marketing Management Magazine, Management
Science, Journal of Business, and Journal of Business Research. Another source of pricing research and
information exchange is The Pricing Center at Fordham University which sponsors conferences and provides
financial support for doctoral student research on pricing. These organizations and journals provide evidence that
pricing is coming of age as a business discipline.
Another source of current information about pricing strategies is pricing blogs. Two of the most popular pricing
blogs are: “Pricing for Profit” by Rafi Mohammed, CEO of Culture of Profit LLC, who also has a book, The Art
of Pricing. Rafi’s blog can be accessed and subscribed to at: www.pricingforprofit.com. The second highly
popular pricing blog is: “Dollars and Sense: The Pricing Blog” by Reuben Swartz, President of Mimiran, which is
a pricing consulting firm. Reuben’s blog can be accessed and subscribed to at http://blog.mimiran.com . Both
bloggers post a new entry at least weekly, often more frequently. Both have been doing their pricing blog since
2006. There are other pricing blogs in the blogosphere, including: http://bestpracticepricing.blogspot.com/ ,
http://pricingandvaluestrategies.blogspot.com/ , http://professionalpricingsociety.blogspot.com/ , and
http://pricingpoints.blogspot.com/ . These blogs provide commentary on pricing subjects which can be accessed
by subscribing to the blogs for daily updates and also by searching blogs for pricing subjects.
Pricing is about value, including concepts of: perceived value, value differentiation, value equivalence, value
delivery, and value communication. This course will provide a framework for developing an economic value
estimation (EVE) for a product or service. EVE compares a product to the most readily available substitute. The
value differentiations between the EVE and the “reference price” can be examined to determine opportunities to
communicate and deliver greater perceived value to the prospective customer. The EVE can be examined by a
managerial price sensitivity analysis (MPSA). The MPSA leads to development of an implementation strategy for
“value extraction”, which is the maximum amount a seller can expect to gain from a customer who is fully
informed and economically rational about the product/service alternatives available. The implementation strategy
should include a communications/education plan to increase a potential customer’s willingness to pay for the
economic value received.
We will apply principles which underly effective pricing management from MBA courses on Managerial
Economics, Cost Accounting, and Negotiations. Each session will focus on pricing concepts and issues presented
in the course text, outside readings, and case studies related to the concepts and issues for the week. We will also
have experts in pricing management as guest speakers. The guests will provide additional perspective beyond the
text, articles, and case studies.
Each student will participate in a team project to develop a pricing strategy for a specific product or service
marketed to two market segments, each of which gains a different economic value from their use of the product or
service. Instructions for this assignment are posted on the course web site. Examples of previous team projects are
posted on the course web site to provide templates for review by each team.
Each student will have an individual project which will analyze pricing strategy and tactics for a company of the
student’s choice. The analysis will include a description of the transactional, competitor, and industry levels of
pricing situation for the company, along with recommendations for the company to pursue higher levels of pricing
excellence. Instructions for this assignment are posted on the course web site.
Each student will also write one blog on pricing, providing commentary on a subject of personal interest. Details
about this assignment will be provided as we review the major blogs in class.
Teaching methods:
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Class discussion, using PowerPoint slides posted on the course web site in advance of each class session
to focus on principles and practices described in assigned reading
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Case studies which focus on pricing principles and issues
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Guest speakers--- consultants and executives who are experts in pricing strategy and tactics:
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Ralph Zuponcic, Senior Partner, PricingPoint Partners, Hudson, Ohio
Harold Peck, VP, Pricing, Cardinal Health, Dublin, Ohio (and two associates)
Debra Patek, Co-Founder and VP, ThinkVine Corporation, Cincinnati, Ohio
Richard Braun, VP, Corporate Strategic Pricing, Parker-Hannifin Corp., Cleveland, Ohio
Eric V. Roegner, President, Alcoa Global Hard Alloy Extrusions and co-author of our text
Raghav Keshav, VP Global Portfolio Management, Sterling Commerce
Kimie Lishman, Director, Marketing & Sales, Pricing, Textron
Grading:
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Individual Project (20 points): Each student will review the pricing strategy and tactics of
a company of his/her choice, including description and analysis of transactional, competitive, and
industry level dynamics. The student will analyze the pricing strategy and tactics against the questions
asked in Robert Dolan’s article: “How Do You Know When the Price Is Right” to give the company a
report card on current pricing processes and policies.
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Group Project (20 points):
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Final Exam: (40 points) in class, open book, open notes.
Students will form a team of three or four persons to analyze
the pricing strategy for a product/service. The analysis will be to determine pricing strategy for two
market segments OR two product/service uses. Projects completed by teams in previous pricing
classes taught by the instructor are posted on the course web site as examples.
The exam will include questions
that apply concepts from the course.
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Class Contribution: (20 points): Students are expected to contribute constructively to
class discussion. Class contribution is measured by the instructor for each session. The scoring for
each class session is:
-1—absent without notice
0---present for class, no contribution
1---present for class, constructive contribution
2—provided insight that: built on discussion, contrasted or extended earlier discussion,
and/or showed application of concepts from the readings for the session.
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Blog: (20 points): Each student will do ONE blog entry on any subject related to pricing
strategy. The concept of a blog is to comment/state your view on something about pricing. To prepare
for this assignment, you will review pricing blogs to determine typical content, length, and to see what
subjects and content are most likely to get comments from blog readers.
There are 120 total points available for your grade in this course. Your highest 100 points will determine
your grade. That is, the grade that is lowest will not be included in your grade computation. If the final
exam is the lowest grade, 50% of the final exam points will not be included in your grade.
Class Schedule: Topics, Readings & Assignments
Week 1 Strategic Pricing: Introduction September 30 for evening section;
September, 24, 29, and October 1 for morning section
1. Why pricing is often ineffective
2. Asking the right questions
3. Formulating a profit-driven pricing strategy
4. Role in a pricing strategy of Costs, Customers, Competition, Capacity, and Communication
5. Leverage of 1% improvement in realized prices (“pocket price”)
6. Intro to course assignments (group project, individual project, blogging project)
Text: Chapter 1, Introduction to Pricing Fundamentals
Chapter 2, Three Levels of Price Management
Article: Robert J. Dolan and John T. Gourville, “Pricing Principles”, Harvard Business Note 9-506-021,
January 12, 2006.
Article: Elisabeth A. Sullivan, “Value Pricing”, Marketing News, January 15, 2008, 8.
Case: Optical Distortion (A) (9-575-072) (discussion questions at end of syllabus)
Guest: Ralph Zuponcic: Senior Partner, PricePoint Partners. His firm is in Hudson,
Ohio. Mr. Zuponcic is a value-based pricing strategy consultant who is quoted in the article above in
Marketing News. Ralph will provide an overview of his consulting practice, with examples of processes
his firm uses and of results they have helped clients achieve.
Week 2: Three Levels of Price Management, October 7 for evening section,
October 6 & 8 for morning section
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The three levels of pricing excellence: transactional, competitor, & industry
The pricing waterfall to determine pocket price
Pricing bands and scatter plots to determine pricing variability across customers
Economic value estimation process
Economic value profiles
Value equivalence lines with zones of indifference
Factors influencing perceptions of value (price sensitivity effects)
Effective pricing management
Guidelines for better pricing decisions
Text: Chapter 3, Exploring Transactions
Chapter 4, Exploring Product/Market Strategy
Chapter 5, Exploring Industry Strategy
Article: Robert J. Dolan, “How Do You Know When the Price Is Right?”
Harvard Business Review, Sept-Oct 1995, pp 4-11
Article: Kostas Indounas, “Making Effective Pricing Decisions”, Business Horizons, Volume 49, 2006,
415-24.
Case: The Medicines Company (9-502-006) (discussion questions at end of syllabus)
Guest Speaker: Harold Peck, VP, Pricing, Cardinal Health, Dublin, Ohio. Mr. Peck will
speak about the pricing journey at a Fortune 15 company that distributes millions of products to hospitals
and pharmacies. Harold and two of his associates will talk to us about pricing at Cardinal from the
perspective of the VP, Director, and Manager level of the pricing function.
Week 3: Research Techniques to Measure Value & Price Sensitivity--October 14 for evening section, October 13 & 15 for morning section
1. Research tools to measure perceived price and benefit
2. Review price elasticity concepts
Article: Gerald E. Smith and Thomas T. Nagle, “How Much Are Customers Willing to Pay?” Marketing
Research Winter, 2002, pp 20-5
Case: The Springfield Nor’easters: Maximizing Revenue in the Minor Leagues Case 2510 (discussion
questions at end of syllabus)
Guest Speaker: Debra Patek, Co-Founder and Vice President, ThinkVine
Corporation, Cincinnati, Ohio. Debbie will speak to the class about scenario analysis, a research
technique her firm uses to help companies with pricing issues in a recessionary market environment. Her
presentation “Making Research Count in Uncertain Times” will be given on October 29, 2008 at the Fall
Conference of the Professional Pricing Society.
Week 4: Pricing New Products October 21 for evening section, October 20
& 22 for morning section
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Level of innovation: Revolutionary, evolutionary, me-too
Elements of new product pricing
How to address cannibalization
Product interdependencies: substitutes and complements
Pricing the innovation for market introduction
Pricing the new product for growth
Text: Chapter 6, New Product Pricing
Article: George E. Cressman, Jr., “Reaping What You Sow”, Marketing Management, March-April,
2004, pp34-40
Article: Tim Matanovich, “Staying Out of Trouble With Innovation”, Marketing Management, MarchApril, 2004, pp14-15
Case: Keurig At Home: Managing a New Product Launch (KEL021) (discussion questions at end of
syllabus)
Guest Speaker: Eric V. Roegner, President, ALCOA Global Hard Alloy Extrusions.
Eric is co-author of our assigned text: The Price Advantage. Eric is President of the Aluminum Company
of America (ALCOA) division which produces engineered hard alloy products to multiple markets from
eight manufacturing plants around the world. His division has over $1 billion of annual revenues. Eric will
speak to us about “Pricing Reflections” which is about his experience as a pricing consultant and as a
“pricer” for a major manufacturing company. Eric will include in his session a case for our discussion.
The case is about how to price a new product category being developed by his company.
Week 5: Value-based Sales & Negotiation, October 28 for evening section,
October 27 and 29 for morning section
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Negotiated versus fixed-price policies
Guidelines for value-based pricing
Negotiation strategies—price buyers, loyal buyers, value buyers
Understanding buying center roles
Tactics used by buying centers to get price down
Preparing competitive bids
Managing the sales force toward value-based pricing
Pricing based on agreed upon levels of performance
Article: George E. Cressman, Jr., “Fixing Prices” Marketing Management, Sept-Oct 2006, pp 33-37
Article: Timothy Aeppel, “Changing the Formula: Seeking Perfect Prices, CEO Tears Up the Rule Wall
Street Journal, March 27, 2007, pp A1, A16.
Case: The Case of the Pricing Predicament (HBR 88205) (discussion questions at end of syllabus)
Guest Speaker: Richard Braun, VP, Corporate Strategic Pricing, Parker Hannifin
Corporation, Cleveland, Ohio. Dick will speak about the pricing journey at Parker Hannifin as
reported in the March 27, 2007 Wall Street Journal article assigned for reading in preparation for this class
session.
Week 6: first session:
Price Customization & Pricing in the Marketing Mix—Yield Management
& Revenue Management, November 4 for evening section, November 3
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Shortcomings of a single price strategy for all markets
Customization of prices by buyer identification
Customization of prices by purchase location
Customization of prices in the short-term/long-term
Customization of prices by purchase quantity
Pricing as a promotional tool
Principles of yield management
Revenue management concepts
Article: Hermann Simon and Robert J. Dolan, “Price Customization” Marketing Management, Fall,
1998, pp 11-17.
Article: Frederick H. deB. Harris and Peter Peacock, “Hold My Place Please”, Marketing Management,
fall, 1995, 34-46
Article: Anne Kadet, “Price Profiling”, Smart Money, May, 2008, 80-5
Case: Avari Ramada Hotel: Pricing Hotel Rooms (Stanford Case M-314) (discussion questions at end of
syllabus)
Guest Speaker: Kimie Lishman, Director, Marketing & Sales, Pricing, Textron. Kimie
will speak about the pricing excellence journey at Textron. Her company uses the value-based pricing
framework studied in this course for their nine businesses.
Week 7 is a week with no class sessions. You will complete the Pricing
Audit and turn it in by midnight, Friday, November 14.
Week 8: Bundling & Versioning; November 18 for evening section,
November 17 and 19 for morning section
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Considerations for pricing in direct and indirect channel routes
Managing price through the distribution channel
Managing retail pricing strategy
Managing price in e-commerce channels
Customization of prices by product bundling or versioning
Text: Chapter 7, Solutions, Bundles & Other Packaged Offerings
Article: Duncan Jones, “The Five Qualities of Good Software Pricing”, Forrester Research, Inc. July 23,
2008.
Case: Trilogy Corporation: Customer Value-Based Pricing”, Kellogg Case KEL-106 (discussion
questions at end of syllabus)
Guest Speaker: Raghav Keshav, VP Global Portfolio Management, Sterling
Commerce. Raghav will speak to us about value based pricing in the software industry as practiced at
his company. Sterling Commerce is an industry leader in software suites for government and banking
applications.
Week 9: Competition: How to avoid Price Wars, November 25 for evening
section, November 24 for morning section
1. Pricing as a negative sum game
2. From share of market to share of scarce market profits
3. Boosting the industry IQ
4. How to manage “dumb” competitors
5. Industry supply & demand factors in judging competitive reaction
6. Use of price & other actions to promote industry profitability
7. Your power base: differentiated product, cost advantage, competitor information
8. Questions to consider before reacting to a competitor’s price reduction
9. Options for reacting to price reductions by competitors
10. When to compete on price
Text: Chapter 9: Price Wars
Article: Akshay R. Rao, Mark E. Bergen and Scott Davis, “How to Fight a Price War” Harvard Business
Review March-April 2000, pp 107-16
Note: George E. Cressman, Jr. “Dealing with “Dumb” Competitors”, The Pricing Advisor, A
Professional Pricing Society Publication, April, 2003, pp 1-2.
Case: ChemBright, Inc. (9-693-026)
Week 9: Pricing Law: – Putting it All Together, November 25 for evening
section, November 24 for morning section.
1. Legal framework for pricing decisions
2. Price fixing versus price encouragement
3. Resale price fixing versus resale price encouragement
4. Pricing & promotional discrimination
5. Restraints against restrictions on customers, territories, or products
6. Predatory pricing & price signaling
7. Ethical constraints in pricing
8. Managing price perception
9. Influencing customer behavior
10. The change agenda: fostering understanding & conviction, formal mechanisms, developing
talent & skills, role modeling
11. Failure modes—issues in achieving The Price Advantage
Text: Chapter 11, Legal Issues, Appendix 2, Antitrust Issues
Chapter 12, Pricing Architecture
Chapter 13, Driving Pricing Change
Article: Hermann Simon, “Pricing—Where Is It Headed?” Note to Professional Pricing Society Members,
April, 2004
Article: Laura Preslan, “Building the Business Case for Price Management”, The Pricing Advisor, June,
2006, pp 4-5.
Case: Price Fixing Vignettes (9-902-068)
Guest Speaker: Lance Parker, Director of Pricing, Cardinal Health, “Bundling”
Week 10 Pricing Project Presentations, December 2 for evening section,
December 1 and 3 for morning section
Each team will give a presentation summarizing the analysis and recommendations from their course
project on pricing strategy for a product/service sold to two market segments.
Week 11 Final exam:
December 9 for evening section and December 10 for morning section: InClass, Open Book, Open Notes
Case Discussion: These questions are intended to assist you in preparation for case
discussion
Optical Distortion (A):
1. What is the Economic Value Estimate (True Economic Value) for the product ODI intends to market to
chicken farmers?
2. Assume ODI will begin marketing their new product in California. What will ODI have to do in order
to gain adoption of their innovation by California chicken farmers to maximize the probability of success
with the rose colored lenses?
3. What are the Annual Benefits to Farmers: Lenses vs. Debeaking (savings/bird/year) – that is, how does
this product compare to the “reference price” of the best available alternative which is “Debeaking”.
4. How would you develop an estimate of Farmer Savings at various prices per Lens Pair
Optical Distortion (A)—Questions—generic questions for any pricing case
This case explores issues in pricing a new product. The reason for this case to be our first case is it
provides an example of analysis included in pricing any product:
1. What problem(s) needs to be solved?
2. Who has the problem(s)?
3. How does this product compare to the most attractive alternative?
4.
5.
6.
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9.
What must we do to get the customer to consider our product?
What are our costs---now, and expected costs for the future?
How does the value (expected benefits) of the product compare to the price (at various price levels)
At what release price do we expect to get the highest long-term profitability?
What implementation strategy and tactics will be needed?
What are the industry dynamics—today and expected in the future?
The Medicines Company
1. What is the economic value of Angiomax?
2. What is the maximum price The Medicines Company could charge for Angiomax?
3. What will The Medicines Company have to do to achieve profitable sales volume for Angiomax?
4. Is the business model for rescuing drugs used by The Medicines Company sustainable?
The Springfield Nor’easters:
1. What are the key findings of the research survey?
2. What did Buckingham learn about a prospective customer profile, pricing, and single-ticket versus
season-ticket packages?
3. Design a ticket pricing plan for the Nor’easters’ first season. Should the plan include more than one
type of season package? How, if at all, can Buckingham take advantage of consumer interest in
grandstand seating?
4. Using the pricing plan you have designed and given Buckingham’s assumptions about
concession sales, will the team reach breakeven in the first year? If not, what options does
Buckingham have that could achieve breakeven in the first year?
Keurig At Home:
1. How will partners (roasters, Keurig Authorized Distributors (KADs), Office Managers) be impacted by
Keurig At Home?
2. How much value will be created by Keurig At Home?
3. Keurig At Home is a two-product sale (brewer and K-Cups) of complementary products. What price
should Keurig charge for the brewer and what price should Keurig charge for the K-Cups?
4. When in the product development process should Keurig have determined the prices for the brewer and
the K-Cups?
4. Who should Keurig define as being in the target market for Keurig At Home?
5. The case includes the implementation strategy for the At Home product. What suggestions do you have
for managing the rollout?
The Case of The Pricing Predicament:
1. Why is Standard in this difficult situation with a loyal customer? What has changed?
2. Evaluate Scott’s ideas of unbundling services and/or changing the product to get the price down.
3. The Akita price could be a “problem of value” if it is their normal price or it could be a “problem of
managing a competitor” if it is an exceptionally low price just to break into this account. What price
reaction strategies would be appropriate for Standard under either of these possibilities?
4. What would you do if you were Tony Della Penna? What would you do if you were Bob Davis?
Avari Ramada: Pricing Hotel Rooms:
1. Should Raza seek to increase the occupancy rate or average room rate (or both)?
2. What are the tradeoffs? What factors should he consider?
3. What other metrics could/should Raza use to evaluate the performance of his pricing structure?
4. Why?
ChemBright, Inc:
1. Why was R.J. Poulson lowering the price for bleach, ammonia, and softener to New England
grocery chains?
2. What options does Steve Vitale have to respond to the pricing announced by R.J. Poulson?
3. What actions should ChemBright take to end the price war?
Trilogy Corporation: Customer Value-Based Pricing:
1. What is gain-sharing pricing?
2. Why would Trilogy consider use of gain-sharing pricing?
3. What customer types, products, or IT projects would provide the most appropriate circumstances for
Trilogy and its customers to enter into gain-sharing arrangements?
4. How might Trilogy use gain-sharing to win customers who would not buy using traditional pricing
models?
5. What risks would Trilogy have if they begin to use gain-sharing pricing?
Price-Fixing Vignettes:
For each of the three vignettes, be prepared to discuss “Who was damaged”, “How damages were
computed/awarded”, and “What actions could have been taken to prevent the price-fixing case” from
happening?