1 Quality in Supply Chain Design Smart Pricing
3 Outline Price and Demand Price Differentiation Smart Pricing Differential Pricing Dynamic Pricing Revenue Management Impact of the Internet Caveats
Price and Demand: Our Assumptions Demand level changes can be made through: Advertising, Displays, Promotional tools Pricing 4
Price and Demand: Our Assumptions All things being equal Demand for a product will typically go up as the product’s price goes down In general the property holds Downward-sloping demand curve 5
Demand-Price Curve 6
Price and Demand: Why? Reservation price assumption Each customer has a maximum price that he or she is willing to pay for the product 7
Markdowns At the end of a selling season, there may be remaining inventory Firms frequently employ a markdown or sale to dispose excess inventory 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 8
Markdown Concept 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. 9
Manager’s Issue What is the optimal price at which revenue is maximized ? Need to characterize the relationship between pricing and demand for each product Utilize this characterization to determine the optimal price for each product May involve many complexities Vast quantities of data may need to be analyzed Competitors’ behavior may need to be captured Many firms do manage to at least approximate this relationship. 10
Price vs Revenue Table Price Demand Revenue $200 900 $180,000 $400 800 $320,000 $600 700 $420,000 $800 600 $480,000 $1,000 500 $500,000 $1,200 400 $480,000 $1,600 200 $320,000 $1,800 100 $180,000
Can We Do Better? 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 However, in many cases, even sales prices are profitable … Ideal pricing: Different customers charged at their respective reservation prices can result in maximum revenue 12
13 Outline Price and Demand Price Differentiation Smart Pricing Differential Pricing Dynamic Pricing Revenue Management Impact of the Internet Caveats
Price Differentiation: Assumption 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 14
Price Differentiation Example According to the demand – price curve, the
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