Ch-05-01-March 2008 revision-04

Ch-05-01-March 2008 revision-04 - Managing in Complex...

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Managing in Complex Environments  1 Robert S. Atkin Katz Graduate School of Business University of Pittsburgh Pittsburgh, PA  15260 atkin@katz.pitt.edu Chapter 5 “How Much Should We Charge for Our Blue Tomatoes” Revised, March 2008 © 2008 Robert S. Atkin 1. Written by the author for use in the course BUSSPP0020 “Managing in Complex Environments” at the  University of Pittsburgh.   Use for other purposes or by other instructors without the author’s written  permission is prohibited under copyright laws. © 2008   Robert S. Atkin Page   136  
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© 2008   Robert S. Atkin Page   137  
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Managing in Complex Environments Lecture Notes 5 How much should we charge for our blue tomatoes   ? “Watch the costs and the profits will take care of themselves”  1 I. Teaser A. Before I joined Pitt, I was the Associate Dean of GSIA, Carnegie Mellon’s  business school (today, The Tepper School and then a “top 10” graduate  business school).  An annual issue was “how much should we charge for next  year’s MBA tuition?”  Interesting question and an important one. 1. If we charged too much, we could lose students and revenue.  Fewer  students weren’t necessarily bad, but lost revenue was. 2. And if we charged too little, we lost revenue we could have gained.  Also  not good. B. What we needed was a systematic approach, one that was likely to come close  to the “right” level.  But how should we construct such an approach? 1. Some folks argued: “Set tuition to match that of similar schools.” 2. Others said, “Determine our costs.  Set tuition to cover these plus a  predictable profit.” 3. Another view was: “Push it as high as we can.  See what the market will  bare.  If we have too few takers, then we’ve charged too much and need to  adjust down” © 2008   Robert S. Atkin Page   138  
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4. Yet others said, “The real issue is tuition stability.  Set it so we don’t have to  change it every year.  Students will like that.”  5. And lots of other opinions. C. Price obviously affects demand.  More importantly, how to decide “what’s the  right price?” usually isn’t obvious.  This and related questions are examined in  this set of notes.  (Oh, by the way, what would you suggest regarding our  tuition-setting problem?) © 2008   Robert S. Atkin Page   139  
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II. In our last set of notes, we asked: “Would anyone buy a blue tomato?” A. This silly question allowed us to develop a number of important ideas.
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Ch-05-01-March 2008 revision-04 - Managing in Complex...

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