Pricing Strategies Professor Jean-Pierre Dub Homework Schedule for Pricing Strategies, Summer 2015 Section 85 Overview of Homework ..................................................................................................... 2 Individual Case Write-up: Due in class Week 3 ................................................................ 3 Individual Assignment (3-6 hours) ................................................................................. 3 Component 1: Curled Metals Case ............................................................................. 3 Component 2: Online Conjoint Task (Done Individually, Graded Pass/Fail) ............ 4 Group Homework Assignments .......................................................................................... 7 Group Homework 1: Due in class Week 4 ......................................................................... 8 Group Assignment (5-10 hours) ..................................................................................... 8 Demand Analysis ........................................................................................................ 8 Group Case Write-up 1: Due in class in Week 5 ............................................................. 12 Group Assignment (3-6 hours) ..................................................................................... 12 Group Homework 2: Due in class Week 6 ....................................................................... 13 Group Assignment (3-6 hours) ..................................................................................... 13 Analyzing Survey Data ............................................................................................. 13 Conjoint Demand Analysis ....................................................................................... 14 Group Case Write-up 2: Due in class in Week 7 ............................................................. 16 Group Assignment (3-6 hours) ..................................................................................... 16 Group Case Write-up 3: Due in class in Week 8 ............................................................. 17 Group Assignment (3-6 hours) ..................................................................................... 17 Group Homework 3: Due in class Week 9 ....................................................................... 17 Group Assignment (4-8 hours) ..................................................................................... 18 Product Line Pricing: Part 1 .................................................................................... 188 Product Line Pricing: Part 2 .................................................................................... 188 Bundling.................................................................................................................... 20 1 Overview of Assignments For each assignment, I indicate whether the work must be done in a group or individually. For group homework, you may not discuss homework assignments with students outside of your group. For individual homework, you may not discuss assignments with any other students - even those in your group. The individual case write-up will be graded out of 30. The 3 group case write-ups will each be graded out of 25 points. The 4 group homework assignments will each be graded out of 100 points. On each assignment, you must sign the standard Booth honor code statement. \"I pledge my honor that I have not violated the Honor Code during this assignment.\" See the Booth student handbook if you have questions about this policy. Using material from previous years' versions of this course is a violation of the honor code. I will consider re-grades submitted within 3 weeks of the date the assignment is returned. You must submit your request for a re-grade in writing along with the original homework (i.e. with the TAs' comments on it). Remember that earning a few extra points on one assignment is not likely to affect your course grade. If you have any questions about your homework, please see the course TA ASAP. 2 Individual Case Write-up: Due in class Week 3 Individual Assignment (3-6 hours) There are 2 components to this assignment: 1) Curled Case write-up 2) The online Conjoint task Component 1: Curled Metals Case Complete the EVC readings in Nagle and Holden, read the Curled Metals case, and then answer the following questions. Use question/answer format, NOT an essay. You may use up to 2 pages with reasonable margins (1 inch) and font size (12 point Times New Roman). This page limit includes any exhibits, should you find them necessary. If your write-up exceeds two pages, you have probably added too much information. Zero credit will be awarded for material included after 2 pages. 1) What are the core benefits of the new pile pad product for a customer? (list both qualitative factors and factors that you can quantify based on the case). 2) For those benefits that you can quantify, calculate the differentiation value of a pile pad. You should get a different number for Kendrick and Corey Construction. 3) What is the reference product? What is the total EVC for a CMI pile pad? 4) What are Curled Metal's costs to produce pile pads? Which costs are relevant for the pricing decision? For consistency, use the smallest size pile pad and assume the manufacturing equipment improvements are profitable. hint: consider avoidable and incremental costs - see Nagle Chapter 8 if you are uncertain about which costs are relevant. If you decide to compute costs in a manner that is inconsistent with costing theory, be sure to justify your assumptions! 5) For each customer, what is the feasible range of prices for a single pile pad: maximum and minimum prices? 6) Outline at least two pricing strategies for Curled Metals. Describe the pros/cons of each strategy and recommend one of them. As part of each pricing strategy, you must address how the product will be distributed. You may want to consider strategies to price discriminate. (please use case information as basis for your recommendation). Hand In: Q1-Q6 above. Hint: In general, you will find there are many factors you can think of that will contribute to the EVC of a CMI pile pad. However, not all of them are quantifiable. Do not try to fabricate data or to guess. Base your EVC only on those factors that can be quantified \"meaningfully\". In practice, data are seldom perfect and our models are frequently approximations. So long as you recognize their limitations (data is incomplete or mismeasured), you will be able to anticipate any biases in your measures. These biases can 3 be considered when applying your results to make recommendations (e.g. under or overstatement of willingness-to-pay). ONLINE ASSIGMENT: Type the following URL in your browser: https://survey.chicagobooth.edu/ViewsFlash/servlet/viewsflash?cmd=showform&pollid=con joint_results_dube!CMI_Poll. Component 2: Online Conjoint Task (Done Individually, Graded Pass/Fail) Conjoint is the most common market research tool used for pricing. The purpose of this assignment is to illustrate a very simple methodology that you can use. This survey asks you to review and rate each of the attached all-in-one printer profiles. Product The following survey regards preferences for all-in-one printers. These printers perform four functions: printing, faxing, scanning and copying. Fairly affordable models have arrived on the market very recently and a recent study in PC magazine revealed that the printers differ mostly on the following four dimensions: speed (measured in pages per minute - ppm), price (in dollars), type (B/W vs. color) and brand. In this context, the following attributes and levels were chosen (realistically) for the experiment. Speed: Pages per minute. These numbers refer to the number of times that a standard test page is printed per minute. Levels: 16 ppm 25 ppm 30 ppm Price: Average street prices were used to set the following experiment levels $79 $149 $199 Type: Most printer models come in two varieties. Black and white Color Brand: Three large manufacturers were used for the study Hewlett Packard Epson Canon You should assume that any other characteristics or features of the printers similar across the scenarios. 4 What to do? Review all of the profiles in the attached questionnaire. Imagine that you consider these printers for purchase. Then follow the guidelines below, one by one! 1. After you have reviewed all profiles thoroughly, first take a rough cut at your ratings by putting things into three piles: "highest rating", "medium rating", and "lowest rating." 2. Within each pile assign a ranking, giving 1 to the best. 3. Only then, fill in the preference rating. 4. Use as a guideline for the preference ratings the % of likelihood that you would actually buy the associated printer on the next occasion you are in the market for one. Printer 1 Printer 2 Printer 3 Printer 4 Printer 5 Printer 6 Printer 7 Printer 8 Printer 9 Printer 10 Printer 11 Printer 12 Printer 13 Questionnaire Table of All-in-One printer profiles and ratings worksheet Intermediate preference (0-100) Characteristics Evaluations (check with 'X') Rating Speed Price Type Brand Highest Medium Lowest 16 ppm $149 Color HP 16 ppm $149 B/W Epson 25 ppm $199 Color HP 30 ppm $199 B/W HP 25 ppm $79 B/W Epson 30 ppm $199 Color Canon 16 ppm $79 Color Canon 16 ppm $79 B/W HP 25 ppm $149 Color Epson 25 ppm $149 B/W Canon 30 ppm $149 B/W Canon 30 ppm $149 Color Epson 25 ppm $79 B/W Epson Notes on how to use the spread sheet This exercise consists of a paper questionnaire and an excel workbook. This workbook "assignment.conjoint.2013.xlsx" contains all the analysis tools you need for this exercise. It consists of 5 worksheets. 1. All you need to do is to put the numbers from the table above (ratings) and your student userid into the first worksheet entitled DataInput. The rest of the work is done for you. No other action or computation from you is required. 2. The second worksheet called DataMatrix simply copies your preference data and appends the experimental design, which I hard-coded here. Do not change anything in this table. 5 3. The third worksheet is called PartWorths (where do I get these names from) and contains all the analytics. Stroll through it and see what I have done. Make an attempt to reverse-engineer my efforts. Can you guess what I did to obtain the partworths and overall importance weights? 4. The fourth worksheet entitled Graphs gives you a graphical representation of your own preferences. The first four panels represent the partworths whereas the last panel reveals your overall importance weights. 5. The fifth worksheet is called WhatUsendtoMe, and guess what, I want you to copy the designated cells on this worksheet to: Type the following URL directly into your browser: https://survey.chicagobooth.edu/ViewsFlash/servlet/viewsflash?cmd=showform&pollid= conjoint_results_dube!conjoint_results_dube If you want to learn more about conjoint, read the chapter on Conjoint in Multivariate Data Analysis by Hair, Anderson, Tatham and Black, fifth edition. Hand In: For this homework, all you need to do is fill out the questionnaire and enter the data into the spreadsheet. However, be sure to study all the results closely so that you can explain how the method goes from your preference ratings and the experimental design to the part-worths. I want you to dig in the spread sheet so that you can do this yourself later. Try and have fun with this exercise. The point is for you to invest time and effort into learning an important and useful marketing research tool with very relevant applications in pricing. 6 Group Assignments You need to form a group of 4-5 people. All group members must be registered for the same section of the course. No exceptions will be made. Group Cases The Group case write-ups should be done in question and answer format (not an essay). You may use up to 3 pages in single-space with reasonable margins (1 inch) and font size (12 point Times New Roman). This page limit includes exhibits. If you find your write-up exceeds three pages, you have probably added too much information. Zero credit will be awarded for material included after 3 pages. Some of you may choose to defer calculations to a separate exhibit with a spreadsheet. Please make sure calculations are clear and easy to follow. It is not reasonable to expect the grader to reverse-engineer your work. Keep them simple and uncluttered. The more complicated and cluttered you make your spreadsheet, the harder it will be to award partial credit!!! Group Homework Assignments There is no explicit page limit for the other group homework assignments. However, in practice, you should not need more than about 4-5 pages. If you find your write-up is considerably longer, you are probably including far too much material. Overloading your solutions with extraneous details may make your analysis hard to follow which could make them difficult to grade effectively. 7 Group Homework 1: Due in class Week 4 Group Assignment Demand Analysis Overview In many pricing applications, it is common to have many products but few observations per product. For example, a catalog typically has hundreds of items, but these items may only be offered in two or three different catalogs. For example, cotton shorts may only be offered in the Spring and Summer catalogs. In this assignment, we will learn how to calculate a price elasticity in a multi-product setting. We will learn how to interpret the price elasticity and how to measure and control for other marketing variables (e.g. is the product listed with a marketing cue such as \"SALE!\"). We will also learn how to calculate price elasticities of different product categories. Assignment Consider the Following Demand Model: 1 2 1 2 (1) (2) is a vector of explanatory variables like whether item j has a \"SALE\" sign in where Book i (i=1 or 2). (We'll get to this in a second). Now we want to: (a) Take the ln of both sides of equations (1) and (2). (b) Difference the two equations. This gives us: where and ln ln are the quantity and price for item j in book i (i can be either 1 or 2). 8 (3) Estimating this Model in Excel Multiple Catalogs We want to estimate the above model in Excel. To complicate matters further, we have 3 catalogs (not just 2). The catalogs are: Name of Book Book 1: Remail Book 2: Description Main Mailing Same catalog as Book 1 mailed at a later date. End of Season Catalog To analyze all this data at once, we \"stack\" the data. For example, the price variable is organized as follows: Observations Rows 2 to 173 Rows 174 to 345 Price: Book 1 Book 1 Remail Price: Book 2 Book 2 Book 2 In other words, row 2 will have the price in book 1 and the price in book 2. Row 174 will have the price in the Remail and the price of book 2 (for book 2, this is the same number as in Row 2). To account for the fact that there are different books, we will add a dummy variable (\"Remail\"). We are making the assumption that the price-elasticity doesn't differ in Book 1, Book 2, and Remail. However, we believe the level of demand (intercept) differs for each book. Logically, the dummy variable is picking up differences in the number of catalogs distributed (e.g., If I send more catalogs, I sell more of everything. That's the intercept.) Variables for Regression We want to estimate equation 3. For price and quantity, this means that you will need to take the log of the ratio of 2 cells in Excel. For , you need to subtract 2 cells in Excel. 1 2 % 1 % 2 # 1 # 2 % 1 1 % 2 2 Regression #1: Estimate the following regression: 9 ln ln (#1) Your regression output should provide , , , , , , ; t-statistics for each of these coefficients, R-square, and adjusted R-square. You may include any other statistics you feel are relevant. Regression #2: Estimate the following regression: ln ln ln 1 In other words, create the variable ln add it to the regression. ln 2 ln ... (#2) and Your regression output should provide , , , , , , , ; t-statistics for each of these coefficients, R-square, and adjusted R-square. You may include any other statistics you feel are relevant. In addition to answering the questions below, make sure to include your regression output as described above in your solutions. Questions to Answer: 1) Submit the output from the regressions following the instructions above. 2) For Regression #1, what is the own-price elasticity of demand (a number)? In words, what does this mean? 3) For Regression #1, interpret the \"Sale\" coefficient ( . That is, in words tell me how to interpret the coefficient. 4) Sales Lift is a term used to describe the additional sales generated by a marketing event. In this catalogue, a marketing event for an item j might consist of a discounted price, denoting the item as \"on sale\