Flexibility Management

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Sample Exam Questions
I. Economic and Behavioral Foundations of
Pricing
II. Innovative Pricing Concepts and Tools
III. Internet Pricing Models
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Example 1 EVC

• High-tech Manufacturing has developed a new type
  of seat belts that is easier to install and more
  comfortable to wear than the seat belts currently
  in use.
• The cost of a standard seat belt to automobile
  manufacturers is 5.00. The labor cost to install
  one belt is 3.00. The new belts take 10 less
  time to install with a resulting labor cost of
  2.70 per belt.
• A marketing research study suggests that car
  buyers are willing to pay 50 more for a car
  equipped with the new and more comfortable belts.
  (A typical car requires five seat belts.)
• What is the EVC (per car) of the new seat belts
  to auto manufacturers?

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Example 1 EVC

• Reference Value 5 x 5 25
• Differentiation Value 0.3 x 5 50 51.50
• EVC 76.50

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Example 2 Hos Diagram

• Burger King has decided to cut the price for its
  Original DOUBLE WHOPPER Sandwich from 2.49 to
  1.99. The unit variable cost is 0.99.
• What is the minimal increase in sales necessary
  for a profitable price cut?
• - (1.99 2.49) / (1.99 0.99) 50
• What is the minimal price elasticity needed for
  this to be a profitable price cut?
• 50 / ( 0.5 / 2.49) x 100) 2.5

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Example 3 Customer versus Product Margin (Loss
Leader)

• As a pricing analyst for Ho grocery chain, you
  are asked to prepare the analysis of a proposal
  to price frozen chicken low in order to attract
  shoppers to the Ho store. The current price for
  chicken is 1.09 per pound. The proposal is to
  set a promotional price of 0.69 per pound. The
  wholesale cost of the chicken, prepackaged and
  ready for sale, is 0.59 per pound.
• By tracking past changes in sales of chicken with
  changes in sales of other grocery products, you
  discover that each one pound change in the sales
  of chicken is associated with the following
  changes in the sales of other products
• Assume the above sales relationship holds, by how
  much must chicken sales increase (in percentage
  terms) to make this price promotion profitable?
• - (0.69 1.09) / (0.10 0.40 0.20 0.20
  0.10) 0.4 / 0.8 50

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Example 4 Customize, Customize, Customize

• Answer the following questions, clearly stating
  the price customization variable used in each
  case. Each example should be chosen so that the
  customization variable involved is different from
  the other examples.
• Pick any bookstore and describe a price
  customization strategy that it adopts.
• Pick any restaurant and describe a price
  customization strategy that it adopts.
• Pick any hotel and describe a price customization
  strategy that it adopts.

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Example 5

• Explain the differences if any between the
  following pairs of pricing policies
• Buy One Get One Free and 50 off.
• An in-store price drop of 5 to 20 and a
  coupon of 5 on a product that is regularly
  priced at 25.

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Example 5 Reference Price

• Explain the differences if any between the
  following pairs of pricing policies
• Buy One Get One Free and 50 off.
• An in-store price drop of 5 to 20 and a
  coupon of 5 on a product that is regularly
  priced at 25.

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Example 6 Revenue Model Design

• Visit www.bizrate.com and describe its revenue
  model. What are its revenue levers? Give a
  specific suggestion to improve the model.
• Other interesting websites include
• www.shopping.com
• http//personals.yahoo.com/
• http//www.cafepress.com/cp/info/
• http//www.ubid.com/

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BizRates Revenue Model in 2003

• Revenue research revenue e-commerce
  revenue advertising revenue

where NR is the number of retailers NC is the
number of clicks NA is
the number of banner ads
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Example 7 Conjoint Analysis

• Sears Tires is interested in measuring consumers
  tradeoffs among the following attributes of a
  tire Brand (Sears, Goodyear, Goodrich), Miles
  (30K, 40K, and 50K), Price (50, 60, 70), and
  Sidewall (White and Black).
• A conjoint experiment that involves a group of 50
  customers from a targeted segment was conducted.
  Respondents rated a set of 18 product profiles on
  a 10-point scale and their ratings were used to
  construct the segments utility equation. Below
  is the regression output with the appropriately
  defined dummy variables

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Data
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Example 7 Regression Output
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Utility Equation
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Example 7

• Which brand has the highest brand equity?
• If the products available in the market are
  (Sears, 30K, 50, Black), (Goodyear, 40K, 70,
  White), and (Goodrich, 30K, 50, Black), which
  brand is likely to have the highest market share?
  
• If the market share of a product in the
  marketplace is predicted by the following
  equation (typically we estimate this relationship
  using historical data)
• where Ui is the utility of product i and the
  denominator is the sum of the utilities of all
  products available in the marketplace. Compute
  the market share for Sears.

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Example 7

• Sears is considering three price options for a
  new and improved product (Sears, 40K, 50,
  White), (Sears, 40K, 60, White) or (Sears, 40K,
  70, White). Assume Sears replaces the old
  product with the new one.
• If the marginal cost is 25 and the total market
  size is 2 million units per year, which price
  option should Sears adopt in order to maximize
  its annual profits?
• How would the above answer change if Goodyear
  drops its price to 60 while Goodrich keeps its
  price unchanged?

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Utility Computation
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Market Share Computation