SHA542: Price Sensitivity and Pricing Decisions ... Customers' buying decisions reflect their price

download SHA542: Price Sensitivity and Pricing Decisions ... Customers' buying decisions reflect their price

of 44

  • date post

    11-Jul-2020
  • Category

    Documents

  • view

    1
  • download

    0

Embed Size (px)

Transcript of SHA542: Price Sensitivity and Pricing Decisions ... Customers' buying decisions reflect their price

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 1

    SHA542: Price Sensitivity and Pricing Decisions

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 2

    This course includes

    • Four self-check quizzes

    • Two discussions

    • Four tools to download and use

    on the job

    • One final action plan

    assignment

    • One video transcript file

    Completing all of the coursework should take

    about five to seven hours.

    What you'll learn

    Employ a strategic, proactive

    approach in pricing decisions

    Evaluate the importance of price

    elasticity in pricing decisions

    Estimate price sensitivity and use the

    results in pricing decisions

    Use mathematical modeling and

    analysis to understand the

    relationship between variables (for

    example, price and demand)

    Course Description

    Pricing has become an increasingly important mechanism in maximizing a firm's profits. The ease with which consumers

    comparison-shop has enticed firms to be more active pricers. Unfortunately, if you lack a proper understanding of the

    impact of price on demand (and contribution), changing prices can quickly erode your firm's profits. This course, produced

    in partnership with the , describes the impact of changing prices in a competitiveCornell School of Hotel Administration

    environment and then describes several methods for measuring demand sensitivity to price changes (or price elasticity).

    https://s3.amazonaws.com/ecornell/content/SHA/SHA542/SHA542_Transcripts.pdf http://www.hotelschool.cornell.edu/

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 3

    The course begins with a strategic look at pricing and discusses the impact of price changes and the anticipated reaction

    of your competitors. We illustrate these impacts with a discussion of recent price changes during economic declines as

    well as a well-documented airline price war. After this strategic discussion, we describe a set of tactical tools you can use

    to evaluate the effect of a price action on demand and, ultimately, on profitability.

    Chris Anderson Associate Professor, School of Hotel Administration, Cornell University

    is an associate professor at the Cornell School of Hotel Administration. Prior to his appointment in 2006, heChris Anderson

    was on faculty at the Ivey School of Business in London, Ontario Canada. His main research focus is on revenue

    management and service pricing. He actively works with industry, across numerous industry types, in the application and

    development of RM, having worked with a variety of hotels, airlines, rental car and tour companies as well as numerous

    consumer packaged goods and financial services firms. Anderson's research has been funded by numerous governmental

    agencies and industrial partners and he serves on the editorial board of the Journal of Revenue and Pricing Management

    and is the regional editor for the International Journal of Revenue Management . At the School of Hotel Administration, he

    teaches courses in revenue management and service operations management.

    Start Your Course

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 4

    Module Introduction: Price Sensitivity and Its Impact on Pricing Decisions

    Think about pricing strategy, which is the central component in your overall profit performance. Should you price high,

    hoping to generate a large margin, or low, aiming to increase demand? Which tactic will be more profitable? A key to

    answering these questions is knowing how customers will respond. Customers' buying decisions reflect their price

    sensitivity and, in turn, should influence your pricing decisions.

    Estimates of customer price sensitivity and willingness to pay can sometimes substantially improve both price setting and

    segmentation. Numerous procedures can be used to measure and estimate price sensitivity.

    After completing this module, you will be able to:

    Explain the implications of and competitive responses to price changes

    List characteristics of an industry that make it especially susceptible to competition on the basis of price alone

    Use break-even analysis to evaluate pricing actions

    Evaluate price changes in a competitive market

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 5

    Watch: Prisoners' Dilemma

    Hoteliers face an ongoing challenge: trying to make sound pricing decisions without knowing what their competitors' prices

    will be. If your rival cuts prices, it will be in your best interests to cut prices to remain competitive. In this video, you will

    examine this pricing dilemma with a classic case study frequently taught in university classes, known as the "prisoners'

    dilemma." How does one person make a decision without knowing what the other will do?

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 6

    Read: Airfare Price Wars

    When American Airlines, Northwest Airlines, and other U.S. carriers began competing to match and exceed one another's

    price reductions, the was a record level of air travel-and record losses. One estimate suggested that the fare warsresult

    reduced overall industry profits in 1992 by $1.53 billion. 1

    The price war began when American Airlines determined that complex fare structures, which had contributed to the growth

    in air travel in the 1980s, were leading to a sudden drop in travel in the early 1990s. American Airlines believed its

    complex pricing system was driving away potential customers.

    American introduced what it labeled "value pricing," which eliminated most discount pricing but, at the same time,

    substantially reduced standard prices for coach, business, and first class. Within a few days, competitors Delta and United

    Airlines reduced the complexity of their fares. TWA dropped its rates. Northwest Airlines followed suit and offered

    "two-for-ones"-buy one ticket and get one free. American, which had begun the pricing move, noted its competitors'

    actions and promptly introduced a 50% price cut.

    In a very short time, American's rational move to simplify its fare structure led to a race to the bottom. The price war was a

    huge bonus for customers; capacity utilization climbed by 20%. But the result for the companies was grim. Some

    estimates suggest that losses exceeded the combined profits for the entire industry from its inception. The price war

    ended with American Airlines, as it had started. It announced it was basically dropping its value fares, and it went back to

    its old fare structure. Over time, all the other airlines followed American's lead and dropped their deals. The industry

    recovered.

    An article by David Besanko for the Kellogg School of Management traced the sequence of events in this price war.

    Students who wish to read the entire Besanko article should visit the site for purchase.Harvard Business Publishing

    Steven Morrison and Clifford Winston. 1996. Causes and consequences of airline fare wars. Brookings Papers:1

    Microeconomics 1996: 85-123.

    http://hbr.org/product/the-mother-of-all-pricing-battles-the-1992-airline/an/KEL006-PDF-ENG?Ntt=david+besanko&Nao=10

  • Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 7

    Read: Post-9/11 Hotel Price Wars

    Key Points

    Hoteliers should avoid following competitors' actions out of panic

    Rate reductions do not necessarily lead to increased demand

    Use statistical tools to make pricing decisions

    When you are working to gain market share, there are no perfect solutions-but there are options far less damaging than

    fighting the battle with price alone.

    As the previous airline price war example shows, it's important not to panic and follow the actions of your competitors

    reflexively. Promptly matching rate reductions, for example, can have consequences from which it may take years to

    recover.

    Using historical data, we can see how reacting to the pricing decisions of your competitors rather than taking a myopic

    approach affects revenue. This chart, created by Smith Travel Research, shows changes in average daily revenue1

    (ADR) and demand in the hospitality industry over a period of 20 years.

    Beginning in 2001, there are two distinct dips in both ADR and demand. The first downturn followed the attack of

    September 11, 2001. In the months that followed, people cut back their travel, and demand fell by close to 10%. Over the

    next year, hotels reacted by reducing their rates - but with little response in demand (i.e. price cuts did not increase

    ).demand

    Over time, demand be