Chapter 15: Smart pricing
1. Introduction
Some examples:
− IBM is investigating software that will allow it to adjust prices according to demand
− Nikon Coolpix Digital Camera sold for about $600
• Manufacturer provides a rebate of $100 independently of where the camera is
purchased
− Boise Cascade Office Products sells many products on-line
• Prices for the 12,000 items ordered most frequently on-line might change as often
as daily
2. Price & demand
− Demand for a product will typically go up as the product’s price goes down
− Certain products more or less sensitive to price changes
− To find the best price, a manager needs to be able to characterize the relationship
between pricing and demand for each product
, 3. Markdowns
− Assumption in example: demand is deterministic based on price
− Realistically:
• Demand is random
• At the end of a selling season, there may be remaining inventory
− Firms frequently employ a markdown or sale to dispose excess inventory
− Reservation price: maximum price that a customer is willing to pay for the product.
− Each of these customers has a maximum price that he or she is willing to pay for the
product this is known as the reservation price.
• When the p=$1,200, D=400, 400 customers have a reservation price at or above
$1,200.
− The lower the price, the more customers with a reservation price at or above that price
− Low reservation price customers seen as:
• Less desirable or profitable,
• Useful to get rid of the excess inventory
1. Introduction
Some examples:
− IBM is investigating software that will allow it to adjust prices according to demand
− Nikon Coolpix Digital Camera sold for about $600
• Manufacturer provides a rebate of $100 independently of where the camera is
purchased
− Boise Cascade Office Products sells many products on-line
• Prices for the 12,000 items ordered most frequently on-line might change as often
as daily
2. Price & demand
− Demand for a product will typically go up as the product’s price goes down
− Certain products more or less sensitive to price changes
− To find the best price, a manager needs to be able to characterize the relationship
between pricing and demand for each product
, 3. Markdowns
− Assumption in example: demand is deterministic based on price
− Realistically:
• Demand is random
• At the end of a selling season, there may be remaining inventory
− Firms frequently employ a markdown or sale to dispose excess inventory
− Reservation price: maximum price that a customer is willing to pay for the product.
− Each of these customers has a maximum price that he or she is willing to pay for the
product this is known as the reservation price.
• When the p=$1,200, D=400, 400 customers have a reservation price at or above
$1,200.
− The lower the price, the more customers with a reservation price at or above that price
− Low reservation price customers seen as:
• Less desirable or profitable,
• Useful to get rid of the excess inventory
