Designing and Managing the Supply ChainWHUT,2017Lecture 12(Chapter 13)THIRDEDITIONDesigning&ManagingtheSupplyChainSmart PricingConcepts, Strategies & Case StudiesWangZhangqiongDavidSimchi-LeviPhilipKaminskyEdithSimchi-LeviMcGraw-Hil/lrwin
McGraw-Hill/Irwin Lecture 12 (Chapter 13) Smart Pricing Wang Zhangqiong Designing and Managing the Supply Chain, WHUT, 2017
13.1 Introduction·Demand&Pricing>Implicit assumption sofarhas beenthatdemandcannotbeinfluenced> In reality, this is not true>Demand level changes canbemadethrough:>Advertising,displays,and promotional tools>Pricing13-2
13-2 13.1 Introduction Demand & Pricing Implicit assumption so far has been that demand cannot be influenced In reality, this is not true Demand level changes can be made through: Advertising, displays, and promotional tools Pricing
Dell's Pricing StrategyProductpricedifferentbased ontypeofcustomerProductprice variesover timePrices ofoptions offeredalso vary overtimeIBM is investigating software that willallow it to adjust prices according todemand13-3
13-3 Dell’s Pricing Strategy Product price different based on type of customer Product price varies over time Prices of options offered also vary over time IBM is investigating software that will allow it to adjust prices according to demand
Questions Related to PricingWhat arethese companies doing?Why does Dell charge a different pricefordifferent consumers?At different times?If Dell can do it, can it work for other companies?What is wrong with a traditional fixed-price policy?13-4
13-4 Questions Related to Pricing What are these companies doing? Why does Dell charge a different price for different consumers? At different times? If Dell can do it, can it work for other companies? What is wrong with a traditional fixed-price policy?
Revenue ManagementPrinciplesAll companiestryingto boostprofitbyusingwhat areknowas smartpricing orrevenuemanagement techniguesTechniques first pioneered by the airline,hoteland rentalcarindustriesAirlineindustryRevenue managementhas increasedrevenuesignificantlyAmericanAirlines'estimates ofannualincrementalrevenue of $1 billionthrough revenue management13-5
13-5 Revenue Management Principles All companies trying to boost profit by using what are know as smart pricing or revenue management techniques Techniques first pioneered by the airline, hotel, and rental car industries. Airline industry Revenue management has increased revenue significantly American Airlines’ estimates of annual incremental revenue of $1 billion through revenue management
13.2PriceandDemandAll things being equal·Demand foraproduct will typicallygoupasthe product's price goes downCertainproductsmoreorlesssensitivetopricechangesIngeneral thepropertyholdsDownward-slopingdemandcurvesooplAP-204Elasticily-33.00$3.00ONewpoint2.9013-6a0
13-6 13.2 Price and Demand All things being equal Demand for a product will typically go up as the product’s price goes down Certain products more or less sensitive to price changes In general the property holds Downward-sloping demand curve
Manager'sIssueWhat is the optimal priceat which revenue ismaximized?Need to characterizethe relationship betweenpricingand demand foreach productUtilize this characterizationto determinetheoptimal pricefor eachproductMayinvolvemanycomplexitiesVastquantitiesof datamayneedtobeanalyzedCompetitors'behaviormay needtobe capturedMany firms do managetoatleast approximatethis relationship13-7
13-7 Manager’s Issue What is the optimal price at which revenue is maximized? Need to characterize the relationship between pricing and demand for each product Utilize this characterization to determine the optimal price for each product May involve many complexities Vast quantities of data may need to be analyzed Competitors’ behavior may need to be captured Many firms do manage to at least approximate this relationship
Example - Single ProductManagement estimates the relationshipbetween demand, D, and price, pD=1000-0.5p>Whenthep=$1,600,D=200>Whenthep=$1,200,D=40013-8
13-8 Example – Single Product Management estimates the relationship between demand, D, and price, p D = 1,000 - 0.5p When the p=$1,600, D=200 When the p=$1,200, D=400
Price vs Revenue TablePriceDemandRevenue$250875$218,750$500750$375,000625$750$468,750500$1,000$500,000$1,250375$468.750250$1,500$375,000p=$1,600D=200D=100p=$1,800,MaximumRevenue=$500,000whenprice=$1,00013-9
13-9 Price vs Revenue Table Price Demand Revenue $250 875 $218,750 $500 750 $375,000 $750 625 $468,750 $1,000 500 $500,000 $1,250 375 $468,750 $1,500 250 $375,000 Maximum Revenue = $500,000 when price = $1,000 p=$1,600, D=200 p=$1,800, D=100
? How to get it?Demand-Price CurvePriceD=1,000-0.5pR=Dp=(1000-0.5p)pp=1,000derivativeD=500Numberof itemsp*=1000MaxR=500000How to improve the revenue further?13-10
13-10 Demand-Price Curve ？How to get it? D = 1,000 - 0.5p R=D p=(1000-0.5p)p derivative p*=1000 Max R=500000 How to improve the revenue further?