Pricing

Pricing Strategy

Pricing for Different Segments

Professor Ye Hu Bauer College of Business University of Houston

Outline



Segmentation Pricing – Charging Different Prices to Different Customer Segments – Graphical Analysis – Analytical Method

Airline Sales Response Curve

Sales Volume 38 0 39 0 B

A $100 Variable Cost

$3900 $

Airline Pricing with a Single Price

Sales Volume 38 0

The Maximum Profit Rectangle for Single Price

19 0

$100

$2000

$

2 Problems with Single Price Strategy



Leaving money on the table – Some customers are willing to pay more Passing-up Profit – Some potential customers were not served even though the firm could have served them at prices above the variable cost



The Profit Rectangle and Associated Triangles

Sales Volume 380

Profit Passed-up Profit Money Left on Table

19 0

$100

$2000

$390 0

$

Single Price

Sales Volume 380

Profit Passed-up Profit Money Left on Table

19 0

$100

$2000

$390 0

$

Customized Pricing

Sales Volume 380 25 4 12 7 Profit (first-class) Profit (Economy) Passed-up Profit Money Left on Table

$100

$136 7

$263 3

$390 0

$

Airline Pricing with a Single Price

Sales Volum e

c

a/b

$

Steps

1. Express profit function in terms of

price 2. Differentiate profit function with respect to price 3. Set derivative equal to 0, and solve for price

Single Price Formula

Customized Pricing

Sales Volume

c

a/b

$

Steps

1. Express profit function in terms of the 2

prices (High Price and Low Price) 2. Differentiate profit function with respect to

– –

High Price Low Price

3. Set each derivative equal to 0, and solve

for the 2 prices simultaneously (2 equations, 2 unknowns)

Customized Prices Formula

+

Customized Prices Formula

?

Comparison of Two-Class...