Mar25(Case)

March 11 20061

Teck-Hua HoPricing Policy

I. Economic and Behavioral Foundations of Pricing

II. Innovative Pricing Concepts and Tools

III. Internet Pricing Models

Tweeter etc.Tweeter etc.

March 11 20062


OutlineOutlineObjectively and subjectively, is Tweeter price competitive?

What is the impact of APP on effective price paid for a product? How is it designed to alter current buying behavior?

Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective?

March 11 20063


Objective Price Competitiveness: Objective Price Competitiveness: Mean PricesMean Prices

Lechmere Circuit City The Wiz Tweeter

27" Color TV $553 $507 $563 $648

Multiple CD Players $229 $240 $229 $389

Camcorders $713 $740 $737 $845

Stereo Speakers $261 $244 $355 $642

Mean Product Price within Selected Product Categories

Mean product prices are higher by 15-27% for 27” TVs and Camcorders, by 65% for CD players and by 125% for Stereo speakers

March 11 20064


ObservationsObservationsThese higher mean prices do not imply lower price

competitiveness for Tweeter because it offers high quality products.

But the 15% to 125% price premium does have an impact on Tweeter’s price image.

“… people would look at our ads and they would look at Lechmere’s ads. Lechmere would advertise a $139 VCR and we would advertise a $199 VCR. They’d have a $399 camcorder and we’d have a $599 camcorder. … we seemed to be more expensive to the inexperienced consumer.”

March 11 20065


Mean Product Price for Mean Product Price for Overlapping ProductsOverlapping Products

Color TVs (Tweeter carries 14 Models: 11 overlap and 3 are unique to Tweeter)

CD Players (Tweeter carries 20 Models: 7 overlap and 13 are unique to Tweeter)

CompetitorLechmere Circuit City The Wiz

Competitor's Mean Price $193 $255 $215

Tweeter's Mean Price $180 $257 $200

Number of Overlapping Models 3 4 4





March 11 20066


Mean Product Price for Mean Product Price for Overlapping ProductsOverlapping Products

Camcorders (Tweeter carries 13 Models: 12 overlap and 1 is unique to Tweeter)

Stereo Speakers (Tweeter carries 23 Models: 1 overlap and 22 are unique to Tweeter)


Competitor's Mean Price N/A N/A $198

Tweeter's Mean Price N/A N/A $200






March 11 20067


Subjective Price Subjective Price CompetitivenessCompetitiveness

Tweeter’s Price Image

+

+

--

-

-

--

APP

EDFP(Everyday Fair Price)

High-End Products

Small, UpscaleStores

Past Price Image

SuperiorCustomer Service

No Sales

Limited Advertising

It is easy to change prices but it is difficult to change price perception!

March 11 20068


OutlineOutlineObjectively and subjectively, is Tweeter price competitive?

What is the impact of APP on effective price paid for a product? How is it designed to alter current buying behavior?

Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective?

March 11 20069


APP and Effective Price PaidAPP and Effective Price Paid

Circuit City Prices

Tweeter EDFP Prices

Time

Price

March 11 200610


Impact of APP on Buying Impact of APP on Buying BehaviorBehaviorEliminate the need for extensive, price-based search: Consumers indicated

that if price were not an issue, they would prefer to buy at Tweeter.

Break the “wait for a sale” buying mentality: Under APP, consumers have less incentives to wait.

Convert “potential” or “free-riding” customers: APP eliminates the need to travel to another location.

Smoothes demand over time: APP eliminates the cyclical buying patterns of sale-based retailing.

Creates positive word-of-mouth (since word-of-mouth has a significant impact on buying behavior).

March 11 200611


Financial PerformanceFinancial Performance

REVENUE 1990 1993 1996

Tweeter Same-Store $39.5 m (+3.4%/yr) $43.7 m (+14.5%/yr) $65.5* mSales

Consumer $23.8 b (+4.5%/yr) $27.2 b (+5.6%/yr) $32.0 bElectronics Industry

NET INCOME - $661K $3600K

MARGIN 34.8% 36.6%

* same-store sales increase by 50% between 1993-1996

March 11 200612


Necessary Factors for APP Necessary Factors for APP EffectivenessEffectiveness Tweeter’s customers pay lower prices for products that overlap with its

competitors.

Tweeter’s small stores and higher levels of customer service translate to a higher costs of operations.

The key to success for Tweeter is the management of their product overlap:

Sufficient product overlap to make APP a credible promotional strategy in the eyes of the consumers.

Sufficient product uniqueness to generate the overall customer margins necessary to maintain the business.

March 11 200613


Can Competitors Imitate?Can Competitors Imitate?

Cambridge Soundworks (70% of sales come from private-label speakers): The product overlap between the company and its competitors may be far too low for APP to be a credible price guarantee in the eyes of the consumer.

Lechmere, Circuit City, and the Wiz: The degree of product overlap for these stores is higher than it is for Tweeter: Lechmere (60% or 58 out of 96), Circuit City (60% or 61 of 101), the Wiz (70% or 55 of 78), and Tweeter (44% or 32 of 73). So these competitive stores may not carry a sufficient percentage of unique products for APP to prove profitable.

March 11 200614


Punch-linePunch-line

It is easy to change prices but difficult to change price image.

Must coordinate your pricing strategy with other marketing mix activities (e.g., product assortment).

Documents

Mar25(Case)