Tweeter etc I Economic and Behavioral Foundations of

Tweeter etc. I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing Models March 11 2006 Pricing Policy Teck-Hua Ho 1

Outline q. Objectively and subjectively, is Tweeter price competitive? q. What is the impact of APP on effective price paid for a product? How is it designed to alter current buying behavior? q. Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective? March 11 2006 Pricing Policy Teck-Hua Ho 2

Objective Price Competitiveness: Mean Prices Mean Product Price within Selected Product Categories q. 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 2006 Pricing Policy Teck-Hua Ho 3

Observations q. These higher mean prices do not imply lower price competitiveness for Tweeter because it offers high quality products. q. 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 2006 Pricing Policy Teck-Hua Ho 4

Mean Product Price for Overlapping 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) March 11 2006 Pricing Policy Teck-Hua Ho 5

Mean Product Price for Overlapping 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) March 11 2006 Pricing Policy Teck-Hua Ho 6

Subjective Price Competitiveness High-End Products Small, Upscale Stores - Past Price Image APP + - Tweeter’s Price Image - Superior Customer Service + - - EDFP (Everyday Fair Price) No Sales Limited Advertising It is easy to change prices but it is difficult to change price perception! March 11 2006 Pricing Policy Teck-Hua Ho 7

Outline q. Objectively and subjectively, is Tweeter price competitive? q. What is the impact of APP on effective price paid for a product? How is it designed to alter current buying behavior? q. Has APP proven effective for Tweeter? What factors need to be in place for APP to be effective? March 11 2006 Pricing Policy Teck-Hua Ho 8

APP and Effective Price Paid Circuit City Prices Price Tweeter EDFP Prices Time March 11 2006 Pricing Policy Teck-Hua Ho 9

Impact of APP on Buying Behavior q. Eliminate the need for extensive, price-based search: Consumers indicated that if price were not an issue, they would prefer to buy at Tweeter. q. Break the “wait for a sale” buying mentality: Under APP, consumers have less incentives to wait. q. Convert “potential” or “free-riding” customers: APP eliminates the need to travel to another location. q. Smoothes demand over time: APP eliminates the cyclical buying patterns of sale-based retailing. q. Creates positive word-of-mouth (since word-of-mouth has a significant impact on buying behavior). March 11 2006 Pricing Policy Teck-Hua Ho 10

Financial Performance * same-store sales increase by 50% between 1993 -1996 March 11 2006 Pricing Policy Teck-Hua Ho 11

Necessary Factors for APP Effectiveness q Tweeter’s customers pay lower prices for products that overlap with its competitors. q Tweeter’s small stores and higher levels of customer service translate to a higher costs of operations. q The key to success for Tweeter is the management of their product overlap: q Sufficient product overlap to make APP a credible promotional strategy in the eyes of the consumers. q Sufficient product uniqueness to generate the overall customer margins necessary to maintain the business. March 11 2006 Pricing Policy Teck-Hua Ho 12

Can Competitors Imitate? q 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. q 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 2006 Pricing Policy Teck-Hua Ho 13

Punch-line q It is easy to change prices but difficult to change price image. q Must coordinate your pricing strategy with other marketing mix activities (e. g. , product assortment). March 11 2006 Pricing Policy Teck-Hua Ho 14