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

2. 2 Teck-Hua Ho Pricing Policy March 11 2006 Outline  Objectively 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?

3. 3 Teck-Hua Ho Pricing Policy March 11 2006 Objective Price Competitiveness: Mean Prices 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

4. 4 Teck-Hua Ho Pricing Policy March 11 2006 Observations  These 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.”

5. 5 Teck-Hua Ho Pricing Policy March 11 2006 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)

6. 6 Teck-Hua Ho Pricing Policy March 11 2006 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)

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

8. 8 Teck-Hua Ho Pricing Policy March 11 2006 Outline  Objectively 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?

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

10. 10 Teck-Hua Ho Pricing Policy March 11 2006 Impact of APP on Buying Behavior  Eliminate 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).

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

12. 12 Teck-Hua Ho Pricing Policy March 11 2006 Necessary Factors for APP Effectiveness  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.

13. 13 Teck-Hua Ho Pricing Policy March 11 2006 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.

14. 14 Teck-Hua Ho Pricing Policy March 11 2006 Punch-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).